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SELECTING A TENANT SCREENING SERVICE

Copyright 2002-2014 Landlord.com

The prudent evaluation of the rental prospect used to be a laborious exercise of interviewing employers, friends, previous landlords and other references, and deciphering occult credit reports which may be accurate or not, then, in all likelihood, flipping a coin. In recent years, services have arisen, devoted to the needs of the real estate rental market, not only to dredge up information on rental prospects, but to evaluate these prospects, verify employment and interview references, and even make decisions to rent or not, based on criteria the landlord has vouchsafed to the service. These are collectively referred to as screening services, and can do much, if not all, of the work the landlord used to do on his own. In one role, they can be used as a single source to obtain all the information the landlord needs to make his own decision on whether or not to rent. In another, they can be used as subcontractors to whom the entire decision to rent or not can be delegated, with the advantage that they are likely to be much more objective because not under pressure to fill a vacancy. The role the landlord selects will affect the process by which he decides which service to use.

The information which the landlord wants in order to screen falls into the following categories:

1. income and employment

2. rental history

3. eviction history

4. credit history

Some landlords have also begun ordering criminal background checks. The value of these, given the present state of the art, is still a matter of debate, so they have not really yet become part of the standard screening package. Most screening services provide them for an additional fee and at an additional cost in time to produce them. See our article on evaluating the applicant's credit for some of the pros and cons of these reports.

Whether the landlord sees the screening service as nothing more than a convenient point at which to procure a credit report and eviction history, or as a complete turn key service, accuracy is the first requisite. Whatever the service reports should be true.

The second requisite is thoroughness. Not only should everything which the service reports be true, but the service should report everything that is true.

The best credit history will be obtained from a company which provides a merged report from all three of the nationwide credit reporting agencies, Experian, TransUnion, and CBI/Equifax. What will appear in one will not necessarily appear in all. The rental history is more problematic, as there are no national reporting agencies. There are differences among them, however, and the landlord should not be hesitant to ask the screening company which service they use and what areas it covers. If the area in which the landlord does business is not one of them, then the screening service may be only of limited use, as most of the landlord's prospects will come from relatively close by. Rental history is, if properly interpreted, the most critical of the public record screening tools. The use of national credit reporting services by the screening agency does not guarantee a relevant rental history report, as evictions do not necessarily show up on the national credit reports. The criminal records check is more of a problem still, due to the way in which criminal records are kept. The landlord should question the screening service about the coverage of this report and carefully evaluate whether it is likely to be cost effective.

Timeliness is a most important factor and, if present, can avoid a lot of holding deposit refunds. When the prospect makes application it is because he wants the unit. It is not a good idea to keep him waiting more than the minimum time it takes to check references and obtain accurate reports, which should not exceed a day or two. The landlord should definitely quiz the screening service on their turn around time.

It is as permissible for a landlord to request a screening service's business references as it is to request them from any other vendor. Once received, they should be checked. This entails more than asking "are you happy with the service?" The landlord should ask the references the same things he asked the service and see if the service's representations match its performance. An important inquiry is always turn around time. Another is whether there have been slip ups. This is not because the landlord needs to find out if there have been any. There most certainly were some. The issue is what the service did in the aftermath of their mistake.

In even the simplest of relationships, the landlord must find out what the screener's mistake policy is. The extent to which they stand behind their product is certainly as important in the decision to entrust the landlord's reporting needs to them as it is in the decision to do business with anyone else. Persons who manage the properties of others should be particularly wary of this since, while the screener's report might be offered as is, the property manager's decision to rent is never as is.

It is possible to engage many of the screening firms to perform the whole screening function. When this is the case, the screener is in the nature of a subcontractor. The firm can be instructed not only to obtain the necessary reports, but also to verify employment, to interview prior landlords, to interview other references, to do follow up to the interviews, and even to make or recommend the decision to rent. This is followed up with the necessary notices under federal and state credit reporting laws. In this case, the decision will be based on guidelines which the landlord has presented to the screener in advance.

There is a menu of services in between the bare minimum and the turn key. A landlord might, for example, ask the service to review the credit and rental histories, and give a range of evaluations from "highly qualified" to "barely qualified" to "unqualified." Or, he may select a service which will allocate a weighted point score based on all information, leaving the landlord to decide whether a "5" is acceptable.

These types of products are certainly useful, but, realizing the amount of trust which will be invested in such a service, the landlord will be anxious to ask questions in addition to those he might have asked if only credit reports were to be transmitted.

The first thing to consider, if the agency is to make screening decisions, is whether the agency has a presence at or near the community in which the landlord has his property. There are a number of small, but significant advantages that a local company will have in evaluating the prospect, local knowledge is valuable.

The next thing to consider is whether the company is competent. When one visits a doctor or architect, one may assume a certain level of competence assured by state regulation. This is not true of screening services. Asking for credentials is important, and business references are as well.

The landlord should speak to the account representative and obtain information on how the company operates. Aside from state and federal privacy and credit reporting laws, there is no standard way of doing business. The landlord must satisfy himself that the company's method of doing business is effective and prudent, and speaking to the people in the company, especially his account representative, is the best way of doing this.

Because of the delegation of so much authority to the screening service, it takes on the characteristics of a subcontractor or agent for the landlord. The landlord becomes liable for its acts in the course and scope of the agency or employment. For this reason, the issue of liability should be addressed, and can be divided into two parts. Does the screener have a well thought out program of compliance with the FCRA and state credit reporting and privacy laws which bear upon its business? What happens when (not "if") the screener does something really stupid and everyone is sued?

The Federal Fair Credit Reporting Act is a known quantity and there are several excellent resources available on the subject. One is offered on our site, and lays out fairly clearly what is required. While this requirement is not much, it is important that it be followed precisely, for there are statutory liabilities for failure to do so in the absence of reasonable efforts to comply. The existence of state laws on the subject is one of the arguments for using a screening service with a local presence. Any service which the landlord decides to employ should double check to make sure that all necessary authorizations have been obtained before they begin their investigation. At the conclusion, a negative recommendation should be accompanied with all necessary notices and advisements to the applicant. Unless he wishes to become an expert on the credit reporting and privacy laws, avoiding which is probably one of the motivations for the landlord to pay for a screening service, an excellent method for evaluating the company's compliance effort is to listen to the company representative explain it. If that person is tentative or evasive, that means that there is no comprehensive training effort in place at the company. Such a training effort, assuring that each employee from the CEO to the janitor is thoroughly imbued with the company's policies and procedures, is the cornerstone of any effort at compliance. If it seems to be missing, that means that the company does not care if it subjects its clients to liability for its mistakes.

The landlord, having derivative liability for the acts of the screening service, must consider what takes place in the event of error by the service. As far as liability to the landlord is concerned, this will be dealt with as a part of the warranty which is offered in connection with the service's work, and has been discussed above. It is in the area of liability to third parties that the most pronounced possibility of spectacular losses arises. At minimum the service should have a policy of insurance which covers them for professional errors and omissions. Coverage under a policy which would extend to acts in violation of the credit reporting and privacy laws should also be part of the package. While an indemnity agreement from an uninsured service may look impressive on paper, if suit is filed against the landlord and he is looking at probable liability for the agency's acts, such an indemnity can only be turned into cash to cover the loss if the agency has the assets to do so. In sum, this type of service being so new, and the area of credit reporting and privacy law so novel and changing in so many ways, the landlord should insist that the service be adequately insured and that he be provided with proof of such insurance. Property management companies representing many owners and offering the service enough business to make it worth the trouble to the service may wish to ask that they be made an additional insured on the service's insurance policy.

The utility of tenant screening contractors properly operated cannot be denied. Their existence alone, however, is no assurance that they are properly operated, or even if they are, that all of them are equal to the demands the landlord will place upon them. For this reason, we have recommended in this article that the landlord consider at least the following factors in making the decision to engage a service:

  1. The scope of the service desired by the landlord, whether the service will make the decision to rent, only provide reports, or do something in between.

  2. The likelihood, based on personal investigation and evaluation, that the service will be rendered accurately, thoroughly, and timely.

  3. The reputation of the company in the trade through business references.

  4. The apparent competence and dedication of the staff with which the landlord will be dealing.

  5. Whether the company has a local presence, and whether that matters, given #1 above.

  6. What happens in the event of a minor or catastrophic failure.

There is no stock score sheet which says which service wins. One which is adequate to the needs of one landlord and has the attraction of a very low price, may be unsuited to another landlord and lose out to a service which offers a greater range of products at a substantially higher price. Keeping all these factors in mind will, however, assist the landlord in making a reasonable judgment.

 

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