The Property Management Shop
by Marc Wilson
Q. I received a rental application from a prospective tenant with a horrible credit history. She has a sordid past of unpaid doctors’ bills, delinquent student loans, and big credit card balances; and she is currently in bankruptcy proceedings. The problem is that I really like her—she seems responsible, and she seems like she would be an ideal fit for my property. How would you handle this situation?
A. Qualifying rental applicants is a lot more art than science. To be sure, applicants with poor credit histories pose greater long-term risks to property managers than applicants with stellar credit reports. On the other hand, I’ve learned over the years that there are people in this world who will, and often do, renege on virtually all of their financial obligations except for their rent payment. Why? Failure to pay your doctor bills or your student loans will ruin your credit, but this behavior will not force you to move your personal property to a local freeway overpass. If you are a tenant, bankruptcy will not make you homeless. Your rental agreement has no financial value and will not be liquidated in a bankruptcy proceeding. I think habitual bankruptcies might even be considered to be a viable financial-planning tool for perennial tenants with no net worth. And believe me our city supervisors are doing everything possible to guarantee that most San Francisco tenants will descend into old age with a positively laughable financial statement. The point is that a tenant’s poor credit history does not necessarily mean that you will end up chasing rent payments every month. When times are tough, the landlord is always the first to be paid.
I often rent to applicants with poor credit histories. Upon receipt of the questionable application, I call the tenant and get the facts relative to the poor credit history. If everything seems plausible and otherwise acceptable—absolutely all other characteristics being perfect—I ask the tenant to hook me up with a cosigner or guarantor. I just tell the prospect that “it’s nothing personal,” but I would feel much more comfortable if there were one person on the planet that was willing to share the risk with me. I prefer cosigners that own their own home or business in or around San Francisco. Most applicants readily come up with someone who is willing to cosign for the tenant. If your prospect is unable to procure a cosigner, this is always a bad sign. In this case, I reject the application.
The cosigner agreement—available from the San Francisco Apartment Association—is very well written and, in my opinion, legally bullet proof. You should handle all negotiations with the cosigner personally. Don’t just give the form to the tenant and ask her to return it signed and completed by the cosigner. Instruct the prospective tenant to give you the name, address, phone number and fax number of the cosigner. Deal with and qualify the cosigner just like you would a rental applicant—conduct a credit check, obtain a photocopy of the driver’s license, and follow through on all the other items on your checklist to qualify an applicant. Get the cosigner agreement fully ratified and place it in your file. In over 20 years, I have never had a tenant with a qualified cosigner go bad.
This is not to say that you should carve out a niche by renting only to tenants with bad credit reports. Renting to tenants with bad credit reports should be the exception and not the rule. You should always receive multiple applications—at least two—with every vacancy marketing effort. Believe me, you will find it much easier to avoid dealings with moderate- to high-risk applicants if you receive multiple applications.
I can honestly say that I receive very few laughable applications from prospective tenants. Why? There are a lot of reasons. First, I only offer apartments for rent that are in absolutely perfect condition. You will attract better applicants if your apartments are pristine. Second, I price my vacant apartments at least 5% to 10% under the market. This act alone guarantees multiple applicants, one of which is usually acceptable. And finally, I use a very organized Offer to Lease contract that mandates a $300 good-faith deposit accompany the application. The tenant’s good-faith deposit is refundable to the tenant only in the event that the application is rejected. If the application is accepted, the good-faith deposit is applied toward the first month’s rent and security deposit. This policy accomplishes two things. First, it means that I spend my valuable time reviewing only those applications that are made in earnest and in good faith. I don’t want to spend time performing credit checks, drafting rental agreements, scheduling meeting dates and times unless and until the tenant has tendered a $300 good-faith deposit. The tenant needs to decide positively that she wants the apartment and only then will I decide if I want the tenant. And second, a $300 good-faith-deposit requirement does a terrific job of discriminating against questionable applicants. It poses an immediate financial hurdle and requirement that most financially weak tenants are unwilling or, for whatever reason, unable to pass. A mandatory good-faith deposit with a well-written and fully ratified Offer to Lease contract means that you will deal with a higher percentage of motivated and qualified applicants.
Whatever you do, don’t start diminishing your qualification standards just because the rental market is weak. Don’t rent to tenants with dogs, don’t rent to tenants with horrible credit (in the absence of a cosigner) and don’t rent to tenants with histories of dysfunctional interactions with their previous property managers. Feel free to give me a call if you want a copy of my Offer to Lease contract.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine.Marc Wilson is the president of SFAA. He has been managing and selling San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.