Sacramento Report

Tenant Screening: A Small Investment for Better Financial Returns

by Monica Williamson

Prior to offering residential property for rent, every owner and manager should take steps to adequately screen all applicants. A prudent operator will develop written screening criteria and apply them consistently to minimize the possibility of allegations of discriminatory conduct. Written screening criteria should include your policy on the minimum income required to qualify, how you use credit scores, employment history and other objective criteria.

Owners who provide applicants with their written screening criteria along with an application to rent can often save time and resources on both the part of management and the applicant. In the long run, the rewards of effective tenant screening can help to ensure on-time rent payments and adherence to house rules and policies, plus minimize difficult resident issues.

Purpose of Screening Criteria
The purpose of written screening criteria is obvious: to ensure that owners have an objective means of determining whether an applicant qualifies for a particular unit. Often, in an owner’s rush to fill vacant units, proper screening may be overlooked. Sometimes owners/managers rely on “gut instinct” or other subjective criteria. This may later turn out to be a costly mistake as the “nice” residents fail to pay rent on time (or at all), damage the unit, disrupt the quiet enjoyment of other residents and finally move out, forcing an owner to incur turnover costs.

Despite the fact that screening parameters are not exhaustively defined in state law–screening criteria is a business decision for each individual property owner or manager–property owners and managers must be judicious in establishing their specific screening criteria.

Income Requirements
One of the most common screening factors is a minimum income requirement. Indeed, a property owner may establish a policy that requires applicants to have a combined gross income at some designated amount above the monthly rent (or equivalent financial assets). For example, if the unit rents for $1,000 per month, the owner could require an income of three times the rent ($3,000 per month).

This amount should be appropriate based on the age and location of the property and the demographics of the area. If a significant percentage of prospective applicants fail the income standard, it may be that the expectation is too high. If a rental property owner allows a married couple to combine their income to meet the income requirement, unmarried applicants who plan to live together must be allowed to do the same.

California law does not allow a property owner to discriminate based on an applicant’s source of income. Income from Social Security or disability payments must be considered when determining whether the applicant meets the minimum income standard. In addition, some applicants may have grants, investment accounts or other sources of income, but may not be employed. All legal financial resources need to be treated equally.

However, California law does not require owners/managers to participate in the federal Section 8 program. When applying income standards to Section 8 applicants, the applicable ratio is between the tenant’s income and the tenant’s portion of the rent, not the entire rent.

Potential proof of income sources include bank records, an offer of employment, income tax returns, proof of ongoing income from a legal settlement, contract employment, government subsidy and/or divorce decree.

Credit Requirements
There are a variety of potential disqualifying disclosures on a credit report, including insufficient income, too many obligations for the income (debt-to-income ratio), unpaid collection accounts, a pattern of late payments, or nonsufficient funds (NSF) checks and bankruptcies. Property owners and managers should seriously consider how they will address the various types of information available on credit reports, including:

How do you define “good credit”?
What particular minimum credit score is acceptable?
Will past-due payments on medical bills be an exception?
How will you handle applicants who are new to our country?

California law allows rental property owners/managers to recover the cost of credit reports and other available rental history gathered by the owner. While screening fees are permitted, there are a number of important considerations that an owner should know.

The amount of the screening fee cannot be greater than the actual out-of-pocket costs of gathering information concerning the applicant, including, but not limited to, the cost of using a tenant screening service or a consumer credit reporting service, and the reasonable value of time spent by the owner or his or her agent to obtain the information.

The initial law provided that in no case, however, can the amount of the application fee charged by the owner be greater than $30 per applicant. This fee may be adjusted annually by the owner commensurate with an increase in the Consumer Price Index. As of January 2007, the adjusted rate is $39.35.

Unless the applicant agrees in writing, the owner cannot charge a fee when he or she knows or should have known that no rental unit is available at that time or will be available within a reasonable period of time. The owner must provide the applicant with a receipt for the fee paid by the applicant. The receipt must itemize the out-of-pocket expenses and the time spent by the owner or his/her employees to obtain and process the information.

If the owner does not perform a reference check or does not obtain a credit report, the owner must return any amount of the fee that is not used. If a fee is paid and if the applicant makes a request, the owner must provide a copy of the credit report to the applicant.

Proper tenant screening is a vitally important function of a rental property owner and manager. The small amount of time and effort invested in this process can return dividends in reduced turnover costs and other related expenses.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Monica Williamson is CAA’s vice president of public affairs. Copyright © 2007 by SF Apartment Magazine. All rights reserved.