Protect Your Real Estate Investment - Screen Your Tenants
Posted 12/08/2010 by Marv Steier, President, TVS Tenant Verification Service Inc.
Successful Real Estate Investing requires a diligence process called tenant screening, this will minimize the risk of renting to Individuals who use landlords as a revolving line of credit.
High Risk Tenants or tenants from hell can turn real estate investing into a bad experience if it is allowed to happen. Please focus on the words if it is allowed to happen and I will explain why.
I once asked Ozzie after a presentation at one of his seminars if there was anything that he wanted me to do differently; I thought that one can always improve his communication skills so why not ask. Ozzie was very direct; he looked me in the eye and very calmly said... well you don't have to scare them so much when you talk about the tenant from hell.
Good point Ozzie, I never considered the fact that I could be scaring off your Students with my enthusiasm for eliminating tenants from hell.
So to put a positive spin on this, Real Estate Investing can be really rewarding when you or your Property Management Company have a system in place that eliminates the possibility of risk associated with bad tenants.
Why do High Risk Tenants use landlords as a revolving line of credit? Well let's examine the facts:
Ø Are they charged criminally for fraud or false pretences? No.
Ø Do they go to jail if they don't pay a court awarded judgement? No.
Ø Do the major credit bureaus allow landlords to report tenant pay habits? No.
Ø Is there any consequence when a tenant leaves a landlord stuck with unpaid rent and damaged rental property? No.
So will High Risk Tenants ever stop using landlords as a revolving line of credit? Yes! When landlords network to identify High Risk Tenants and when tenancy is denied based on bad tenant pay habits.
Not being able to maintain a roof over your head should be a strong incentive for many tenants to change their irresponsible ways and become responsible tenants who pay rent. There are many tenants who don't pay simply because there is no consequence. We will discuss landlords networking a little further along.
For many Real Estate Investors it is imperative that the rent is paid on time because in most instances there is a mortgage that needs to be paid. It is really important therefore that the tenant who you hand the keys to for your investment property is credit worthy, has a stable job and a level of income that ensures timely rent payment.
The biggest complaint that I hear from Landlord Associations is that many landlords do not treat the rent process like a business. Furthermore they don't know the tenancy laws in their State or Province, they don't complete the proper forms for tenancy or lease and they don't conduct any kind of tenant screening, but they do complain about the system when they have a problem. Go figure!
So Real Estate Investors listen up!
Ø Familiarize yourself with the Tenancy Laws in your State or Province
Ø Screen your tenants as you don't want to be stuck with the tenant from hell
Ø Join your local Landlord Association, they are generally experts in the tenancy arena and can help you out with a problem tenant or the Residential Tenancy Office.
Ø Have a checklist that ensures you have completed all diligence that includes proper forms.
Ø Make a list of what your criteria will be as a landlord and ensure that it doesn't discriminate or violate as per the Human Rights Act.
Ø Ensure that the Property Management Company you hire has a proper screening process in place.
Having tenants is a lot like raising kids; many of them need to be reminded what their responsibilities are, and they need to be made aware that consequences exist for not being responsible which includes not paying rent on time. Most tenants will obey the lease rules when they are advised of the consequences for not doing so, particularly when they read that it could affect future tenancy. Consequences should be in writing and the tenant should acknowledge same by signing so there can be no argument later. This would be called a Deterrent.
One aspect of the TVS Deterrent form for late rent payment includes reporting tenant pay habits to a credit reporting agency at the beginning of each month. Let me ask you a question... knowing that the credit card company reports late payments to the credit bureau, do you pay on time or do you wait for 2 or 3 months before making a payment? Okay a rhetorical question...so if the tenant knows that you report pay habits to a credit reporting agency on the 3rd day of each month do you think they are more likely to pay? In most instances they will. Reporting tenant pay habits will minimize risk of late and missed rent payments.
Rules rules rules! Kids get sick and tired of rules and so do tenants; they also need to have incentives and rewards. Many Landlords & Property Managers have different strategies to affect this on a periodic basis throughout the year. As you have a Deterrent, so should you have an Incentive. This would be a Certificate of Satisfactory Tenancy that the tenant would receive at the end of the lease period providing that tenancy was completed in a satisfactory manner. That is to say rent was paid on time and the rental property was in good condition upon move out. The tenant can take this certificate to the next landlord who can verify same by calling you or the screening company that you employ. The Certificate coupled with a good tenant history that you have created for your tenant, could quite possibly open the door to a better rental next time around. And wouldn't you like to be the landlord that is handed a Certificate of Satisfactory Tenancy?
So what we are really talking about is education, and where landlords take the time to educate tenants regarding responsibilities and rights, there are far fewer hassles and generally there is a lot more respect shown towards each other. This is the ideal scenario for landlords and tenants.
I have had many landlords at various seminars tell me that they rent to an Individual based on gut feeling and don't feel that it is necessary to spend the money on tenant screening. Well that works when you are lucky enough to get a tenant that has every intention of paying rent and fortunately most do, however where your mortgage payment is dependent on the rent, are you willing to take that chance?
One such landlord who went on gut feeling called me about 8 months ago from Toronto looking for advice. She had just lost a court decision that cost her $18,000.00 and was hoping that someone would tell her she didn't have to pay. The tenant had taken her to court for a variety of in discrepancies arising out of the lease. She rented to her tenant without completing any forms or getting anything in writing, and she didn't know anything about the tenancy laws in Ontario or what her responsibilities were as a landlord. The tenant that she rented to was from you know where...but the landlord had a good gut feeling at the time right? There are many landlords who do not have a process in place and there is often a negative impact which equates to lost rental income. The simple fact is that many landlords are not educated and just don't know what to do.
What Real Estate Investors need to be aware of, is that there are Individuals out there who rent and call themselves tenants; we call them Systems Users or Abusers, depending on your perspective. They look for landlords who are naïve or ignorant, don't know the tenancy laws or their landlord responsibilities and don't conduct their rent process like a business. These so called tenants make a great living at what they do, they get free rent and a court awarded payment for leaving, simply because they know the tenancy laws and you don't... can't get much better than that for the tenant can it?
So I mentioned Landlords & Property Managers networking to identify High & Low Risk Tenants. What if every landlord and property manager reported tenant pay habits to a credit reporting agency? Would that affect the way High Risk Tenants use landlords as a revolving line of credit? Yes
Can reporting tenant pay habits benefit Low Risk Tenants? Yes Many tenants do not have a good credit history, but they pay their rent on time and complete a satisfactory tenancy term. A Certificate of Satisfactory Tenancy would definitely benefit them.
Tenant Screening Toolbox:
How can I screen my prospective tenants and report tenant pay habits? Visit www.tenantverification.com
How can I get Deterrent and Incentive forms for my business? TVS has them in the forms section which can be accessed after you sign up to become a TVS member. No Cost Membership.
How can I educate myself and my tenants pertaining to rights & responsibilities? www.tenantsinfo.com
Where do I find my Province or State tenancy laws? http://www.tenantverification.com/tvs-links.php Also Google residential tenancy laws for your Province or State.
Article written by:
Marv Steier President
TVS Tenant Verification Service Inc.
Bio for Marv Steier, President
TVS Tenant Verification Service Inc.
Marv is a retired Police Officer and former Fraud Investigator who had an idea that evolved into a successful business that serves the Residential Rental Industry across North America.
