Property managers and landlords are often faced with uncomfortable choices: to rent to the well-meaning but credit-challenged tenants or wait until the ideal candidates pop up. In the real world, most people will suffer obstacles during their financial lives, but such curve balls as double-digit unemployment and furloughs present major challenges. Smart landlords and property managers in the home rental industries are wise to take another look, though: the glass is often half full.
Go4Rent spoke to a range of Realtors and industry professionals to tap their views on how to offset or mitigate risk when choosing tenants with credit issues, working with them rather than against them.
Here’s the skinny: there are a range of ways to lessen risk, but three of the most common are:
1) asking for a double or larger deposit upfront
2) getting a guarantor or co-signer on the lease; and
3) using insurance or a service such as LeaseSURETY(a product of Go4Rent) to guarantee the lease. LeaseSURETY, functions to protect the landlord in case of default for up to 60 days, less the costs of eviction.
The Big Deposit
Jaime Valdivieso, team leader with Uptown Houston real estate group, told Go4Rent that his business is generally strong. That said, over the course of his career he has had to employ strategies to secure tenants for property managers such as asking for a larger deposit. Sometimes he has had to ask for a larger deposit as well as tap the LeaseSURETY product offered by Go4Rent.He says of the double deposit or large deposit approach, “We do this all the time and usually it works out. I have just one scenario when we had to request a two-month deposit … The tenants didn’t pay on time so we had to use the full two months’ security to pay what they owed.” Valdivieso says a drawback to the extra deposit request is that while usually the landlord returns a full security deposit, “not everyone has the liquidity [to pay a higher deposit].”
Kevin Knight of SureVestor, which essentially provides insurance to property managers, based on an Australian model the company discovered, says, “We don’t address the bigger deposit or a guarantor; that would be up to the management company, who does their own screening by checking the tenant’s credit [and other items].” While Knight is not helping lease properties when wearing his SureVestor hat he does under the auspices of a property management company he runs, Liberty Management in San Antonio.
He manages properties in the area, and “a lot of times if the tenant is really weak we’ll ask for an additional deposit. We have a scale we look at. Depending on their combined credit score of everyone living there, [we’ll take as much as ] one and a quarter times or one and a half to two times’ more.” In another scenario, he says, “somebody could have a pretty good score, but on the landlord reference we may find out they have done damage, such as pet damage running up to $2,000 or $3,000 they didn’t take care of.” He says while the credit score is important, a property manager might also rule out the irresponsible person who didn’t pay off damages, such as pet stains or tears, or the proverbial “party girl” who trashes the place. “Our main goal as a property management company is to find a tenant who takes care of the home. Some people may have bad credit because of medical bills [but otherwise be a strong candidate], for instance.”
Guarantors and Co-Signers
While Knight will secure the large deposit, he is not keen on asking for a guarantor. “It’s not popular in San Antonio,” he says, “because of some legal concerns when you have to do an eviction; our real estate attorney says don’t use guarantors. Some companies do, but there are some issues I think when it comes to evictions. [For example, someone’s] not living there, but their name is on the lease. It’s not easy to enforce.” Knight says in the San Antonio area there are a lot of military personnel who rent homes. “They get transferred overseas and the property manager can’t afford to have them evicted. They are not professional investors,” so they need the help he and SureVestor can provide. Austin-based Dustin Stroud, Realtor with Coldwell Banker United, says he has often looked at speculative income to determine a prospective tenant’s credit- or rental-worthiness. And he has also employed the guarantor method at times. For example, one time he worked with some people moving from Chicago to Texas and used a guarantor “based on their merits”. “The grandma, mother and daughter were all in fields that would [experience layoffs] … One worked for a coach, another was a nurse … They had been furloughed but had documentation that they would go back to work. And they did. So no problem there.” He has also worked with a guarantor for someone who was retired and on disability.
Seeking a co-signer can be problematic for the adult “child” with credit issues because it is an embarrassing discussion with the parent. While it is true no one loves us like ourfamilies, it is also true that no one knows us like our families. Dad may be aware that 29-year-old Susie never quite outgrew her penchant for expensive, spontaneous shopping sprees or girlfriend getaways to Cabo.
Yet, that adult who may be shy to ask a parent to co-sign should realize almost anyone can be a guarantor – a spouse, sibling, aunt or uncle, grandparent or even a friend. And needless to say, not only should one only guarantee a home for someone they trust but as the tenant, one should realize the impact of this relationship. Ask yourself these questions: ‘What if I lose my job and Uncle Joe has to pay? How will that affect the family dynamic?’ or ‘If I become incapacitated for a period of time due to an injury or illness, do I feel comfortable letting my friend Jessica pay the lease?’ It is always worth pondering the famous Shakespearean line from Hamlet: “Neither a borrower, nor a lender be; For loan oft loses both itself and friend.”
LeaseSurety and Similar Products
A third approach to credit-challenged applicants is having them apply for LeaseSURETY, which supports landlords who rent to those with less than perfect credit, little to no rental history, or who are self-employed. The average monthly installment was $55.00 for tenants in late 2018, with one-time premiums just under $200.00, based on a monthly rent of about $1,500. As an added perk, a professional represents the landlord or property manager in eviction court, if necessary. LeaseSURFETY also pays the rent retroactively from the date of non-payment by the tenant.
Renters are not required to pay an additional deposit, typically, or risk losing the home they want to rent or lease; Realtors stand a stronger chance of renting the home they have on the market; and landlords are able to rent faster, as they do not have to wait for that picture perfect-on-paper applicant. The renter pays for the “surety” of leasing the property. Applicants go through Go4Rent.com and search rental listings on the home page, completing an online lease application for the property they want.
Many of Go4Rent’s clients have tapped this resource, a buttress for any tenant who has potential but may not be quite as credit-worthy as some. Other clients have chosen to use a guarantor or ask for a double or slightly larger deposit from tenants deemed somewhat risky.
As mentioned above, LeaseSURETY is an extra layer of protection for the landlord or property manager. For renters, a LeaseSURETY agreement is the de facto guarantor offering the landlord more financial security.
Stroud says, “I really have not had to use Lease Surety on the tenant side; only on repping the landlord. It really helps protect landlords as well as an opportunity for folks … Someone can be on the way down, not making the best decisions whereas, a lot of people may be working their way up but may have fallen on hard times.” He says it’s this latter category that nicely fits the LeaseSURETY model.
“LeaseSURETY is a great product to help those people who are working their way back up, allowing them to rent a great property they might not otherwise be in first position for. For example, if there are multiple offers [a landlord would] choose [a tenant] based on the rental criteria and how they fulfill that in an application.” LeaseSURETY, he says, “absolutely gives a layer of protection to both parties. The tenant pays the landlord a little more per month, and that’s baked into the rent, with the landlord invoiced that extra money. ”SureVestor, while something of a different business model, also helps protect landlords’ interests. They offer insurance with special features such as a “cooling off’ period of 21 days from the commencement of the policy, which allows the buyer to cancel for a refund if he finds it doesn’t meet all his requirements. Knight says Lloyd’s has temporarily placed a freeze on writing policies during the pandemic, but he hopes to be writing them again in soon.
In conclusion, Valdivieso has had some experience with tenants experiencing challenges, even though the volume of business at the front end has remained good this year. Some aren’t paying rent on time “or they want a discounted rate, but that’s mostly what it is, that they are taking longer [and not breaking their leases].” He says most landlords and property managers are being kind enough to work with them. Savvy landlords do work with tenants, just as they screen carefully – whether that means being on the lookout for damage at previous homes or credit issues, as noted in the aforementioned comments. Careful vetting of applicants through Go4Rent and then LeaseSURETY adds a double layer of protection for all.
And if things get even tougher, these products are designed to protect landlords and property managers. Stroud says of the LeaseSURETY product: “My clients have used LeaseSURETY with great success. It provides protection to the owner or landlord when someone defaults on rent and has to be evicted.