Credit Reports (YAWN) & COVID Tenant Placement

“Everyone has a plan until they get punched in the mouth.”

“Iron” Mike Tyson

The “sleep industry” (from bedding, sound control, “sleep consultants”, prescription pills, etc.) is estimated to be a $30B-$40B annual business growing by 8% year.  That’s a lot of money going to something that should naturally be free; and, unfortunately, the inability to sleep seems to be an issue that keeps growing.

My father told me that a solution that always worked for him was to read textbooks.  It made sense, but most adults (thankfully!) don’t have many lying around.  However, if you’re in the property management arena, you do have a lot of credit reports you can read through that will have the same effect. 

On a single rental application, it is possible to have 20+ pages per person.  Every open and closed line of credit they’ve ever had in their lives is listed.  It can be painful reading and sorting through them as the pages can begin to just run together…

Many property management companies outsource the application process.  I get it!  No one wants to read through the reports and try to put together how someone’s finances link to whether they’ll be a good tenant, especially when 10-20 applications are coming in per property.  It’s arduous.  That’s why it’s common for property management companies to have credit score minimums- for example, if you don’t have a minimum 600 credit score, your application will automatically denied.

There are a couple problems with that approach, in my opinion.  The first is that if every landlord did that, there would be a lot of people in the streets who weren’t eligible to rent a house.  That seems harsh, unfair, and inhumane. 

The second is that a credit score alone is insufficient to gauge an applicant’s true financial strength.  I think the level of debt to how much available credit they have is a huge indicator.  A credit score rewards taking on debt to a certain extent as it measures whether debt payments are being made in a timely fashion; people with no debt (or utilized available credit) seem to have lower credit scores because there is less of a payment track record to go off of.  Should people be penalized for that?  I guess I have an “old-school” mindset where I think not having debt is preferable to the alternative.

Thirdly, I like to see cash flow and where it is going.  I’ve had 700+ credit score applicants who have so much debt to pay off that after their monthly debt obligations (aka credit cards, financed cars, etc.) there is little room to pay rent and other niceties of life (like food). 

This is where COVID and tenant placement comes in.  How strong is the applicant?  Can they pay when times are good and bad?  Can applicants take a financial punch?  COVID is a huge punch to almost everyone.  But even putting COVID aside, a punch could be an unexpected job loss, big car repair, or some other major expense that life throws at everyone at some point.  Can it be weathered?

That’s where I find the credit report to be an invaluable tool and a “must-read”.  I always felt that the #1 responsibility of property managers is to keep the rents flowing to the owners.  And property managers are only as good as the bench of good-paying tenants they have in their properties.  How strong is the bench?  Can it handle adversity?

COVID has and will continue to put things to the test.  I think the practice of pouring that extra cup of coffee while poring over the credit reports will prove to be time well spent.

Happy Landlording!  And Stay Safe!

Rudy is a Great Movie, Just Not a Great Rental Application

Rudy Ruettiger (aka “Rudy”) was the subject of a great movie in 1993 about his improbable story of getting into Notre Dame and then playing on their football team.  It’s a true testament to the human spirit as he played high school football (not recruited), went to the Navy for two years, worked at a power plant for two years, and then after not getting into Notre Dame for low grades, went to Holy Cross College for two years before being admitted to Notre Dame on his 4^th try!  Whew!

Then he walked on to the football team and made it(!), got beat up on the scout team every day at practice, and then got on to the field his last game and picked up a sack.  What a story!

Of course Hollywood embellished the story a little bit as Joe Montana, a freshman quarterback at Notre Dame at the time, said in an interview.  No players were taking off their jerseys demanding that Rudy get in the game, it was typical for seniors to get into the last home game, and the players carrying Rudy off the field in triumph were just playing around.  And Rudy’s legendary work ethic?  “He worked his butt off to get to where he was and do the things he did.  But not any harder than anyone else,” Montana said.

The truth is that Rudy should have never gotten into Notre Dame due to his bad grades (4 tries!  Where did he get the money to pay the college application fees?  Does “no” ever mean “no”?  Did he finally get an admission officer who was napping?).  He never should have been on Notre Dame’s football team (He was 6 years older than everybody else.  He was 5-foot 6 inches tall and 165 pounds!  He’s lucky he didn’t get killed in practice.).  “Rudy” should have never happened and a movie was made about him because somehow it did.

As a Charlotte property manager, we sometimes get rental applications that I feel might have been inspired by Rudy.  And I’m not saying that to be mean.  I really feel that if we approved some of the applications we received, we’d essentially be ruining the applicants’ lives.  For example:

We had a rental house on the market for $1,400.00/month.  We received an application where the prospective tenants had several credit cards almost maxed out, they had been late 8 of the past 12 months on rent, and the rent they were currently paying was $1,000/month on a smaller house.  How was adding $400.00 in additional rent (not to mention higher utility costs for a bigger house) a responsible move for anyone- landlord or tenant?  It would just have made life much harder for everyone.

Even as romanticized as Rudy was, the chances are no one would have wanted Rudy’s life prior to running through the tunnel and getting into his one Notre Dame game.  He was studying all the time to pass classes that were too difficult for him, while walking around with a beat-up body from banging into guys that were too big and strong for him to compete against.

Rudy may have learned character, perseverance, and many other worthwhile traits (while being the subject of a great movie!), but it was a hard journey.  He was able to walk away with a Notre Dame degree, a great memory, and a lucrative speaking career after the movie came out.  But I’m not sure there are any rewards for taking on more housing payment than one can afford.  It’s stressful, and hurts families and relationships.  Usually, it leads to evicted tenants and fired property managers.

We all want to root for the underdog, but Rudy is best seen in the theaters and not experienced in real life.  Denying unworthy applications can sometimes be a great act of kindness.

Happy (& Responsible) Landlording!