Manual vs. Automated Income Verification

It’s no secret that one of the most common forms of fraud in the rental space is using fake income documents. These fraudulent documents can be crafted using various software and easily tweaked to display a higher income, making it challenging for property landlords and managers to verify their authenticity. Unfortunately, this can lead to significant losses for the property.

Traditionally, landlords have used manual methods to verify income. However, technological advancements have launched automated solutions in recent years that help streamline the process.

This article will examine both manual and automated income verification methods, comparing their pros and cons and their impact on property management.

Understanding Manual Income Verification

What is Manual Income Verification?

Manual income verification involves collecting and reviewing hard-copy documents or copies from applicants.

The steps involved include document collection, where landlords ask for specific financial documents from potential renters to verify their income. Next, the papers must be scrutinized for consistency, relevance, and accuracy. In some cases, landlords may reach out to the applicant’s employer to confirm employment and income details.

Here are some examples of the types of documents that can be reviewed:

• Recent pay stubs
• Bank statements
• Tax returns
• Employment verification letters
• Social Security benefits
• Pension statements

Advantages of Manual Income Verification

One of the biggest advantages of manual income verification is that it allows landlords and property managers to have some “human” control over the process. They have direct oversight and involvement in each step of the process.

Here are two additional advantages:

Deeper Evaluation. Manual review helps landlords to consider not only the income amount but also spending and savings patterns.

Flexibility. This approach is adaptable, factoring in non-traditional income sources or renters with unique or complex financial circumstances, like freelancers or someone with fluctuating incomes.

Disadvantages of Manual Income Verification

For starters, collecting and reviewing documents is labor-intensive, especially if the property manager oversees multiple properties or tenants. Here are three additional disadvantages of manual income verification:

Human Mistakes. Errors can occur during the review process. A property manager may overlook critical details, get the wrong impression about financial data, or even overlook verifying an important document. Unfortunately, this can lead to inconsistent outcomes due to subjective judgment.

Greater Fraud Risk. Manual verification is more susceptible to altered documents, especially if the property manager doesn’t have experience identifying these issues. Most, if not all, document manipulations are impossible to spot with the naked eye, leading to higher instances of fraud at properties that rely on this method.

Delayed Decisions. Manual processes simply take longer, resulting in missed opportunities if other landlords process applications quicker.

Understanding Automated Income Verification

What is Automated Income Verification?

Automated income verification uses technology (and sometimes artificial intelligence) to streamline and expedite the verification process. These digital tools typically connect to financial institutions or employment databases to pull out and confirm an applicant’s income data in real time.

How does it work? The prospective renter consents to the system accessing their financial information. Next, the software extracts income data from their bank accounts, payroll providers, or other financial institutions. Then, the system analyzes the data and creates a report for the property manager itemizing the renter’s income, employment status, and cash flow.

Here are some examples of the types of data sources that can be used:

• Direct payroll integration
• Financial institution data
• Automated income calculation

Advantages of Automated Income Verification

 Most landlords will agree that one of the most helpful advantages of automated income verification is the speed and efficiency. Automated processes complete in mere minutes what manual methods could take days – or even weeks – to get done. Here are four more advantages of automated income verification:

Accuracy and Reliability. Automated tools are less susceptible to errors because they pull data straight from reliable sources. This reduces the risk of falsified information or human oversight.

Security. Most automated systems available on the market today are highly secure, ensuring the privacy and protection of sensitive renter information.

Standardization. Automated systems deliver standardized reports, making it much easier for property managers to compare prospective tenants and make educated decisions.

Renter Experience. Automated verification improves the tenant’s experience by decreasing the number of documents required to submit and cutting down on the overall processing time.

Disadvantages of Automated Income Verification

While automated income verification tools are increasingly used by landlords and property managers for screening applicants, they come with some disadvantages. Here are a few to consider:

Initial cost and setup time. Implementing and maintaining automated income verification systems can be pricey. Some may find the costs outweigh the benefits, especially if the system doesn’t dramatically improve the screening process.

Potential issues with system compatibility. Some landlords may still use older systems that may not easily integrate with newer, more automated tools, resulting in major costs and time spent upgrading these systems.

Comparing Manual and Automated Processes

Efficiency and Speed

Manual

The manual process entails collecting pay stubs, bank statements, or tax returns from applicants, which can take a lot of time. It’s also extremely labor-intensive – landlords or property managers must review each document carefully to verify income, which can, in turn, delay the entire proof of income screening process.

Automated

With automated processes, landlords can instantly verify income by pulling data straight from banks or credit bureaus, speeding up the entire process. In addition, automated systems handle the bulk of the “work,” minimizing landlord time and effort.

Accuracy and Reliability

Manual

Manual verification is more subject to errors in judgment or oversight. Documents can be misconstrued, or fake documents might be accepted if not thoroughly examined. Also, manually reviewing data sources such as pay stubs and bank statements involves the time-consuming work of checking for consistent pay periods, matching them with employer details, and looking for signs of tampering.

Automated

Automated systems use algorithms to cross-check and verify data, decreasing the possibility of errors. These digital tools also commonly include tools baked into the system to detect fraudulent activity.

Cost Considerations

Manual

Manually examining documents or contacting employers requires significant time and effort, which can often lead to longer renter approval processes.

Automated

While efficient and accurate, automated verification processes commonly come with a monthly fee or per-applicant charges, which can be expensive, particularly for smaller-scale property management companies.       

Scalability and Flexibility

Manual

A manual verification process isn’t scalable for multifamily properties. The process itself takes a considerable amount of time, making it difficult to effectively screen tenants in a timely manner while feeling confident in the results. Additionally, manual processes are not easily adaptable to changes in rental regulations or market conditions. 

Automated

With automated systems, landlords can expect the tools to handle massive volumes of applications, requiring minimal hands-on intervention. This is ideal for landlords with multiple rental units or property management businesses. While less customizable than manual processes, automated tools ensure a standardized verification strategy, lowering the risk of inconsistency or bias.

Compliance and Security

Manual

Property managers must maintain proper records of the verification process to comply with legal requirements. However, manual record-keeping can be error-prone and inconsistent, often leading to compliance risks if records are incomplete, incorrect, or lost. Further, manually handling sensitive information such as pay stubs and bank statements requires stringent measures to protect renter data. Failure to secure this data properly can lead to privacy law breaches. Also, the risk of data breaches through loss or theft is higher with physical documents.

Automated

Automated verification services often include built-in security measures, like encryption and secure data storage, to comply with privacy laws. They also commonly utilize advanced encryption for storing and transmitting sensitive data, offering more security than manual processes. Additionally, automated platforms tend to feature robust access controls, ensuring that only authorized personnel can access renter data, reducing the risk of unauthorized access and boosting overall security.

Case Studies and Real-World Examples

Example of Manual Verification

Michelle is a small landlord who owns a duplex located in a suburban neighborhood. She’s hoping to rent out one of the units and receives an application from Brian, a prospective tenant.

Michelle receives three months of pay stubs from Brian. She thoroughly reviews them to ensure they are consistent with his reported income. She checks the dates, gross income, deductions, and net pay and notes that the pay stubs appear to have been printed from an online payroll service, which looks legitimate.

Brian also gave Michelle three months of bank statements. She reviews these to ensure that the income shown on the pay stubs matches the deposits in his bank account. She discovers that the deposits align with the pay stubs; however, they are slightly lower than the net pay, which Brian explains as deductions for health insurance that are not reflected in the bank deposits. Michelle also uses the phone number Brian provided to reach out to his employer. After a few attempts, she gets ahold of someone in the HR department, who confirms that Brian is employed and earning the income shown on his pay stubs. However, the contact is vague about his job security, noting that the company is undergoing restructuring.

Challenges of the Manual Verification Process

Time-Consuming. Michelle spent significant time reviewing documents and contacting the employer, prolonging her decision-making process.

Risk of Errors and Oversight. Without specialized tools, Michelle relied on her judgment to find inconsistencies, which can lead to errors, like overlooking a forged document.

Limited Ability to Verify Employment Stability. The vague response from Brian’s employer about the company restructuring left Michelle with uncertainties about his job stability.

Security Concerns. Handling physical and digital copies of sensitive documents, including pay stubs and bank statements, poses a risk of data breaches if not securely managed.

Manual income verification can be time-consuming and prone to errors and biases. It also poses challenges in verifying employment stability and handling sensitive data securely, making it less reliable than automated solutions, especially for property managers with multiple rental units.

Example of Automated Verification

Andrew is a property manager overseeing multiple rental properties. With several units to fill, he receives numerous tenant applications daily. To streamline the process, Andrew relies on an automated income verification system.

Applicants upload their financial documents—like bank statements, pay stubs, and employer information—directly through an online portal. The system automatically gathers and organizes the data for review. The software verifies the authenticity of the uploaded documents by cross-referencing them with payroll databases, bank records, and other financial institutions. It flags any inconsistencies or potential issues, like forged documents.

The system then compares the income reported on pay stubs with the deposits in a potential tenant’s bank account. Any discrepancies are highlighted, but the system also provides explanations, including standard deductions (i.e., health insurance), helping Andrew better understand the complete financial picture without manual analysis. The automated system also contacts employers via secure channels, checking employment status and income, eliminating the need for Andrew to make multiple calls and speeding up the verification process.

The automated system seamlessly processes high volumes of applications, allowing Andrew to oversee multiple properties without getting inundated with manual work and helping him to approve applications faster.

Advantages of Automated Verification for Property Managers

Speed. The process is fast, enabling quick tenant approval and minimizing vacancy time.

Accuracy. Automated tools ensure document authenticity and minimize errors.

Scalability. The system can handle numerous applications simultaneously, which is ideal for managing multiple properties.

Security: Sensitive data is securely processed and stored, lowering the risk of data breaches.

Automated income verification is a robust tool for landlords and property managers like Andrew. It enables efficient management of multiple properties. It streamlines the screening process and ensures accuracy, making it a game-changer for managing high volumes of rental applications.

Making the Decision: Factors to Consider

Choosing an automated income verification system for tenant screening involves weighing benefits like speed, accuracy, and security versus aspects like cost and integration.

Business Size and Volume of Applications. Automated systems process documents and verify information within hours, allowing quicker decision-making. This is vital for minimizing vacancy periods and securing renters quickly. If managing multiple properties or receiving numerous applications, automated verification can handle significant volumes seamlessly, saving valuable time and decreasing workload.

Budget and Resources. While automated systems often require an upfront investment, they can save money down the road by lessening the time spent on manual verification and reducing the risk of accepting financially unstable renters. Most automated services offer tiered pricing based on the number of applications processed, making it cost-effective for both small landlords and larger-based property management companies.

Technological Readiness. Determine whether an automated verification system will integrate smoothly with your current property management software. Seamless integration can boost overall efficiency and lessen the need for manual data entry. The system should also be user-friendly for both landlords and tenants, simplifying the application process and reducing possible technical glitches.

Staff Expertise and Training. The effectiveness of automated verification systems heavily relies on the expertise and training of the staff managing them. Team members must be well-versed in how automated income verification systems operate, including understanding the algorithms behind the software, how data is collected, processed, and interpreted, and being able to troubleshoot.

Long-Term Goals and Strategy. Adopting automated income verification solutions is not just about immediate efficiencies but also about aligning with long-term business goals. Automated income verification systems offer scalability, enabling property managers to handle a higher volume of applications without sacrificing speed or accuracy. Reduced labor costs, fewer errors, and quicker processing times contribute to lower operational expenses, enhancing overall business profitability.

Final Thoughts

The decision between manual and automated income verification methods is pivotal in shaping the effectiveness and efficiency of the tenant screening process. Each method has its own set of advantages and challenges, and the choice ultimately depends on your property management business’s specific needs and goals.

Whether you choose a manual, automated, or hybrid version of each, the key is to make an educated decision that represents a healthy balance of efficiency, accuracy, cost-effectiveness, and overall renter satisfaction.