Utilizing credit reports in tenant screening

Proper tenant selection is arguably the most important task in operating a rental business. While we noted earlier that credit checks are not a panacea, they are one component of instilling confidence in making a leasing decision.

We normally loath making blanket statements, but on this subject, we can assert some. Any screening fees cannot exceed the landlord’s out-of-pocket costs, and any expenses that are incurred during this vetting process must be itemized and shared with the prospective tenant. If there is a deficit between the amount of time and money spent in screening the tenant and the fee the landlord collected, the difference must be refunded.

What if the landlord or their agent rent to a tenant before they evaluate another candidate vying for the rental unit? The landlord cannot pocket the money. If no work or expenses were incurred, landlords must refund the entire screening fee. In other words, an application fee is more than a prospective tenant throwing money into a pool to be considered as if it is a rental lottery – the application fee must reflect the actual hard costs of running a check and is not a game of chance.

At Bornstein Law, we are sticklers for bookkeeping and have seen many disputes arise where there is not proper documentation. If rental property owners are fortunate to avoid litigation fomented from untidy accounting, they may get a knock on the door from the California Department of Real Estate, an agency that is all too willing to make a closer examination of the books from time to time.

Assuming that credit reports are properly pulled and accounting is in order, the question is how to interpret the raw data. Here in San Francisco, the average credit score of those approved for an apartment is north of 724, according to RentCafe, earning the city the dubious rank of second in the country in terms of credit required to get an abode.

Evaluating credit is a subjective matter, and we might recommend looking beyond the score. Some of our clients, for example, would gladly welcome a tenant that has $200K in medical debt, versus a tenant that has $20K in credit card debt, isolating candidates that are prone to exorbitant spending and living beyond their means.

Tenant screening is part art and part science, and the numbers do not always tell the whole story. We have encountered many landlords and property managers that eagerly handed over the keys to a credit-worthy applicant, only to serve a 3-Day Notice or commence an unlawful detainer action later.

For this reason, we recommend that you do some front-end work and do not cling entirely to credit reports. The law and a culture of amnesty can conceal a tenant’s credit, criminal and eviction history making personal sleuthing more important in the digital era.

The rental business is tough, even beginning before the inception of the landlord-tenant relationship. Our job at Bornstein Law is to make it a little easier by aggressively representing, counseling, and advocating on behalf of rental property owners.

Daniel is the founding attorney of Bornstein Law, the San Francisco Bay Area's foremost authority on managing landlord-tenant relationships, property management issues, and complex real estate litigation. Having protected the rights of property owners for over 23 years, he is also renowned for his educational workshops, his speaking engagements with numerous organizations, and as an expert witness. Contact his office today.

 
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