Whether you have one rental property or several, one of the most frustrating parts of being a landlord is screening tenants to make sure that you are choosing someone who will respect your property and pay their rent on time. So many landlords approach finding a new tenant by relying on what they call a "gut feeling." And while there is nothing wrong with trying to get a read for the person in front of you, trusting your gut feeling in order to determine whether or not someone will be a good tenant is not the smartest approach to tenant screening. For one, having a good "interview" does not guarantee that a potential renter will be good to have around your home.
We hear how many rental property owners have their own system of choosing the best tenant to fill a vacant space. This could include their friendly interview with potential renters and possibly a quick look at their paystubs or last years tax returns. And of course there is the gut feeling that a landlord has in choosing a great tenant for a rental property. We have spoken with many rental property owners that have in the past followed this process, and it has worked well for them. But on the flip side of that there are situations when things have not worked so well. A rental property owner could be left with a $5,200 loss in value, plus a couple of months of lost rental income while the property is trying to be filled by new renters.
Most people in the real estate investment niche and rental property ownership take a more organic or gut-check-based approach to selecting tenants. Professional tenant screening can be foreign to some. This is a post for owners of rental properties who would like to gain an understanding of the more professional approach, as well as where the common approaches fail and how screening for a quality tenant can assist in avoiding such a scenario.
The Real Cost of a Bad Placement
Let's start with the number that gets people's attention.
Cost of a Bad Placement: A single eviction in Virginia can cost an owner $3,500 to $7,000 or more. Court filing fees alone for an eviction in the General District Court in Virginia for example are $61 to $85. Then there are 30 to 60 days of lost rent (as the eviction proceeds through the court) and then there are attorney fees to remove the tenant. In the end, there are also the costs of turnover to get the unit ready for new renters. When all is said and done, an owner can lose $5,200 or more in a two month void of rental income.
An example of this would be in North Chesterfield where a rental property owner self-managed a property for many years. He said that the applicant seemed nice enough prior to moving in, but when rent failed to arrive for the 3rd month running he discovered in conversation that the tenant had informed his employer of a change of address. He took on a new owner who then re-advertised for tenancy and the property ultimately incurred a turnover cost of around $5,200 and two and a half months of lost rental income as a result.
That's not a cautionary tale. That's a Tuesday in this market.
Why Credit Score Is Only Part of the Picture
Here's something to consider: a 750 credit score does not make someone a great tenant.
Credit scores are built on how someone manages consumer debt, credit cards, car payments, personal loans. That tells you almost nothing about how they communicate during a maintenance issue or whether they'll report a leaking pipe before it becomes a structural problem.
We have seen numerous instances where owners have put "nice people" in their rental properties and then found themselves dealing with problem tenants. These tenants would at first make timely payments and seem like perfect renters. But then they would stop paying rent and when they moved out they would leave the property in disarray.
For our owner's our credit minimum is 620-650 depending on the property and circumstances. In addition to a good credit score there are many other aspects to consider when evaluating a potential applicant.
Income Verification: The Ratio That Actually Matters
There are a number of different ways to calculate and qualify income, but as a rule of thumb most property management companies follow the 3x rent standard. Using the $1,800 per month example above, an applicant would need to show gross income of $5,400 per month to qualify for the rental. In looking at current listings for single family homes in the greater Richmond area, the average rent is somewhere in the neighborhood of $1,750 to $2,100 per month, depending on location and condition.
We've recently taken over management of a single-family home in Henrico County. When it was self-managed by the owner the previous tenant had been placed based on friendly conversation with the owner and the tenant's verification of employment based on a single pay stub (screenshot of pay stub, not even a print out). The owner thought everything had gone well until 3 months later when he stopped paying rent. He was ultimately evicted from the home and was out about $5,200 in lost rent and repair costs. Although the tenant appeared fine on the surface there was clearly hidden trouble and the owner had been blind-sided by lack of solid documentation and proper verification before renting to him.
For income verification we use the 3:1 rule (3 times the monthly rent in gross income) and verify the applicant's income via recent paystubs, an employer letter, or most recent year of W-2s. We can also verify the income of self-employed individuals via review of their tax returns or bank statements. It is also very important to note that applicants will often complain that we are not accepting them due to lack of income documentation. As with all items in the application process we use this information to make our determination.
Rental History Is the Underrated Filter
Rental history on prior landlords is a very valuable item that is typically never verified. By verifying the rental history on prior landlords we can get a better indication of whether or not an applicant is going to make a good tenant.
Rental History Verification- Verifying prior tenancies is not the same as using a service to check credit reports and run background checks for prior rental payments. Verifying a prior tenant's rental history is more valuable than most other criteria used in the tenant selection process. That is to ask prior landlords whether or not rent was paid on time, whether the applicant ever violated terms of the lease in question and whether or not the landlord would rehire that applicant for future tenancies.
The Legal Layer: Fair Housing and the VRLTA
Remember, we are managing rental properties in Richmond City as well as Henrico, Chesterfield and Hanover. These properties are subject to the Virginia Residential Landlord and Tenant Act and thus there are specific provisions with which every landlord must comply.
First, all landlords must apply the same written criteria to the screening of all applicants. Landlords cannot pick and choose who they want to apply their criteria to, nor can they change their criteria in the process of screening applicants. Applying different criteria to different applicants constitutes discriminatory practice in violation of both state and federal Fair Housing laws. In discriminatory practice cases, the Federal government can impose a penalty of up to $16,000 per case for the first offense, and the Virginia Fair Housing Office can also investigate discriminatory practice complaints.
(2) Source-of-income discrimination is also prohibited in Virginia since 2020. The law does not specify any restrictions or maximum amounts for landlord charges to tenant using section 8 or other "source of income". Therefore as long as PMI James River applies same criteria for all applicants for a property (such as gross rent income divided by 3 for minimum qualifying income, same pass/fail criteria for all applications for the property for background checks and prior rental history, same rental criteria verbiage in advertisements and lease agreement, etc.) we will manage Section 8 and HUD rental properties and treat all Housing Choice Voucher holders equally to other applicants with same qualifications for a property.
Blanket screening criteria for criminal history have recently become a very touchy topic due to HUD enforcement actions that have sought to ban landlords from performing background checks on applicants in the past. The HUD approach to the issue has been to advise against applying such blanket criteria and, instead, performing an individualized assessment. The type of offense, how long ago it occurred, and whether the individual has rehabilitated themselves, are some of the factors that must be considered.
Consistent documentation isn't just good practice in this market. It's your legal shield.
"Flexible" Screening Isn't Kindness, It's Liability
Every so often we'll get an owner to describe the scenario of an owner doing rental history checks on a particular applicant who's going through a difficult time, i.e. a recently divorced female with 2 small children – they've just gone through a difficult time in their life – and in doing so, they're going to give her a break because of the recent change in her life as she's gone through a recently divorce and is starting from scratch in a newly found single status. Other scenarios include giving recently laid-off applicants a break too in hopes of rehabbing a rental history of late paying rent (usually caused from decreased income) that resulted from unemployment of newly hired applicant in hopes that said applicant can return to fully paying status as he become newly fully employed again.
Landlords who screen applicants in a formal, consistent manner have 3-5 times lower eviction rates than those who don't. The landlord who is unwilling to be consistent in his/her application of screening criteria is putting himself/herself in risk of an adverse proceeding with a tenant the landlord was attempting to help. The landlord's intent to give the applicant a "chance" gets lost in the negative light of having to evict the tenant.
A Richmond City owner recently shared with us his "leson learned" in Rental Property Management. The tenant he put into a property had a 580 credit score. The person reported that he was self employed. His rent became inconsistent within 60 days of his lease commencing. It cost the owner $4,000 plus 2 months of vacancy before he was able to remove the tenant from the property. This was not because the owner was careless with the selection process. It was because he had made an exception to his normal criteria and had no criteria documented in writing as to why he made the exception. He felt that he had been fair by letting the tenant have the property. But the tenant was not fair to the owner. The owner had given the tenant the benefit of the doubt. The owner had made an error in judgment by not strictly following a criteria for screening potential tenants.
Using a consistent and proper method of screening applicants is in the best interest of both the landlord and the applicant. The landlord has protection from applicants who have a poor rental history and who are likely to have problems paying rent on time. The applicant has a clear set of criteria against which they will be judged and can determine in advance whether or not they qualify for a rental property.
Security Deposits and What Happens After Move-Out
Regardless of whether you are in a state that allows withholding of a security deposit for certain charges (like VRLTA in Virginia) you must return the entire amount of the security deposit to tenants (plus any accumulated interest) within 45 days after the end of the lease term. Failure to comply with this could result in the full return of the deposit plus attorney's fees. This is an issue that can really hurt self-managed landlords, especially when there is a delay in an end of lease inspection. We have seen many times where a landlord fails to take proper photos and document the condition of a rental unit at move-in only to have tenants claim damage at move-out. By documenting all damage and dirt with photos at move-in, landlords can avoid these disputes altogether.
So documenting your properties' condition before a tenant moves in is crucial for ascertaining any damages and losing any money at move-out. We utilize online tool RentCheck for said process of documenting properties for move-in and move-out. The photos taken at both times are documented within the respective inspections, include timestamping to track when photos were taken. It is also crucial that such records be kept and remain online throughout tenant's time at rental property. After tenant has moved out of said rental property, said online portal may then be used to document said property's condition at the time of tenant's departure as well.
When Maintenance Behavior Signals Tenant Quality
Here's something most landlords don't factor into screening: how a tenant is likely to handle maintenance.
We also examine an applicant's way of communication and how they would manage maintenance. We look at their manner of how they would report and handle certain problems. For example, would they read the entire lease contract before signing it, or would they want to rush into signing it.
The Step by Step Process for Tenant Screening with PMI James River
After credit, background and eviction checks have been run, we verify the applicant's income by reviewing their paystubs and W-2s and contact their prior landlords to get their perspective on the applicant's rental history. Each application is reviewed against our written qualifying criteria and we document our entire process through Rentvine so nothing is lost in someone's inbox.
If you are finding the process of tenant screening to be more complicated than it should be, or if you have had a poor tenant placement, we would love to discuss the various tools and methods that PMI James River uses to bring value to our property owner investors.
FAQ
How long does the tenant screening process typically take?
Each of our managed properties goes through a structured screening process and typically completes an application within 3-5 days. Don't try to fill a vacancy by taking the first applicant through the door – it will most likely end poorly in the long run.
Can a Virginia landlord reject an applicant who uses a Section 8 housing voucher?
No, a landlord may not reject an applicant based on the fact that the applicant uses housing assistance to pay rent, such as Section 8 housing vouchers. Source-of-income discrimination has been prohibited in Virginia since 2020. Voucher holders must be screened just like all other applicants for rental properties in Richmond, Henrico, Chesterfield, and Hanover.
What credit score should landlords require in the Richmond area?
We typically use a minimum credit score of 620 to 650 in order to ensure that applicants have sufficient credit history to be able to manage rental payments. However, credit score is only one component of a complete tenant screening and should never be used in isolation to make a renting decision.
Bad tenant placement: what is the true cost to the landlord?
A full eviction cost a Virginia landlord typically $3,500-$7,000 or more in lost rent and additional fees for services of attorneys, servers, and process servers, plus the cost of any damage to the apartment that was done by the tenant during their lease term.
How long does a Virginia landlord have to return a security deposit?
A Virginia landlord has 45 days in which to return the security deposit for a tenant who has vacated the rental property. If he fails to do so within the 45 days, he will forfeit the security deposit plus the tenant's attorney's fees for collecting what is lawfully owed to him.
Is it legal to have a no-pets policy for a rental property in Richmond?
Typically, policies regarding pets are allowed under Fair Housing laws as long as you make the necessary accommodations for individuals with assistance animals regardless of your pet policy. That being said, a blanket "no pets" policy can typically decrease your pool of applicants with little gain. Creating a set of parameters for acceptable pets can be good for your property and help you be competitive in the local market.
