How to Choose the Trustworthy Tenants
January 13th, 2014 by Alisa Sava
Commercial property rentals are different from residential ones. Usually a tenant rents commercial property for three or five years. The amount of money at stake is substantial, that is why choosing trustworthy tenants is very important and could determine the overall success of investment.
Any commercial property owner is looking for tenants who consistently pay rent on the first of the month, treat their property with care and don’t cause any kind of trouble with their neighbors. Without any doubt, finding a good tenant is a challenging task, but there are some simple rules which could help you to make the right decision.
Before signing a contract, it is important to conduct a deep check of the tenant’s background and get information about their past properties and business history. A careful tenant screening will help prevent fraud and reduce income loss. Here are some useful tips on how to choose the trustworthy tenant:
Setting Your Screening Standards
While organizing the process of the tenant’s screening, first of all, identify your criteria: the level of income, references, clean criminal record, no evictions, etc.
The Ability to Pay Rent Is the First Quality of a Good Tenant
Many tenants think that they can afford more than they really can. So, in order to feel secure, avoid legal fees, lost rent and other kinds of damage, choose the tenant who earns at a minimum three times more than the cost of rent.
A Solid Payment History Says a Lot about a Tenant’s Responsibility
It is not a pleasant experience when a tenant doesn’t pay on time. Usually a tenant who pays late is likely to stop paying all together. So, to avoid this stressful situation, be aware of the tenant’s payment history. You can also receive this information from the previous tenant’s landlords.
A Clean Tenant Background Is Another Important Thing to Check
The tenant’s involvement in any crime, drug or other illegal activities will cause you nothing but troubles and expenses. A tenant who recently faced an eviction is not a good choice either. Thus, be sure that you have checked these records carefully.
The Tenant’s Job Stability Is the Guaranty of Timely Payments
The ability to pay rent and pay it on time depends on the tenant’s job situation. If you see that the tenant’s job is uncertain or he/she is eager to switch it, consider choosing another applicant. If the tenant becomes unemployed you will probably stop receiving the rent check.
Starting the Screening Process
Don’t waste your time on people that won’t fit your search criteria. Organize you screening process in the right way. Creating an advertisement, a custom application form and using social networks can facilitate this process.
Advertising Helps Weed Out the Wrong Applicants
Advertising your property in the newspaper, on Zillow.com or other services will help you to weed out the wrong applicants on the first stage of screening. Placing the location of your property in the advertisement will automatically narrow the list of potential tenants. Declaring the price in the ad will attract only those people who can afford it.
Creating the Application Form
Make sure your application looks professional and be sure to include all the necessary questions. Ask for as much information that’s legally allowed. The application might include:
Personal information, such as name, home address, phone number
Social security number and date of birth
In the application you should also ask for permission to perform a credit check. To check the credit history of your prospective tenants you will need to request it from one of the three national credit bureaus that could provide all the necessary information. This way, you will get to know if the tenant has been paying bills late or not, if they have gone through bankruptcy or have ever been evicted. To get a credit report, you need to have a tenant’s name, address and social security number.
Face-to-Face Interview – the Most Important Stage of the Tenant’s Screening
After you have chosen your potential tenants, it is time for a face-to-face meeting. An in-person interview is a good chance to check the tenants’ punctuality, their vehicle and personal appearance. If, for instance, the tenant comes late without letting you know, he/she probably is a kind of person that cannot be trusted. Looking at characteristics like friendliness, politeness, and commitment, you can get a better understanding of the tenant’s trustworthiness.
Here is the approximate list of documents to ask your prospective tenants to bring with for the in-person meeting:
5 years of financial statement of the tenant’s company
Personal financial statement
Mission statement describing the tenant’s company
Report on the tenant’s recent financial standing
Recent tax returns
Proof of Insurance
All existing loan documents
Copies of all current leases
Copies of the recent engineering and environmental reports and appraisals
Moreover, it is important to remember that there are some specific questions that are legally prohibited to ask. These are questions concerning tenant’s origin, race, religion, sexual orientation, family status, etc. So, in order to avoid any percieved discrimination against your prospective tenant, you should be a good diplomat.
Checking the Tenant’s Personal Background Is Essential
In commercial leasing, tenants use a corporation’s information rather than their personal info. But, if the tenant has never leased before, we advise to verify a personal data to see if the owner is able to pay the lease in case the business closes. So, it is crucial to check the following information:
Address and all basic personal information
Previous criminal activity
Past and present business status
Look for Additional Information in Social Networks
Of course, the information provided on social networks can’t be viewed as an absolute truth. But in today’s world, people reveal more secrets on their Facebook, Twitter or Google+ than to their mothers. You can’t ignore this as a resource for additional information.
Good References from the Past Landlords Are Essential
You should ask for references from both the prospective tenant’s past landlords and personal friends and family. This will give you a more comprehensive view. Choose the candidate who has only good references. And always follow the rule: if you can’t verify some information, deny the application without a second thought.
Hiring a Real Estate Agent Makes the Process Easier
There are a number of services that real estate agents offer that could help you with the screening process. They will make your job easier and selection more accurate and fast. Usually screening companies perform criminal searches, credit checks, reference checks, validate social security numbers, etc. Their reports can be used to back up any argument of your choice as well as document that you are not discriminating a prospective tenant based on sex, race, etc.
Real estate managers have an access to the tenant database which allows them to do a deeper check and analysis of information. Another benefit of hiring a property agent is that they will serve as a mediator between you and your potential tenants. This helps prevent any conflicts of interest. Moreover, after finding the tenant, the property should be inspected from time to time to see if it is well cared for. This task can be also delegated to your real estate manager.
Of course, screening this way will cost some money. But, in order to avoid any expenses, all the screening costs can be passed on to the prospective tenant – it is a frequent practice. Among the most reputable tenant screening companies are E-Renter.com and TVS Tenant Screening.
Using screening services can help you save time, minimize risk and prevent losing significant money in case of fraud.
Choosing a trustworthy tenant is a challenging task. There are a hundred ways to do it and no “right way,” because what works for someone else may not work for you. However, at a minimum, you can ensure that the potential tenant can afford the property, will pay on time, and will not destroy the place. Indeed, by effectively screening the prospective tenant – looking into the data provided by the tenant as well as analyzing outside information – you can reach a reasonable estimate and reduce the chance of fraud and undesirable income loss.
We hope that our guide will help you distinguish a good tenant from a bad one and make the overall screening process easier.