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What information do I need from my applicant to screen them?

checklistTenant Screening reports include vital information to help you make an educated decision on your applicant. Before you check your applicant’s background & credit you will need to have your tenant fill out a rental application with some required data to return complete and accurate reports. It is a good idea to ask for a photo ID along with the tenant application to verify the applicant’s identity. Often times an applicant uses a nickname or has illegible handwriting which can result in blank or inaccurate reports.

The tenant application needs to include these required fields when ordering a credit check:

  • Full legal name
  • Date of Birth
  • Current Address
  • Social Security Number

Credit reports will not be returned if the Name doesn’t match the Social Security Number on file with the credit bureaus.

The tenant application needs to include these required fields for ordering a background check:

  • Full legal name
  • Date of Birth
  • Current Address

Background checks will not be accurate if you don’t use the applicant’s full legal name or submit a date of birth.

The tenant application needs to include these required fields for ordering an eviction search:

  • Full legal name
  • Date of Birth
  • Current Address
  • Social Security Number

Big Changes Made to FICO’s Credit Score

FICOWhile you know the data that creates the credit score comes from the creditors who you’ve done business with, did you know that your score is actually generated by a mathematical formula owned by just one company? FICO is the analytics software company that is responsible for generating 90 percent of all the U.S. consumer lending decisions through its FICO Scoring model.

The FICO credit score is what allows banks, property managers, landlords, and other creditors to make business decisions every day. The credit score is generated when a consumer’s credit history is fed into FICO’s analytical software that uses the credit data to calculate the credit score. The three credit repositories, Trans Union, Experian and Equifax, each license the use of the FICO scoring model to generate credit scores for use on their reports.

It’s important to understand how credit scores are determined because slight changes in the FICO scoring model can make big changes to a consumer’s credit score, making it higher or lower. A more stringent FICO model will result in more landlord, lender and creditor denials. While a more forgiving FICO model will yield in higher scores and more credit approvals.

FICO has recently announced some big changes to how the credit score is calculated by recently releasing the FICO Score 9. Due to changes in the risk analytics, more consumers are expected to score higher enabling more creditors to approve consumers for loans, leases and purchases.

So what’s different about the FICO 9 Score model compared to the older versions?

  • The new FICO Score does not penalize or calculate any negative score effect for paid collection accounts. In past FICO models, even though a collection account was paid off, the fact that it was a collection account would reflect negatively on your credit score.

 

  • The other difference is that new the FICO Score model is sophisticated enough to differentiate between medical collection accounts and general collection accounts. This now ensures that medical collections will have a lower impact on the consumer’s credit score and the level of consumer risk they represent.

 

Consumers should benefit from the new model. FICO’s efforts to remove paid collection accounts and decreasing the negative effect medical collections on the score is aimed at making the credit score even more predictive of a consumer’s likelihood to repay debt than previous version. The hope is that the new scoring model will also help banks, property managers, landlords, and other creditors to make better decisions as well, diminishing risk and increasing profits by allowing them to approve a wider pool of qualified applicants.

When Your Tenant Won’t Pay

There comes a point when apartment owners find that despite their best
efforts at resident screening, they will have to grapple with evictions and
collections in response to non-payment of rent.

The weak labor market is currently contributing to greater numbers of people
encountering difficulty with paying their rent compared to just eight years
ago—so owners beware.

Where evictions for nonpayment of rent is concerned, property owners should
first make sure they are thoroughly familiar with the local landlord-tenant
laws and regulations. Every jurisdiction has its own rules governing, for
example, the minimum number of days the rent is delinquent before late notices
can be sent out.

The company’s procedures should be to file the papers for a court date in
connection with an eviction as soon as that is permitted by law—whether or not
a payment plan is being worked out with the resident concurrently.

It is important to take action at the earliest possible opportunity because
each step in the eviction process can take time, and it can be at least
one-and-a-half to two months before the resident is evicted. If the resident
appeals, that will cause further delays. And if the property owner wins the
case, it will take at least another 15 to 30 days before the resident is made
to vacate the unit by the marshall.

Follow eviction rules closely

Property owners need to be consistent and regimented in complying with their
companies’ own rent payment rules and procedures, aspects of which may also be
contained in the lease agreements signed by residents. For example, after the
grace period, the notices need to be sent out.

There are absolutely times when residents have genuine and temporary
problems paying the rent. In such cases, the company can deviate from the rule
books and work with them to help them make the payments.

Property owners need to refrain from clearing out residents’ belongings too
early—a common pitfall when a resident skips the rent and moves out. If there
is no court order in place to evict them, the residents may want to be
reimbursed for the items. Landlords can clear the apartment and hold the
belongings in a separate location, but the danger is that things can be stolen.

The other aspect of evictions is collections. The accounts receivable of
residents who leave an apartment, but still owe back rent, may be sent to debt
collectors. The fact is, most property owners may be reluctant to go after
their residents for backrent. A study released by TransUnion late last year
finds that about half of property managers (46 percent) have had renters skip
out on their rents, with 19 percent having had that experience in the past
year. According to the study, which received 476 responses, only 46 percent of
property managers pursue residents who skip out of their apartments and leave
with unpaid rent or damages.

Steve Roe, vice president in TransUnion’s rental screening division, says it
is a mistake for property managers not to try to claim that bad debt. There are
two philosophies with regard to whether the account is turned over to the
collections agency. The first says that “if we have the wherewithal, let us get
a shot at going after someone in the first 30 days. We are not splitting the
recoveries with a collections agency.” The second school of thought says that
“the account should be turned over to a collections agency immediately. There
will be less time spent and aggravation on the part of your staff.”

Property owners can expect recoveries, on average, of 15 percent to 18
percent if the agency is doing its job correctly. The proportion of recoveries,
of course, also depends on the profile of the portfolio. For example, in the
case of affordable portfolios, recovery percentages may be less.

Collection agencies typically do not report to credit bureaus in the first
30 to 60 days of receiving the delinquent account. Individuals are more
inclined to pay if their accounts have not yet been reported to the credit
bureau, as they find it important to maintain their credit files.

Successful recoveries depend on four factors: the applicant screening
criteria of the property management company; the use of nationally licensed
collections agents; how effective the agency is in skip tracing, that is, in
locating the individual who skips out on the rent; and the initial conscientiousness
of the property management company in gathering vital information—such as
social security numbers, emergency contacts and places of employment—from the
resident.

When it comes to choosing a collections agency, it is important that the
company has a national reach. A little over half the states in the country
require collection agencies to be licensed or bonded in the state in which they
operate. So if the agency is not licensed in that state, it would not be able
to contact individuals who have moved there. Larger collection agencies may
also have the resources to pay for, and sophistication to obtain, national data.

Indeed, the reputation of the collections agency is a prime consideration
for the apartment firm. The apartment company should make sure the financial
security of the agency is sound—as there are cases in which collection agencies
collect on bad debt but do not remit the collections to the property owner.
Checking references for collection agencies is also critical.

Apartment companies may also want to make sure the collections agency does
not mistreat its customers. A professional and courteous manner on the part of
the staff yields better responses and results. Also, the apartment company
would “not want to see its names or our names in the papers. You must protect
the image of the agency and the client.

Obtain the information needed by the agency to do its job. And even more
important, get the accounts to the agency as soon as possible instead of
sitting on it.

Turning a tenant applicant down because of their credit report information? Know your legal obligations!

The FCRA requires you as the potential property manager/landlord to give an adverse action notice to each consumer whose credit report was used to deny their lease application. The consumer is also then entitled by the law to a free copy of their credit report.

What is an adverse action notice?

An adverse action notice informs an applicant that they have been denied credit, employment, insurance, or other benefits based on information in a credit report. The notice should indicate which credit reporting agency was used, and how to contact them.

All consumers are entitled to a free copy of their credit report if:

  1. They were denied or were notified of an adverse action related to credit, employment, insurance, a government license, or other government granted benefit within the last 60 days and a credit report was used in the decision process.
  2. They were denied a house or apartment rental or were required to pay a higher deposit than normally required within the last 60 days and a credit report was used in the decision process
  3. They certify that they are unemployed and intend to apply for employment within the next 60 days.
  4. They certify that they are a recipient of public welfare assistance.
  5. They certify that they have reason to believe their credit report contains inaccurate information due to fraud.

StarPoint Tenant Screening gives you the ability to print adverse action notices with each credit report. The notices allow the property manager/landlord to check off the reason for the denial. The letter also informs the consumer that they can contact StarPoint for a free copy of their credit report.

How to Check Business Credit Rating

Much like your own personal credit rating, businesses are assigned credit ratings. These numbers, on a scale from 0 to 100, are a sign of how reputable the business is when it comes to dealing with creditors. An optimal credit rating for a business is 75 or higher. You can check a business credit rating for yourself, as long as you have the right information.
Find a reputable website where you can check a business credit rating.  At www.starpointtenantscreening.com , you can even search for a business and select the right one from a list.

Ask for the business identification number. A FIN or an EIN is helpful when you want to check a business credit rating. You can get the identification number from the owner of the business. However, some owners are reluctant to give this information out. It’s similar to a person’s social security number, and many businesses protect this information for their own security.

Check the personal credit of the business owner. Some businesses, especially small businesses, are funded based on the owner’s personal credit rating. If you find out the credit rating of the owner, it’s a safe assumption that the business has a similar credit rating.

Equal Access Rule: LGBT/Gender Identity

HUD on Jan. 24 proposed a rule that would prohibit discrimination in federal housing programs on the basis of sexual orientation or gender identity. The rule is available at http://bit.ly/hLMC0H. HUD says that lesbian, gay, bisexual and transgender (LGBT) individuals and families are being arbitrarily excluded from housing opportunities. HUD reports that 20 states, the District of Columbia and over 200 localities have similar laws.The proposal clarifies that the term “family” includes LGBT families and couples and also prohibits inquiries regarding sexual orientation or gender identity in all HUD-assisted housing or housing with financing insured by HUD.

While this proposal is limited to HUD-assisted housing, there was movement in the last Congress to expand the protected classes in the Fair Housing Act to include not only gender identity and sexual orientation, but source of income as well. At this time, it is unclear whether such efforts will emerge in the 112th Congress.

2011 Apartment Forecast by the Numbers: Is it Getting Better?

Economists predict a steady recovery for the apartment industry as a whole, but not all apartment owners will be swept up in the growth.

After facing a maelstrom of tight credit, job loss and weak housing demand in 2009, many in the apartment industry are understandably tentative as they enter 2011. Improved demographic demand coupled with virtually no new supply would seem to point to a profitable year to come for many apartment providers. But not every owner has such a rosy outlook. While trophy properties with strong performance continue to gain value as investors look for sure bets, apartment communities with weaker performance may still face challenges finding financing or attention from investors. And while demographic trends are pointing in a positive direction, disappointing job growth in 2011 could derail improvements in rent growth and occupancy.

Just how improved will the apartment market be in 2011? A number of established economists and research firms in the apartment industry offered their takes, painting a picture of slow but steady progress for the national economy, employment, apartment fundamentals and financing—as long as that progress isn’t wiped out by a double-dip recession.

Job Growth Likely

The U.S. economy overall should improve in 2011. Pent-up consumer and business demand will begin to release next year and drive a stabilized recovery, with GDP growth at around 3 percent, according to Marcus & Millichap Research Services’ economic outlook.

The consumer sector may still remain a drag on the economy, however, the firm says. Consumers continue to be strapped by tight credit, and the extended downturn has lead many households to pay down debt and increase savings rather than spending disposable income on goods and services.

Job production will likely remain limited and, importantly, inconsistent from month to month, according to Greg Willett, Vice President, Research and Analysis for apartment research firm MPF Research. While the onus of the recovery is on businesses, they first must regain confidence before they undertake more substantive hiring.

On the other hand, young adult hiring in 2010 has been the best since 1984, indicating substantial new household formation, notes Ron Witten, President of multifamily market advisory firm Witten Advisors.
So despite lackluster economic growth and continuing uncertainty in the labor markets, households appear to be returning in droves to the rental market and signing leases, says Victor Calanog, Director of Research for research firm Reis.

“This reflects some optimism about an improving job market,” he says. “It may take individuals anywhere from six to nine months to find a job, but that is far better than the situation in early to mid-2009, when the nation was shedding hundreds of thousands of jobs per month.

“In other words, pent-up demand from renters tired of living with their families or roommates may be driving these results. Another factor seems to be flat or declining trends in house prices and mortgage rates. There is an incentive to sign 12-month leases for an apartment rental, versus committing to a home and a 30-year mortgage, particularly if home prices and mortgage rates are expected to stay low,” Calanog says.

Apartments will gain a disproportionate share of new housing demand for other reasons, as well. “Between 2005 and 2009, the number of 18- to 34-year-olds living at home increased by 2.2 million, the highest level recorded in over 25 years,” according to Marcus & Millichap.

“Based on expectations that strict mortgage standards and elevated downpayment requirements will persist for several years to come, most young adults will head for the renter pool.”

Loan servicers should continue to step up the pace in dealing with non-performing mortgages, Willett notes. “That throws more owners who haven’t been paying their way out there looking for other alternatives,” he says. “Additional households who have been renting single-family homes that will go through the foreclosure process will be displaced, and lots of those households do end up back in apartments.”

However, Calanog notes, if the rate of job creation remains disappointing through 2011, it is likely that strong numbers from apartment rentals may moderate.

Despite persistent weakness in consumer and business confidence, the risk of a double-dip recession remains unlikely, predicts Marcus & Millichap, and employment growth should strengthen next year to near 2 percent.

Demographic Delight in Store

For apartment operators, the favorable demographic trends lead to an optimistic outlook for next year. With virtually no new completions on the market, demand growth should drive occupancy significantly.

Entering Q4, occupancy is up to 93.9 percent after hovering around 92 percent through most of 2009, according to Willett. Q3 effective rents are up 1.2 percent quarterly and year-over-year, with particularly strong performance from the Midwest and the Carolinas, Willett reports.

Reis found similar improvement, with national vacancy falling from 7.8 percent to 7.1 percent, one of the sharpest drops in vacancy on record, and asking and effective rents rising by 0.5 percent and 0.6 percent respectively, about the same pace relative to Q2.

The consensus view is that rents should bounce back strongly in 2011. Witten Advisors predicts rents up 4.5 percent in 2011 as operators become aggressive in raising rents with little fear of losing customers to other housing options.

As demand picks up, occupancy should rise above the 95 percent mark, up 1 to 1.5 percentage points, according to MPF.

Shifting Investment Strategies

For developers, owners and investors, the big question at this time last year was how lenders would manage their apartment portfolios. Would they continue to extend maturing loans, or would they demand repayment or sizable paydowns?

The answer, so far, seems to be a healthy mix of both. Servicers are extending more loans for deals that have life and can eventually repay, while foreclosing on others that have very little chance of repaying, either due to poor markets, physical conditions or bad sponsors.

That policy appears to be working, according to Mike Kelly of Caldera Asset Management. Tightening rent rolls and competitive debt markets will help many deals that were under water at the end of 2009 to be able to return some equity.

Investors have begun to accept that the wave of deeply discounted, distressed opportunities they were expecting has not panned out. That capital, however, is now turning its focus to stabilized assets, according to Marcus & Millichap. Competition for deals has increased and cap rates have started to contract for higher-quality properties.

On average, cap rates dropped 10 basis points this year to 7.3 percent, while per-unit prices rose 9 percent to $83,600, the firm found.

Along with that improvement in pricing, investors are tempering their real estate return expectations, according to the Emerging Trends in Real Estate 2011 report released in October by PwC US and the Urban Land Institute. Investors anticipate high-single-digit returns for core properties and mid-teen returns for higher-risk investments.

“Investors have begun and will continue to target those markets where the prospects for job creation are stronger,” says Mitch Roschelle, Partner, US Real Estate Advisory Practice Leader, PwC.

“This is why we see this flight-to-quality trend of late in the real estate industry, and this is a factor contributing to the lowering of cap rates in some recent transactions in certain large, coastal cities.”

Debt Markets Loosening

The report also predicts that debt markets will thaw further in 2011 as banks continue to strengthen balance sheets, take their losses and step up lending, resulting in higher transaction volumes.  Borrowers are expected to have improved chances to obtain refinancing if they own relatively well-leased, cash-flowing properties. But overleveraged owners dealing with high vacancies and rolling down rents may face more uncertain prospects in the credit markets, including the increasing likelihood of foreclosure.

“Real estate market participants continue to see a gulf between buyers and sellers; however, there is an expectation that the bid-ask spread will begin to close in 2011 as selling sentiment improves dramatically from last year’s all-time survey lows and buyers temper expectations for giant discounts,” says ULI Senior Resident Fellow for Real Estate Finance Stephen Blank. “Investors with cash could have excellent opportunities to seize market bottom plays by recapitalizing cash-starved owners or buying foreclosed assets.”

Caldera’s Kelly predicts the government agencies Fannie Mae and Freddie Mac will continue to lead the debt markets. Freddie Mac’s Capital Markets Execution product has become a staple in many new acquisitions, and Fannie Mae should come on strong as its Delegated Underwriting and Servicing (DUS) lenders become more aggressive.

Longer term, the White House faces a Jan. 31 deadline to present its plan for reforming Fannie Mae and Freddie Mac, and Congress has indicated that GSE reform will be their first major initiative for the new Congress next year.

At a recent industry event, U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan pledged that the Administration is “fully committed to not just making sure that multifamily is part of the debate, but that it is part of the solution.”

Will Cap Rates, Taxes Jump?

While recent trends offer a great deal to keep the apartment industry optimistic about the future, there are also a number of unanswered questions, Kelly says.

• If Freddie and Fannie consolidate or change styles, what happens to the apartment market? Will cap rates jump?

• Owners have seen cap rates improving, but many of these sales have been newer properties in prime markets. Can they expect the same for B and C properties, or is the apartment industry entering a world of “haves” and “have nots?”

• Effective rent growth looked strong in 2010, but residents who signed a lease with concessions are now coming up for renewal. Will they be willing to accept increases of 5 percent or more in their effective rent?

• What about expenses—particularly taxes? Could they go up faster than multifamily housing operators expect?

While industry experts and researchers can make forecasts about the year ahead, their predictions only go so far. Finding the answers to these questions and more will make 2011 a fascinating year to watch.

Jeffrey Lee is NAA’s Manager of Communications

2011 Quick Rental Industry Overview

• Nearly eighty-nine million Americans, almost one third of all Americans rent their housing.

• There are 17.3 million apartments in the U.S. (in properties with 5+ units). They house 16.5 million households, or more than 14 percent of all households.

• The value of the entire apartment stock (buildings with 5 or more units) is $2.2 trillion.

• Rental revenues from apartments total almost $120 billion annually, and management and operation of apartments are responsible for approximately 550,000 jobs.

• Construction of apartment communities in the last five years has added an average of 210,000 new apartment homes per year. The value of the new construction has averaged over these five years more than $32 billion annually, providing jobs to over 270,000 workers.

• Apartment living now attracts a wide variety of Americans, including households that could afford to buy, but prefer the convenience of renting. In fact, households making $50,000 or more a year make up a quarter of all apartment renters.

• The U.S. is on the cusp of fundamental change in our housing dynamics as changing demographics and housing preferences drive more people away from the typical suburban house. According to Professor Arthur C. Nelson, Presidential Professor and Director of Metropolitan Research at the University of Utah’s College of Architecture and Planning, to meet emerging housing demands, between now and 2020, half of all new homes built will have to be rental units.

For more quick facts, visit www.nmhc.org/goto/quickfacts .