Whether you have a home, triplex or 150 units, we all have that one leasing story. For most of us it has worked out okay. One client took a risk with a foreign engineering student despite having no credit history and not being able to verify the international banking statements. This tenant turned out to be one of the client’s best renters. Another client accepted a local drug dealer because he wanted to give him a chance. They had an understanding that if anything went wrong they would part ways. Something did go wrong. The tenant honored his word and he left without a peep.
Then there are the times we don’t talk about. That one tenant we should have never leased to. We saw all the red flags but took a chance anyway. It is that type of tenant that makes us pull our hair out – that one tenant who actually inspires us to leave our units vacant indefinitely. But leasing does not have to be a game of Russian roulette or craps. If done right, you can have better odds than one-in-six at a Vegas casino. In this article, we will take a look at the leasing ads, screening tenants and key issues that impact successful leasing, all in the hopes of helping you find the best tenant with the least amount of risk to you and your business.
Advertising Your Rental
In order to maximize rent, one must maximize exposure. Every landlord should utilize three websites to accomplish this goal: a syndicating rental website, Apartments.com and Craigslist. A syndicating rental website is a website that posts to other rental websites. In our office, we prefer VFlyer. This website will save the owner from needing to have logins and passwords for Zillow, Trulia, Hotpads, etc. Apartments.com is a great resource. It is owned by CoStar which gives a local mom and pop owner an institutional grade platform on which to advertise with national exposure.
Craigslist is my personal favorite and brings in the bulk of our renters. It is easy to use and renters have most likely used it in the past for something else like community activities, services, discussion forums, jobs and items for sale. It makes perfect sense that renters would turn to Craigslist to find housing.
There are a few perceptions concerning Craigslist though that make owners reluctant to post on it. One is that predatory renters target Craigslist posts. Another is that renters who come from Craigslist are less desirable than tenants who come from Hotpads, Trulia, Apartments.com or other trendy renter websites. But the main objection is that ads can be easily copied by scammers and reposted. The first two perceptions are easy to counter with solid tenant screening: verifying income, calling references, reviewing the line items that makes up the credit score in the credit report/background check and engaging the prospective tenant.
The main objection about copying and reposting ads requires a little more work on the part of owners but is easily manageable. To reduce reposts of vacancy ads by scammers, owners can do three things: post photos with watermarks, check Craigslist every couple of days for duplicate ads and be quick to respond to potential renters. Potential renters are the best to point out duplicate ads. Craigslist may have some perceived shortcomings but any owner that does not use Craigslist is missing out on a great leasing tool when used smartly.
Screening Potential Tenants
No matter how one goes about finding tenants, in order to reduce risk, one must thoroughly screen potential tenants. Even though Craigslist may get a bad rap for poor tenants and predatory renters, an owner faces the same risk with any potential lessee. The four key principals of screening tenants are verifying income, calling references, reviewing the line items that make up the credit score in the credit report/background check and engaging the prospective tenant.
Verifying income is as simple as asking for proof of a month’s worth of income and confirming the information. Most the time this can be two paystubs but sometimes a tenant can be paid weekly. In that case, four paystubs would be required, because you want to verify a full month’s income for reliability. The employer is then called to verify that the tenant’s paystubs and salary. The goal is for the prospective tenant to make 2.5 times the monthly rental amount based on gross income. For example, if the unit is leasing for $1,500 a month, the tenant must make $3,750 a month. There is also the possibility that the tenant is self-employed. In this case, one would ask for tax returns and bank statements to confirm that the applicant is making over 2.5 times the rental amount on a monthly basis. It is imperative that the tenant meets the ratio of rent to income. Without it, it is more likely that they will not be able to pay their rent. Should they fall short of the income to rent ratio, asking for a cosigner is a good idea if you would still like to proceed with the renter.
Calling references is an intangible and requires some people skills. The basics are to call the current and the previous landlords. Confirm the time the tenant was in the unit and the rental amount. Ask if there were ever any late payments or problems. Pay close attention to the answers. Did the current landlord just confirm the basic facts and rush to get off the phone with you? Did they not return your call? This may mean absolutely nothing but it definitely makes the previous landlord’s response a lot more important. The logic is that the current landlord is more likely to say less if the tenant was a problem. The previous landlord on the other hand has nothing to lose and is more likely to give you an honest answer. In an ideal situation you could reach both landlords but the truth is you don’t always have that luxury. Should that happen, the other three areas of screen take on added weight and require additional attention. As mentioned above, the current employer should be called as well to confirm income and employment.
Credit score: Ideally, all owners want 800-plus credit, which believe it or not, does exist. But the truth is that a credit report is more than just the credit score. The question to be asking is what is the story behind the credit score? Are there any 30/60/90 day late payments? Are there any collections? If so, this is a red flag that potential lessees may have a higher chance of not paying their bills and, in turn, not paying their rent. In situations like these, ask the potential tenant questions as to why they had late payments or collections. Listen very closely to their answer and their demeanor. Do their responses make sense or do they not add up? Are they being defensive or evasive? If their response does make sense, a cosigner to offset the risk would be in order. All this being said, every owner is unique and has to assess the risk to which they would like to expose themselves. Some owners have a zero tolerance policy for 30/60/90 days late. Others may be okay with something with a reasonable explanation and a cosigner.
Engaging the tenant is critical to success. There are two key ways to engaging the tenant. First, show the unit to them in person. It is important to meet each tenant and see the whites of their eyes. When a prospective lessee starts to picture where they are going to put their bed, this is a good sign. On the other hand, when they start to be critical of the space over small details, this is a tenant to avoid because they will nit-pick and cause difficulty throughout the lease term. The second way to engage the tenant is to ask them questions during your screening process and see how they respond. You can question as to why they are moving or as mentioned above why they had that one 30- day late payment from 2015 on their student loan. If the tenant is responsive and communicates well, they will do the same while they are in the unit. If they get defensive or don’t work with you as you ask them questions, they will be the same way as a tenant. The goal with engaging tenants is to see if you can communicate with them in a constructive way to solve any problems or concerns on either side. Building rapport and good communications will be invaluable should there be a problem in the unit.
Three Key Issues
There are a few other key issues that impact successful leasing. The first is seasonality. Vacancies move faster and for higher prices during the summer months, whereas vacancies sit longer and will rent for less during the winter months. If you are looking for that high rent in December and January, good luck. You may have to sit with the unit vacant until March or April. Second is that our neighbor’s posted rental prices don’t always state the actual market rental rate. Many times, an owner will start at a higher rent just to test the market and then drop the price in a week or two. It is important to keep this in mind when pricing your unit. This may be a great strategy to test the market but it also runs the risk of an owner chasing the market down should the rent be above market. Third is to listen to the market. If you post an ad and don’t get any calls or emails around the 1st, 15th or 30th of the month, it may be best to reconsider your pricing. Barring a holiday, rain, Super Bowl Sunday, etc., low traffic is a dead giveaway that a price is too high. These are just three key issues that impact successfully leasing a vacancy. There are others, but these are really important.
We have only scaled the tip of the leasing iceberg. A lot more can be said on the subject but don’t be overwhelmed. Like everything else in life, remember to take it one step at a time. And don’t beat yourself over the inevitable mistakes along the way – remember also that practice makes perfect.
Following the best practices and procedures discussed in this article will put you light years ahead of owners who don’t follow this advice. Good luck and good leasing!
The above article was written by Matt Williams of Williams Real Estate Advisors. Williams Real Estate Advisors is a full-service property management company with over 100 properties in the greater Los Angeles area. For more information or if you have any questions visit www.williamsrea.com or call 310-987-7978.