The Three Most Important Components of Screening
A Brief History of Tenant Screening
Prior to the invention of FICO in 1979, there wasn’t a single consistent national measurement of someone’s willingness to pay rent; therefore tenant screening was done very differently across property management companies. There was a larger emphasis placed on methods that are time-consuming and hard to obtain today, such as previous landlord references. There were even screening methods used that are considered illegal under fair housing law today, such as the subjective character judgment of the site staff on the applicants that physically came into the leasing office.
After the advent of FICO, it became more common throughout the 80s and 90s to use a credit score in tenant screening. They were fast & easy to get and could be used on the majority of applicants in a consistent way. Credit checks were more fair housing compliant than what came before it, and were a data-driven process that achieved better returns for most managers. The big 3 credit agencies saw a huge opportunity, and while bundling these credit scores with background checks, created derivative scores marketed just for property managers. Thus the modern tenant screening industry was born.
Tenant Screening Today
Today, for every property manager, a bare minimum screening process is running a credit check, a criminal background check, and an eviction records check on every applicant who applies. Even if your company isn’t purchasing this data directly from one of the big 3 credit agencies, these agencies are the primary source for this data across the market. Additionally, most of the resellers aren’t changing the core data very much, even if their marketing claims otherwise.
In addition to this central component (credit + background checks), most property managers are performing two additional checks on applicants.
Income & Employment Verification
Together the credit check, income verification, & identity verification form the three-legged stool of most companies' modern tenant screening.
Trade-off Between Ease of Applying & Good Applicants
Problematically, traditional employment & identity verification methods are time-consuming for both applicants and leasing staff. They require applicants to produce pay stubs, bank statements, photo IDs, and other documents, which leasing staff then have to look through manually. Additionally, staff often waste hours emailing applicants for missing documentation.
When this type of friction is introduced into the application process, it increases lead-to-lease times, reduces prospect-to-tenant conversation rates, and creates a huge burden on company staff who often aren’t trained to catch fake documents. Even more worrisome, it can lead to lower occupancy rates.
This problem has led some companies to abandon income verification and instead experiment with exclusively using credit & criminal data from screening providers. This method has the benefit of being near instant and universal (you get more approved applicants), but has created delinquency, bad debt, and eviction problems for most of the multifamily managers we speak with.
The main problem with using only credit scores is that they are an imperfect measure of someone’s willingness to pay the rent. Most of the companies we’ve spoken with that have experimented with removing income verification from their screening process are now in the process of reintroducing it.
So why are credit scores the cornerstone of the entire world of screening if they’re not the best measurement of someone’s willingness to pay rent? It’s because they’re the easiest piece of data to buy instantly on almost all applicants without having to train staff.
Income Is Actually The Most Important Thing to Verify
Our data shows that the best predictor of whether an applicant will not only pay the rent on time, but also renew their lease, is consistent income and employment. This is especially true for applicants with middling credit scores, or limited credit data.
What our data shows, so long as someone has consistent income, even if they’re financially irresponsible with car or credit card debt, the last thing they’ll stop paying is the rent. The reason isn’t hard to figure out; the last thing anyone wants to lose is their housing.
People’s willingness to pay rent is different from credit card payments, and for most renters, credit card payment history makes up the majority of how their credit scores are calculated. This problem is only getting worse with the younger generation’s aversion to debt of any kind.
One of the most interesting data points we have from one property manager with a screening system that de-emphasizes credit scores is on tenants who were previously foreclosed on (credit destroyed) BUT have consistent employment and high income. This group not only has the lowest delinquency rate of any tenant group, they also have the highest renewal rates.
Our data also shows that having consistent income is actually a much better predictor of whether someone is willing to pay the rent on time, especially when compared to just a credit score. The only reason income verification isn’t done industry-wide is because the traditional operational practices for verifying income aren’t instantaneous and easy like a credit report, but technology is changing that.
Ways To Implement Income Verification Today
Managers can simply start requiring an applicant to include recent paystubs & bank statements with their application, and we have seen significantly reduced bad debt & evictions with the operators who have simply added this back into their process.
Furthermore, leasing staff can be trained to do very basic fraud detection on documents, such as checking whether an applicant's net pay on a paystub matches direct deposit transactions on a bank statement. We've found simple operational methods like this can reduce fraudulent applications by up to 25%.
That said, we’ve found that over 50% of fake documents can’t actually be caught with the naked eye. This is where solutions like Two Dots that combine forensic AI document fraud detection with direct source of truth checks like bank account links & DMV records can assist.
Additionally, AI-based solutions like Two Dots can read pay stubs & bank statements much faster than any human being, don’t make human errors, and can even fully automate approvals and denials based on income requirements; therefore there’s zero work required by staff and qualified applicants are still approved quickly. The future of tenant screening & leasing is further automation so a smaller number of site staff can focus on improving the resident experience rather than busy work. It's largely just a question of when for most multifamily managers.