Should You Run Credit Check and Background Check when Screening Tenants
Screening tenants and running a credit check is vital to being successful in your real estate business.
Without properly screening your tenants, you will possibly run into issues, problems, evictions, etc. with the tenant you place. You may even lose money because of all the costs involved with having bad tenants.
Let’s think of it in another way.
Would you let someone live in your personal home without knowing who they are? Would you feel safe without knowing:
- Criminal History
- Employment History
- Credit History
- Personal History
- Public Record History
- Collections History
- Payment/Non-Payment History
- Eviction History
- Federal Terrorist History
- Did I say Criminal History? 🙂
More than likely, you will NEVER let someone live in your home with you if you did not know these things.
Same goes with your rental property business. Doing a property tenant screening by running a background check, criminal history check, and a credit check, you are setting yourself up for success.
By passing up on the less desirable tenants, you will be able to find the tenants that will do these things for you:
- Pay their rent on time
- Take care of the property
- Inform you of any incidents
- Not have to go through an eviction months after placing the tenant
- Save thousands of dollars not having to evict a tenant
- Be a benefit to your business than a liability
I personally use Avail for all my background and credit checks.
I did an entire walkthrough of the Avail software that has much more. Check it out.
Objections to Running Background Checks when Screening Tenants
There are two common objections to running a credit check.
- They cost money
- My type of tenants will not do a background check
Let’s dispel these objection quickly.
Objection 1: Background Checks Cost Money
Background checks cost on average $35. They usually give you the following:
Total (average): $35
The cost of an eviction can be in the thousands of dollars. To find this dollar amount, we need to add up all the fees for a property making $1,200 a month in rent with a $800 a month mortgage.
- Eviction legal fees: $500 (average)
- Loss of rents: $1,200 x 3 months = $3,600
- Mortgage payments: $800 x 3 months = $2,400
- Clean up and repairs: $1,200 (1 months rent as average)
- Placing a new tenant: $1,200 (first months rent paid to Property Manager or leasing agent)
- Carrying costs: insurance, taxes, utilities: $100 x 3 months = $300
Total (average): $8,000
Would you pay someone $35 to save you $8,000?
Would you buy home insurance in case of a fire in the home?
Even a Junior High student can see that paying $35 to save you $8,000 is a no brainier.
Now, I’m not getting down on you. I used to have the same feelings about spending money for a credit check. After I realized how much money I was spending on each eviction, I got wise really quick.
Objection 2: My Type of Tenants Would Never Do A Background Check
Of course, no one desires to have history looked into by another person. It reveals things we may not want others to see.
Even more so, the bad tenants who have evictions, overdue credit payments, criminal history, etc. will absolutely NOT want you to see what they have done in the past. They don’t want you to know their history so they will not go through a background check.
Your good prospective tenants have nothing to hide.
If someone objects to a background check, most likely you do not want them in your rental property let alone your personal residence. Most likely they want to hide something from you.
Now, after dispelling these two objections, there is no reason why you should not run a background check when screening tenants.
Before we get into the reasons to run a background check on a tenant, you may be asking: “How do I know what to look for in a tenant”?
Well, check out this blog post where I share the best things to look for in a tenant.
Reasons You Should Run A Credit Check when Doing a Tenant Screening
1. Spend Money To Save Money
We’ve already covered this earlier but it must be restated.
Spend only $35 to save a potential loss of $8,000!
2. It Makes Good Business Sense
The process of turning over your rental property is very expensive and takes a lot of money and man power to get done.
The property manager over the property has better things to do, like make you money than cost you money. If you manage your properties yourself, your time is taken up as well as your business will suffer without you working on it.
Your business will grow when you are making money, spending time on building the business, and keep money from escaping your pockets. By properly screening your tenants, you will be able to do all these things because good tenants stay longer and cost you much less money when they leave.
3. Never Place A Tenant Without A Background Check When Screening Tenants
It is time for you to make a business rule about your tenants.
- If you are not screening your tenants, start today.
- If you are not running a background check, start today.
- Make it a business rule check all potential tenants.
If you have a property manager, implement that into your business immediately by informing the PM that they MUST always run a background check when they consider placing a tenant.
4. Tenant Screening, Credit Check, and Background Check are Like Insurance for Future Problems
Think of running a background check and credit check as a way to insure future profits from your company.
Insurance is paying up front for a benefit in the future for your business. Like fire insurance, you pay little up front for the benefit in the case of a fire.
The insurance company will pay to make the problem of the fire go away and get your property back up to be rentable.
Thank of a credit and background report as insurance against future losses. Obviously it is impossible to make a 100% perfect decision every time you place a tenant.
Even though that is the case, you are at least able to make a wise decision on whom to place in your property.
After doing a background check on one possible tenant, I found they had 4 evictions in 3 years. Talk about a nightmare! On the application she filled out, everything looked good. Then the background check came back with all those evictions.
Needless to say, I wasn’t going to be the 5th eviction for her in 3 years.
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5. How to Know “Who” When Screening Tenants
The easy answer is, everyone.
You screen every tenant by calling past employers, places they lived, etc. to make sure they are telling the truth.
Anyone who places an application in to live in your property, that is a person you should screen.
It doesn’t matter if you have been best friends for years (never place friends or family in your properties), or if they drive a Porche and look rich.
Always screen your tenants and run background checks on everyone who applies.
6. Make Tenants Pay for the Background Check as an Application Fee
In all the properties that I own, the tenant pays for the application fee which goes to the background check.
On average, the background check fee is $35. I suggest you make the tenant pay $35 just to apply. Let them know it pays for the background check.
If they say they won’t pay for the background check, pass on them. There is probably much more going on than the money to pay for the credit report and criminal report.
7. Proper vetting of the applicant and review their application.
If you are paying out of your pocket for the tenant screening background check, then you need to be selective on who you let get past the application phase.
Personally, I vet every application on their application. Last thing I want is to waste time screening a tenant that does not fit my business model when they fill out the application.
Look for things like:
- Employment history
- Are they willing to do a background check
- Who else will be signing on the lease
- Who else will be living in the property
- Education history
- Criminal history
These are all things that should be on your application for the prospective tenant to fill out themselves.
If they lie one any one part of the application, pass on them. No need to set yourself up for failure. Who knows what else they are lying about.
What are your thoughts about running a background check?
Leave me a comment below.
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