Wealthy Living Paycheck-To-Paycheck? More Pressure on Tenant Screening

When you hear the term "paycheck to paycheck" you probably think of low-income households struggling to make ends meet. That's even the title of a new HBO documentary highlighting the plight of America's working poor. But a new paper released at the Brookings Institution's BPEA conference Friday finds that a sizeable number of wealthy households are living paycheck to paycheck, too.

"The Wealthy Hand-to-Mouth," by economists at Princeton and New York University, finds that roughly one-third of American households -- 38 million of them -- are living a paycheck-to-paycheck existence. These are families who hold little to no liquid wealth from cash, savings or checking accounts. But a staggering two-thirds of these households are not actually poor; while they resemble poor families in their lack of liquid wealth, they own substantial holdings ($50,000, on average) in illiquid assets. Because this money is locked up in things like their houses, cars and retirement accounts, they can't easily dip into it when times get tough.

Christopher Ingram (Washington Post 3/21/14)

When running tenant rental applications, property managers and landlords are largely looking for one thing: tenants who will pay on-time and in-full every month (while not committing felonies in between “House Damage” parties).  We are looking at credit scores, criminal background checks, income, and landlord history.  But is this sufficient?

Based on the article above, prospective tenants that we once thought looked great on paper may be riskier than we thought.  For example, a house renting for $2K/month may draw the following applicant:

Married couple

Husband makes $96K/year

Wife stays home with 2 children

No criminal record besides 2 speeding tickets in the last 5 years

760 & 720 credit scores

Owned a home in their old town which they sold to move here for a job

They look like great candidates!  But let’s dig deeper with a back-of-the-napkin calculation when we delve into their credit report and specifically, their monthly cash inflows and outflows:

$8,000.00 Salary

less taxes (approx 40%):         ($3,200)

2 car payments:                       ($1,000)

Rent:                                       ($2,000)

Utilities                                   ($300)

Student loans                          ($200)

Private school (children)         ($600)

Credit card balances               ($100.00 minimum payment)

Car insurance                          ($250)

Food??
Activities??

Gas??

With $7,650.00+ in estimated monthly expenses, making $8K/month turns out to be tight.  If something happens unexpectedly (sickness?) or job loss (just moved here for a job), this could get bad in a hurry.  We know cash flow will be insufficient to cover the rent, so the question becomes how many assets do they have?  And how liquid are those assets?

And then the line of questioning turns into “Do we know?  Did we even ask?”

At the end of the day, the rental application can’t really devolve into a mortgage application-like colonoscopy.  It’s too painful for everyone involved and takes too much time. 

The good news is that a run-of-the-mill credit report is pretty thorough.  The credit report screening starts with looking where cash flow is going monthly and then factoring in the other common monthly expenses (car insurance, gas, utilities, cell phones, etc.).  If large credit card balances are present, it’s probably indicative that their expenses are more than their incomes.  Using a back-of-the-napkin look at their income and monthly expenses (coupled with alarm bells for any large credit card balances) will give a good idea of how risky the applicants are.  If there is sufficient cash flow left over each month, approve them and move on.  If it looks to be too close for comfort, ask more questions.  Ask for more documentation of assets.  And then reject the application or ask for a bigger security deposit.

Applications are about present qualifications, but also about future vulnerabilities.  Few things always go perfectly for everyone; this is real life we are talking about!  And if things don’t add up, it would behoove you to get to the bottom of it as opposed to just taking the path of least resistance.  High income and credit scores may not be grounds for fast track application approval anymore.  Times change and we need to change with them.

Happy tenant screening! 

Brett Furniss is the President & Owner of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords & Home of $100 Flat Fee Property Management.   BDF Realty utilizes their innovative Pod System for exceptional customer service in residential property management, home repairs, and home sales for single-family homes, condos, and town homes in the Charlotte-Metro Area.  Contact Us Today!

Charlotte Property Management Weekly: $200 Rental Application Fees- Genius?

I don’t find myself being amazed at things very often, but I have to admit I was taken aback when I saw a large property management firm change their application fee from $25 to $200.




My initial thoughts were, “who is willing to pay that?” and “how can I justify charging that much for a rental application fee?”



I don’t know why they changed their rental application fee, but I have a guess- they got way too many applications from candidates who would never qualify to rent! Their people were inundated! So they used common sense.



In general, if a company wants less people to apply, then all they have to do is raise their application price. Corporations in every industry do something like this to control demand. If they want to sell less sweaters ($50 retail), then they raise the price to $100. If they want to sell more, they lower the price to $25. Simple.



But a smaller number of applicants equal less people who may rent the house. That’s bad! Maybe… But what if the tenants are screening themselves so that the non-qualifiers don’t even bother applying? If the probable non-qualifiers know they are borderline applicants, they still may be willing to gamble away $25 on an application fee. But $200? Not very likely!



Another thing I liked is that the property management firm refunds the $200 application fee if the tenant is approved. Now, good applicants know there is no risk to applying at $200 a pop. This property management firm is using price to lower the amount of resources needed to screen applicants (by lowering the number of applicants themselves!). They are also freeing their people up to work on higher margin activity (like filling the rental properties with their smaller, but better, applicant pool).



What’s not to like? Should every firm go to $200 per rental application?



As I racked my brain to figure out why I shouldn’t raise our rental application fee to $200, I came up with several reasons:



1. Applicants who don’t qualify will get really angry; not $25 loss angry, but $200 loss angry (which could equal the money earned in several days of work). This can really stress out employees and make it so they want to work for someone who has $25 application fees and not get screamed at everyday.

2. Employees would need to be prepared to be doggedly challenged on turned-down applications. That means the tenant screening process would need to be super- tight and really easy to explain. This would also remove some (in my opinion) much needed subjectivity in the application screening process.

3. The main objective of changing the application price is to save time. Unfortunately, almost every person that calls is new to the firm. That means the $200 rental application fee will have to be explained in every phone call! I’m getting a headache just writing that.



I still think it’s a great idea; I’m curious to see how it will work in practice. I’m still a middle-of-the-road $75 rental application fee believer, but am ready to be convinced otherwise!



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)