By Linda Alexander
“When I was growing up in the business, I don’t remember ever checking someone’s credit, only the income,” said Joseph Brusco, vice president, Westside Management Corp., whose family has owned and operated a large residential portfolio on the Upper West Side of Manhattan for more than 40 years. “But today, we look at everything — from income and credit to legal issues. If there’s a guarantor, we vet their information, too.”
The days of a handshake, deposit and a couple letters of reference are long gone, especially in cities where the cost of living is higher, along with the possible loss of revenue for building owners with delinquent tenants. Moreover, there is much greater access to credit information today, including myriad third-party credit services available to owners and management. Most of the credit firms do the heavy lifting with digital background checks at the applicant’s expense. There’s no real downside for ownership or management because a bad tenant is an expensive tenant.
So much is at stake because of the high cost of eviction, as well as the span of time it takes to file for non-payment, go to court, get a judgement and, finally, take possession of the unit – and then clean it and lease it! In New York City laws, if a tenant moves into a rent-regulated apartment, the cost to remove for non-payment of rent increases exponentially, not to mention the time it takes to collect back rent.
Therefore, it’s incumbent on management and leasing professionals to be extremely careful when it comes to checking applicants’ backgrounds and credit. Red flags should skew well beyond income, to include bankruptcies and, if possible, spending habits. Adam Heller, principal of the Heller Organization, which has developed a proprietary application that requires recent pay stubs, photo ID, bank statements and employment letters, as well as a requirement checklist for guarantors. He also uses a checklist from a third-party credit firm that identifies FICO scores and housing court appearances, if any, and performs eviction and Homeland security searches.
“Long before a property manager or landlord reviews a lease, it is our responsibility to ensure everything the stated on an application is vetted and confirmed,” Heller pointed out. “That diligence extends beyond a qualified salary.”
Five recommended areas of discovery for tenant applications, include:
- The credit profile, which will identify low credit scores, unbalanced credit-to-debt ratios and other problematic patterns.
- Criminal records and background checks. Although in some states, property managers are not allowed to deny a rent application solely based on criminal histories, it’s still a window into the reliability of a prospective tenant
- Employment verification, which can be tricky these day because it’s the norm for people to change jobs frequently, especially among younger renters. In those cases, it’s a good idea to not only contact the current employer for salary verification, but one or two of the more recent employers to find out whether the applicant left in good standing each time.
- Eviction reports – an obvious red flag.
- Address history. In addition to verifying the current address, past ones provide details about relationships with previous landlords, and rent payment habits. A seven-to-ten-year window is ideal, but in many cases concerning new renters, a background check only reflects 12 to 18 months.
In New York Metro, many landlords require a renter’s annual salary reflect at least 40 times the monthly rent. With those metrics, a prospective tenant who makes $80,000 per year, qualifies for a monthly rent of $2,000. It’s a tough criterion, but in an area where expenses are high across the board, it becomes a practical standard.
Not surprisingly, there are plenty of prospective renters who meet salary requirements, but haven’t developed a credit history, such as recent college graduates or first-time renters. Ex-pats relocating to New York also face pushback, despite many having well-qualified incomes and corporate guarantors. For potential renters who, for one reason or another, don’t meet current credit standards and don’t have glaringly bad credit issues, a category of Internet-based insurers, i.e., “insurtech,” has emerged over the past decade to solve many of these issues. Among the digital saviors are such companies as Leap, Insurent, Jetty and Rhino. In newer developments, especially those catering to millennial and Gen-Z tenants, it is not uncommon to have an inhouse relationship with an insurtech firm to expedite the leasing process. And while the purpose of insurtech companies is to guarantee that rent is paid on time to the landlord, some also go so far as to provide security deposits, too. As with third-party credit companies, credit checks in this particular digital space are fast and, again, it’s the applicant’s responsibility to pay for the search. The difference for the renter is that they continue to pay a separate monthly fee to the insurtech firm through the life of the lease.
In the end, the purpose of a comprehensive credit and background check is to make sure there is a responsible tenant who pays rent on time, does not damage a property and will not break the lease. After all, the primary goal is to protect the asset.
