Finding a Good Tenant in a Bad Economy

As one the oldest Orange County property management companies, we have identified and screened thousands of potential tenants for our clients over the years.  When performed correctly, the screening process may save the rental property owner thousands of dollars in future unpaid rent, repairs, and eviction costs.

In prior years, the process of identifying quality tenants was much more scientific.  Most Los Angeles and Orange County property management companies had a specific checklist of items they would use to predict the prospective tenant’s likelihood of fulfilling his monthly rental payment obligation.  In essence, this process required the applicant to have great credit and substantial income.

This means that if a prospective tenant had a great credit score (which more often than not accompanied a credit history free of bankruptcies, foreclosures, and evictions) and an income that was at least three times his monthly rental payment, we would assume they would make a good tenant
for our client’s property.  Of course there were always exceptions, but as a rule, this approach served our clients well for almost a half a century.

Unfortunately, the current Los Angeles and Orange County property management markets have experienced a dramatic decrease in the number of “credit worthy” applicants.  Although there are still individuals out there that have great credit, we have found that such prospective tenants have become the exception, rather than the rule.  As a result, when rentals are not well priced, a homeowner may end up waiting months for a credit worthy tenant.

In response to this issue, we have modified our tenant screening process dramatically.  As a result, it has become more of an art, than a science.  Now when we come across credit challenged applicants, we gather all the facts including events that may have resulted in the applicant’s less than perfect credit score, and then ask ourselves if the credit score is a reasonable indicator of whether he will fulfill his monthly rental payment obligations in the future.

During law school I learned that when a judge decides a dispute, he looks at the “totality of the circumstances.”  This simply means that a judge considers everything before he determines which party will prevail.  We now follow the same approach when evaluating an applicant for one of our clients’ properties.

Under the totality of the circumstances approach to tenant screening, we look at many different factors when analyzing the likelihood of a prospective tenant paying his rent timely.  That means that if an applicant has a low credit score, we will dig a little further to find out why.

One of the most common examples of how this approach has recently affected our Riverside, Los Angeles and Orange County property management clients is when the applicant’s low credit score is the result of a recent foreclosure.  In prior years a foreclosure would be the kiss of death for a prospective tenant.  Now however, we go through a thorough evaluation of the circumstances surrounding the foreclosure.

We want to find out if perhaps the applicant lost his home as a result of an adjustable interest rate loan that reset at a higher than expected rate, thereby making the mortgage payment unmanageable; or if the home was loss as a result of one spouse in a dual income family experiencing a loss or reduction in income.

When such circumstances exist, we look at the credit report line by line and determine whether the applicants maintained a timely payment history on all of their remaining accounts despite the foreclosure.  If they did, it is a good sign that they take their financial obligations seriously and “but for” the unforeseen circumstances they would have continued to pay their mortgage on time.

There are several other factors we go on to look at such as the amount and stability of their income stream, employment history, debt to income ratio, and ability to provide a cosigner.  After gathering all of this information, we would assess it and make a recommendation to our client, with whom the final decision on whom to lease to always rests.

I should note that when utilizing the totality of the circumstances approach we do remain conservative as we do not want our clients to take uncalculated risk.  However, even though our approach is not scientific and the outcome for our client is not guaranteed, the results have been positive.

Although we specialize in providing Riverside, Los Angeles and Orange County property management services, the totality of the circumstances approach to tenant screening should work relatively the same wherever your rental property may be located.