Do Your Tenants Need to Know How to Budget?

I listened to a web cast today on how to fill vacancies with residents who will pay rent.  I was surprised to hear that the incidence of failure to pay rent is going up.  The fact, according to this presenter, is that rents are rising and incomes are staying the same.  That means that more of a family’s budget has to be put toward the rent. There are several safeguards that can be used by the property manager when renting to someone with little or poor credit history. But the one least used, that comes to mind for me, is giving the tenant a bit of good old fashioned education about how to budget.

Young people, especially students, are sometimes on their own for the first time. Budgeting may be taught in business classes but I have not heard of it being taught in school as a general rule.  Another category of high risk families is single mothers with no child support.  However, poor rent payers are not just limited to these groups.  They come from all income levels and backgrounds.  But everyone needs a place to live.  Everyone needs shelter and to be able to feel safe and secure in their home. Furthermore, it is against the law to discriminate when considering an applicant unless that applicant obviously does not earn enough money to pay the rent.  So there are going to be times when you will rent to a high risk tenant.  Of course you always use tenant screening, and check pay stubs, and speak with employers, and past landlords before deciding to rent.  Those are tried and trusted ways to get good tenants.  But we have all had to get after our tenants at one time or the other for failure to pay on time.

budgetingThe next suggestion I have is that these high risk  tenants should get the budget your money talk.  “The rent” is the most important payment a resident makes each month.  Oh they may argue that they need a car more than a place to live, but with that mentality, they could end up living in their car.  Ideally rent makes up 25% of the monthly budget.  But recently it has creeped up to an average of 33% of the monthly budget.  That leaves car payments, insurance, utilities, food and clothing and finally entertainment to be budgeted (planned). Hopefully they are not into using credit cards when they run out of their own money or the situation could escalate from good to bad very fast.  If at risk tenants turn this sequence around, you will see many failures to pay rent. Unfortunately we see the reverse sequence all too frequently. (i.e. entertainment, clothing, food, utilities, car payments,insurance, rent)  At least if you have the talk, you will put them on alert.  Hopefully they will realize that budgets are a great way to keep everyone happy and give them the feeling of control over their lives.

I have been in property management for many years managing my own investment properties, before I bought a software company that provides software for property management. In both capacities I have heard all kinds of excuses and reasons for late rent payments.  You all have heard them.
“I mailed the check. Didn’t you get it? It must be lost in the mail”.
“I gave the rent to my husband. Didn’t he give it to you ?”
One of the best was “I had to take my kids on vacation and don’t have enough left
to pay rent.
“I dropped an envelope with cash in the door slot of the office.  It is not my fault if someone stole it.”
And another doozie “I already paid the rent last month.”

Then there is the issue of paying on time.  When you don’t get paid on time, your own budget and finances suffer.  It costs the property manager money every time a rent is late.  Of course we have found that through use of online automated rent payments, the excuses go away.  There is no more excuse for late rent because it takes the guess work out of where the rent is and all of the arguments listed above, except the vacation situation, are no longer valid.  But that is a topic for another blog.

I think it is a great idea for the property manager to talk with any young tenant, first time tenant or person with poor credit about “the importance of paying rent on time, every time it is due” before handing over the keys.  Sometimes they need to hear that rent should be the first bill they pay before they spend money on anything else.

The other question to ask your new tenant is on what day they get paid.  A solution to late rent payments may be as simple as setting the date rent is due to a couple of days after the person gets paid, or at least make the grace period long enough to accommodate that tenant. In some cases, it may be a good idea to add language to a lease document stating that the conversation about how to budget for the rent payment was done.  It may also be a good idea to offer a booklet about budgeting with a sample budget to demonstrate how easy it actually is.  I realize that this kind of approach will not solve all of the problems with poor rent payers but it may bring your percentage of on time rent payments up a few percentage points.

Timmi Ryerson
Smart Property Systems
help@smartpropertysystems.com

What To Look for in a Tenant Screening Report

If you follow our blogs (Problem Rental Solutions and Real Estate Asset Links) you have read how important we believe tenant screening is. So this article will tell you what you need to know about reading the Tenant Screening Report. You cannot request a credit report directly from a Credit Bureau.  You must use a portal to request a screening that the tenant approves and fills out before that report before it is sent to you.  Tenant Screening is built into the Smart Property Systems platform for your convenience. You order the report which generates an email to the prospective tenant and they log in and fill out the data. Once you get that report back, it is important to be able to understand what you are seeing.

First check the tenant’s credit Score. Some reports give a FICO score and some give a Vantage score.  The Fico score is that score given by the credit bureau which provided the report.  A Vantage score is a combination of all three FICO scores from the three main credit bureaus that serve the US.  Scores range from 300 (poor) to 850 (best).  Generally any score above 650 shows reasonable risk and indicates that the tenant will make regular rent payments. Scores below that level will put you on notice that you need to get more security deposit and or first and last month’s rent.

The report should be checked for a history of bankruptcy.  The report will also show payment history for any credit accounts where regular payments are expected.  Check for payments to credit cards or revolving credit accounts with merchants. If they are showing green or on time that shows that the applciant pays their obligations regularly. That will give you an idea of how this prospective tenant views payment obligations such as rent.

Personal injury claims and civil lawsuits are reported on some types of reports.  If the prospective tenant is local to your area, you can also check that history at your county courthouse. While you are at it, do verify employment and the amount of pay claimed on the application. If there is a previous landlord, call and check the tenant history.  Ask specific questions to be sure that you are not calling a friend of the prospective tenant and not the real landlord.  Previous landlords can be your best source of information when deciding to turn over your valuable property.

Eviction data is currently not very reliable. Even if the report says that no evictions have happened, it may not reflect the unknown data.  If the tenant was served with papers and moved before the eviction date, this information is not reported by the courts because the case was never heard.  Many jurisdictions do not report eviction data to the general public.  Credit and data bureaus are working hard to change this data void but it may take years to get a reliable eviction report.  You can check for evictions in the county in which you own property however in court records.

If you have ordered a report that gives you criminal history, be sure that it shows Felony, Sexual Predator and Homeland Security scans. If not, change your source of reporting. This information has become especially important in the past several years. I also recommend that the report inherently verifies Identity and Social Security number. (Yes, there have been reports of people using someone else’s social security number because they have bad credit.)

Your Application Fee should help you cover the cost of the tenant screening.  Typical Application Fees normally range from $30 to $70 and are payable when the application is submitted. In California there is a new law requiring you to show the tenant your charge for tenant screening.  (read this law).  This fee is to cover the cost of your time and screening and risk management for your properties.

If you decide not to rent to a person because of low credit scores or information you have received when doing your due diligence, you are required by law to provide that person with the name and address of the credit bureau or agency that reported  the negative information and or the reason for denial.  You must also inform this person that he has a right to obtain a copy of the credit report from that agency by contacting that agency within 60 days of being told that the application was rejected based on the individual’s credit report. (see article) Those forms are built into the library at Smart Property Systems and can be embedded with esign for your protection.

Tenant Screening well done can help you create a quality tenant mix for your properties.  You will have tenants who pay rent on time, care for the property and get along with neighbors. It is a necessary part of the tenanting process.

By: Timmi Ryerson, CEO
Smart Property Systems
smartpropertysystems.com