Daniel Berlind
CEOIn this article
Choosing the wrong tenant to occupy your property is every property manager’s worst nightmare. Dealing with problematic tenants who don’t pay rent, damage the unit, or cause a disturbance to neighbors is not only frustrating but can become costly.
Most property managers have crafted thorough rental criteria to screen out potential issues. Things like credit checks, background checks, rental history, and income verification all serve to make sure you get the best tenants in your buildings.
But what happens when a bad tenant slips through the cracks, and how do they do it? Tenants have now figured out how to alter their bank statements and pay stubs. A document that once stated they made $50,000/year now says $150,000. Whether they do this themselves or hire a company to change the document for them, this fraudulent practice has become increasingly popular – and is undetectable in the eyes of many property managers.
Identifying and preventing fraud can be challenging, but we’re here to make it easier. Read on to see how you can spot these shady practices and avoid bad tenants and lengthy evictions.
Why is Fraud on the Rise?
With fears mounting over a looming recession, it has never been more crucial for property managers to secure reliable sources of rental income. Bad tenants can disrupt rent collection or worse: require an eviction.
To understand why recessions increase tenant fraud, we can look back a few years. According to a 2011 study published by Harvard University, the Great Recession significantly increased the cost burden on tenants. The percentage of those who spend more than 50% of their income on housing rose to 29.4%. When tenants allocate more of their monthly income to rent, they are less prepared for unexpected occurrences, such as a medical emergency. This puts them at risk for nonpayment of rent and eviction.
Another link between fraud and a recession is the loss of employment. Over 23 million people lost their jobs during the COVID-19 pandemic, putting tenants in a tough spot. They needed to keep a roof over their heads but didn’t have sufficient income to do so.
Similarly, many students abruptly lost housing at the start of the pandemic. As universities closed without warning, nearly 600,000 college students needed to find new housing after their dorms kicked them out with less than a week’s notice. In these types of situations, desperation can lead to the submission of fraudulent applications.
Finally, in a situation like this, there will be a small subset of people who attempt to take advantage of the situation. The federal freeze on evictions that lasted from March 2020 to August enabled fraudulent applicants to seek apartments outside of their financial means. If they weren’t weeded out via a screening process, they were then protected from evictions for months on end, whether or not they could actually afford the unit. This is why it is critical to catch fraudsters prior to accepting them as tenants.
Spotting Fraud
One of the best things you can do while reviewing rental applications is to be thorough and diligent. Tenant screening software combined with good old-fashioned manual reviews is the secret sauce to getting it right the first time.
Request Multiple Bank Statements and Pay Stubs
Be sure to require multiple pay stubs and bank statements and review for inconsistencies (we cover this process in our articles on identifying fake bank statements and fake paystubs). Look for visual cues, checking for obvious discrepancies such as misaligned numbers or degraded text quality. Check that transactional details and other figures on documents from financial institutions match formatting in verified documents received from the same source in the past. Also, make sure the numbers add up: for instance, see if claimed income totals the same amount printed on pay stubs or other financial documents.
Check Their Rental References
Many property managers also invest the time to verify income and references by calling numbers and clicking links listed in applications, or looking up the contacts themselves. To ensure the person you’re speaking to is, in fact, the previous landlord or work supervisor, ask questions they can answer easily while a friend may be stumped, such as, “What was the start date for the applicant?” Remember that businesses have limitations on the information they can disclose about employees, so don’t reach beyond your role. ‘Yes’ or ‘No’ questions may aid in this effort: “The applicant stated she earns $4,000 per month. Is this correct?”
Consequences of Undetected Fraud
So, what happens if you don’t catch the fraud? The sad truth is that if you don’t spot fraudulent documents, you’re more likely to have a high-risk tenant in your property. In fact, those with fake documents are 7 times more likely to cause an eviction or other financial trouble. The last thing you want is an expensive, time-consuming eviction on your hands.
The typical property manager in a 2020 study by ReRez Research says at least 15% of evictions involve tenants who submitted fraudulent rental applications. Respondents also reported the average cost per eviction is almost $8,000 due to lost rent, legal fees, and other associated costs. A firm managing 3,000 units with a 20% eviction rate may endure 600 evictions every year, totaling more than $1.3 million per year in expenses related to fraudulent rental applications alone. Yikes!
Preventing Fraud
While the rise in document fraud is a valid cause of concern for property managers and landlords across the country, there are steps you can take to prevent it from happening.
Tenant Screening
As a property manager, you need to be sure that you’re leasing to tenants who will treat your property with respect, pay their rent on time, and not cause you any headaches. The best way to do this? A thorough tenant screening process. Not only does it give you peace of mind, but it can save you time, money, and stress in the long run. But what exactly goes into a good tenant screening process?
Credit checks will provide information on payment history, residence history, prior bankruptcies or evictions, and the tenant’s credit score. Since a credit check is run directly by the screening personnel and sourced from a third party, it is harder for the applicant to forge. We recommend requiring a minimum 650 credit score for applicants.
Criminal history reports may search national, federal, state, and county databases to supply notice of convictions or any pending criminal cases. Be sure to check the laws in your area, as some states have strict rules regarding whether or not a criminal background check is allowed. Even if detailed background checks are prohibited, you may be able to check applicable sex offender registries.
If the tenant has been sued in the past or is currently involved in a lawsuit, it will show up in public records. Take note of tenants who have been sued for unpaid rent, unpaid child support, or other serious financial matters, as this may indicate a pattern of nonpayment.
Lastly, don’t make concessions on any of your requirements. Just because an applicant seems nice or appears to have good intentions does not mean they won’t do whatever it takes to secure one of your units. Treat every applicant the same and stick to your criteria.
Fraud Detection Software
While there are many perks to the tenant screening process being online these days, it also increases the likelihood of fraudulent documents slipping through the cracks. Lucky for you, we have a solution.
Snappt’s software is able to detect falsified financial documents with a simple addition to your current screening process, and has more accurate results than other screening tools. We catch over 99.8% of fake documents, reducing potential future bad debt & evictions by over 50%.*
Instead of spending four to 10 hours vetting an application, you can spend minutes uploading digital documentation for image and historical analysis as well as a data-driven review using algorithms tuned to catch document manipulation. Within 24 hours, we certify whether the documentation is fraudulent or authentic. Now, you can rest easy knowing that we’ve prevented bad tenants from infiltrating your property.
To Sum Up…
Fraudulent documents can be a serious threat to multifamily properties and it’s essential to stay vigilant and keep up with the latest developments in technology and software solutions that can help prevent them. By taking the necessary steps, property managers can reduce their risk and their stress.
Remember, preventing fraudulent documents before they’re misused is always more effective than dealing with the aftermath. Snappt can help with that. Download our fraud checklist, or reach out for a demo today.
Chat with our sales team to learn about our comprehensive fraud solution