In a 10,000-unit portfolio, approximately 300 residents committed fraud to move in. Right now, 225 of them are paying rent on time. In the next recession, 210-225 will default.

Most institutional property managers assume this is impossible. The logic seems obvious: someone lying about their identity or income must be planning to default.

They're wrong.

Right now, 70-75% of fraudulent applicants in your portfolio are paying rent on time. Your "anti-fraud" screening system is missing 20-60% of fraud attempts, meaning 2-3% of your current residents committed fraud to move in—even with sub-1% bad debt rates.

Why are bad debt rates so low despite all this fraud? It's not because your fraud prevention works. It's because the economy is strong enough that even high-risk tenants can scrape together rent. When the next recession hits, your bad debt rates will spike to 2-4% or higher, destroying IRR and portfolio returns.

The Six Types of Rental Application Fraud

Not all fraud carries equal risk. Default rates vary dramatically by fraud type:

Obfuscation Fraud: Applicants with bad credit falsely claim to be recent immigrants without an SSN to avoid credit checks.

CPN Fraud: Applicants use fake Social Security numbers to generate clean credit reports despite having real SSNs with negative history. Search "apartment approval package" to see how openly this is sold.

Synthetic ID Fraud: Completely fabricated identities with fake names, credit, and income. Primarily used by organized crime for Airbnb arbitrage and sublet schemes. Highest correlation with 60-day delinquency, but relatively rare.

Income Document Fraud: Falsified pay stubs, bank statements, or tax returns. Currently only 20% of these applicants default—the lowest risk category.

Offer Letter Fraud: A subset of income fraud but deserving separate mention because it's extremely common and often used by applicants with zero income.

Insider Threat/Non-Compliance: Staff intentionally or unintentionally bypass screening requirements. Often the biggest predictor of future defaults.

Understanding these fraud types reveals the scope of the problem. But understanding why fraudulent residents are paying today—and why they won't tomorrow—reveals the urgent timing.

Why Everyone's Paying Now (And Why That Won't Last)

Rent sits at the bottom of Maslow's hierarchy. People will do almost anything to avoid homelessness, which means they prioritize rent over nearly every other expense.

When the economy is strong—4% GDP growth, low unemployment, reduced immigration pressuring wages—even bottom-quartile earners can hustle enough to make rent. Applicants with bad credit, eviction histories, criminal backgrounds, or non-traditional income who faked documents to qualify are still finding ways to pay.

In 2020-2023, that wasn't the case. The bottom quartile struggled with inflation, high unemployment, and increased labor market competition from immigration. Bad debt spiked across the industry.

Here's what property managers get wrong: They attribute recent bad debt reduction to expensive fraud prevention systems. It's not. It's macroeconomic improvement. Applicants haven't become less rent-burdened or more qualified—they're just earning more in a stronger economy.

The Current Numbers

Our retrospective analysis of existing resident portfolios reveals:

• 5-7% of all rental applications nationally contain fraud
• Traditional screening systems miss 20-60% of fraud attempts
• Only 25-30% of residents who committed fraud are currently defaulting
• At least 2-3% of your current residents committed fraud to move in

Real Portfolio Example: The Hidden Time Bomb

We ran a backtest on a 25-property portfolio of B/C assets in the Southeast. The results were stark:

7.5% of current residents had committed some form of fraud. Yet the portfolio's bad debt rate was only 2.1%—seemingly healthy performance that masked catastrophic risk.

In a recession, this manager faces bad debt potentially spiking to 7%+ as these fraudulent residents default. The portfolio looks healthy today but is carrying massive hidden exposure.

Why Expensive Fraud Prevention Systems Still Let Fraud Through

That 20-60% miss rate isn't just about detection technology—it's about what happens after detection.

Traditional non-AI screening systems have a fatal design flaw: they can't handle edge cases. Complex applications with mixed credit histories, non-traditional income, recent immigrants, or job changes require human judgment. Without override procedures or wide "conditional approval" bands, occupancy would collapse.

This creates the vulnerability. Even when screening systems flag fraud warnings, the fraud gets through because:

Overrides bypass everything. Site and regional staff have approval authority to override system denials. Some leasing agents willfully ignore fraud warnings to hit occupancy targets. Many more simply don't understand how to interpret fraud alerts or navigate multiple screening systems correctly.

Even well-trained centralized teams face impossible choices. When an applicant claims not to have an SSN because they're a recent immigrant—but they're 35 years old and don't match what the agent expects a recent immigrant to look like—what should they do? They can't deny based on appearance or assumptions. But they also can't approve someone who might be committing obfuscation fraud. Without sophisticated AI systems to adjudicate these complex questions, and with organizational incentives always pushing toward approval (as they should for occupancy), the path of least resistance is to approve.

Partial detection is useless. Many fraud prevention systems catch some fraud types but not others. A system might flag CPN fraud but miss income document fraud. It might catch synthetic IDs but not obfuscation schemes. Without comprehensive fraud adjudication that handles all fraud types with consistent, compliant decision-making, detection alone doesn't protect your portfolio.

Every traditional system has the override problem. Even the most expensive fraud prevention platforms on the market ultimately rely on leasing agents to make final decisions on flagged applications. This means your fraud prevention is only as good as your least trained, most pressured, or least compliant site staff member.

In today's strong economy, you don't see the performance degradation immediately. Most fraudulent residents are paying, so overrides seem harmless. Since the override problem is industry-wide, you don't notice underperformance versus peers who share the same portfolio drag.

What Happens During the Next Recession

Most fraudulent residents currently paying will default. Property managers relying on override-heavy screening systems will see bad debt rates spike to 2-4% or higher.

The dollar impact is devastating. For a 10,000-unit portfolio at $1,500/month average rent, a spike from 1% to 3% bad debt means $3.6M in additional annual losses—wiping out 360 basis points of NOI margin. This doesn't just hurt current returns; it destroys refinancing options and makes properties difficult to sell during downcycles.

This isn't speculation. It's what happened in 2020-2023, and your portfolio now has more hidden fraud than it did then because traditional systems haven't improved while fraud sophistication has.

What You Can Do Now

The time bomb is ticking. Property managers who act now can:

1. Audit current portfolios to understand true fraud exposure
2. Evaluate screening systems for override rates and fraud detection gaps
3. Assess organizational incentives that may be pushing approvals over risk management
4. Plan for economic downturn before it arrives

The window to build a clean portfolio is closing. Properties that wait until recession hits will face the dual challenge of spiking bad debt and restricted lending markets.

The question isn't whether your portfolio contains fraudulent residents. It's whether you'll identify and address the risk before the next economic cycle exposes it.

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Book a Demo Now to see how Two Dots can help protect your properties while ensuring fair and compliant screening for all applicants.

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