The Rental Business: Processing a Lease Application

In the last post we talked about showing your house and collecting the application. Now, we’ll talk about how to process the application.

After you have arrived at your qualification criteria for your tenants,  create an “Application Instructions” document and publish it along with your listing in MLS. This document should clearly call out what your criteria is and how you go about processing the application. It should state – of all the would be residents, who all should apply and what the application fee per applicant is. For an example, take a look at the application instructions published on dallasrenthouse.com. Get each applicant to sign your “Application Instructions” along with the application.

How to collect the application fee? When you collect the application either immediately after the showing or later by fax or email, you must collect the application fee. If you are meeting them personally, then you can either collect cash or cashier’s check/money order. Before you have established a business relationship with your prospective tenants which comes after you have processed the application fee and collected the security deposit, do not collect any payment in the form of personal checks. Always, insist on a secure and reliable form of payment like a cashier’s check or money order. If you receive the application form by email or fax, you may be able to collect payment online by sending them a “Request to Pay” from your bank account. The option of using PayPal or other such fee based service may not be cost-effective for the small application fee.

How much should the fee be? A full application verification process including credit and criminal check will cost around $40. You can check sites like www.citicredit.net for their rates. A $35 to $40 application fee per applicant is not unreasonable in the Dallas, Fort Worth, Denton area. The cost to perform the full verification will sometimes exceed that fee. You may not always be able to pass the full cost to your prospective tenant as there is a market application fee. If you application fee is too high for that market, you may lose some otherwise qualified tenants.

The Verification Process

Your verification process is the method you use to ascertain that your prospective tenants meet your pre-established qualification criteria. Here are some of the steps you may use in your verification process:

1.       Identity Verification:  All other credentials, even if met, are futile unless you can clearly associate those credentials with the person in question. So identity verification is key. When you collect the application, check their driver’s license or other state issued ID. You may want to collect a copy of that ID along with the application. If you are collecting the application on site after the showing, you can easily take a picture of the ID on your mobile phone.

To run the credit check, you need their social security number. The standard TX residential lease application form will ask for this information. Verify either their social security card or some other document like their pay stub, tax return or military id that has their social security number along with other identifying information on it.

It is important to look at the picture in the provided ID and make sure that is the person you are interacting with.

Identity theft is facilitated by not enforcing strict identity verification. So as a landlord it is your responsibility to not only be careful with identity information provided to you, but also to ask for sufficient identity verification in the first place.

2.       Income Verification: It is important to establish sufficient recurring income. The simplest verification process might be looking at pay stubs to see not just current income but recurring income and year-to-date numbers. If the applicant has business or commission income, verification could be a bit more tedious. Use bank statements and/or tax returns to verify sufficient income.

3.       Credit Report: You will have to create an account with one of the credit query companies like www.citicredit.net that will enable you to verify a prospective tenant’s credit. To run a credit report you will need the person’s social security number, date of birth, current and previous addresses, full name and written authorization. The standard Texas Residential Lease form has a “Release of Information” authorization page for this purpose.

A credit report contains sensitive personal information. So treat it with utmost care. Learn what the record keeping and confidentiality laws are. Read the discussion on what to look for in a credit report in our earlier posts.

4.       Employment Verification: This is not the same as verifying pay stubs. Pay stubs only show the past. You must verify if they are still employed. Your prospective tenant will provide information on current employer in their application. Contact the employer’s HR department and find out what the employment verification process is. Do not simply call “Joe the boss” as that’s what your prospective tenant told you to do. Establish independent contact with the company and find out what the process is. Then use the process. The “Release of Information” authorization should allow you to perform employment verification. Some companies will have a process such as www.theworknumber.com where the employee will have to setup a code and then give it to you for processing.

You will often run into the case where your tenant is from out of state and is moving into the area. They may be taking up a new job. You will have to still contact the new company’s HR and obtain employment confirmation in addition to verifying some document like the offer or transfer letter. Note that past pay stubs are not that significant in this case.

5.       Verification of Prior Residence: If they are currently renting, call the current landlord. Ask him/her if they have paid on time, maintained the property well and have given proper move-out notice. If they are renting an apartment, the management company should provide this information after they collect a copy of the “Release of Information” form from you. Sometimes, current landlords have an ulterior motive and may not provide correct information. They may not want them to leave and provide bad information or worse, may want them to leave and paint a rosy picture. So, calling the previous landlord is a good cross check. They don’t have any incentive to mislead you (anymore).

If the applicants own their home, you may want to check if their home is on the market. Consider their current mortgage payment and see if they can still pay your rent even if they do not sell their house. This is especially true in a home buyer’s market where it could take a while to sell a house.

6.       Criminal Check: You will be able to query the national crime database using services like www.citicredit.net. Public databases may also be available. You typically need the same information to pull a person’s criminal report as you need for the credit check. Some verification services will offer a package deal to obtain credit and criminal reports together.

The Order: The order in which you check is largely up to you. However, some checks have fees associated with them and some don’t. So you may want to do the free checks first and run the ones that have a cost, one at a time after. However, note that it may be more expensive to run credit and criminal (the two that you often end up paying for), separately. One other thing to consider is that employment verification could take some time. So you may want to send an inquiry into the applicant’s employer while you perform other checks.

To summarize, set up a verification process like the one we have talked about here that enables you to ascertain with a high degree of confidence that the person meets your qualification criteria. Document your verification process and discuss it with your attorney to make sure you understand the laws that may govern your process.

Your tenant qualification criteria, application instructions and verification process are three overlapping but separate items. Keep them documented as a part of your business file and use them consistently house after house, applicant after applicant. If you end up changing any of these documents, keep a dated change record.