The following article is from Canadian Real Estate Wealth Magazine.
Any landlord who has been involved in the real estate rental business for more than a few years has likely come across a tenant disaster, or at least knows somebody who has. One of the most common comments we hear from prospective, current, and former landlords relates to the headaches caused by accidentally renting to a bad tenant.
The relationship between landlord and tenant is known to be rocky, at the very least, and disastrous or expensive in a worst-case situation. Bad tenants have left landlords with garbage to clean up after suddenly leaving a property, pet damage and repairs in suites clearly marked as not allowing pets, damage to property after massive parties, junk removal requirements after night-time move-outs, and everything in between.
Horror stories are everywhere, and news travels fast: selecting the right tenants is the most important step in the real estate rental business. Landlords who can master this skill will succeed in the business, while the opposite is also true, unfortunately. Bad tenants are the number one reason for landlords leaving the industry and selling their properties in search of greener pastures.
Landlording is a risky business. Selecting a disreputable tenant who causes major damage to a unit can leave a landlord with a significant bill for clean-up and repairs, scare off other regularly paying tenants, and even label the landlord as inattentive or with the classic slumlord designation.
Unfortunately, there is rarely any insurance that can protect landlords in this area, and a problematic tenancy resulting in a massive expense will almost never pass the strict criteria that an insurance policy will require prior to paying out on a repair claim.
Tenancy laws throughout Canada differ greatly, but they all set out specific protections for both landlords and tenants. Most landlords assert that the laws favour tenants in almost every situation. Certain provinces, such as Alberta, offer slightly more protection to landlords than other provinces, where landlords can be forced to endure a problematic tenancy for months, or even years.
How to screen your prospective tenant
The best and most sure-fire way for landlords to avoid having to deal with this problem starts at the very beginning of the landlord-tenant relationship. Landlords who screen their tenants properly will greatly reduce the risk of future loss, maintain their reputation in the greater community without blemish, and not be constantly stressed about their rental properties.
Here are three tried and true methods of selecting the best and most qualified tenants and learning ways to avoid costly disasters.
1.) Rental documents
As any real estate or courtroom lawyer will tell you, good documents are the starting point of any successful business relationship. Having a successful tenancy requires good, clear, concise definitions of everybody's responsibilities and rights. Skipping this step means a tenancy relationship is beginning without a solid foundation, and during times of difficulty there may be nothing to refer to for clarification.
Rental application form
This document is probably the most important of any document in the entire rental process, which comes as a surprise to many new landlords.
A good rental application will require information on:
• the applicant's job
• their supervisor
• their income
• current address
• landlord reference, friends and referees
• government identification
• next of kin and extended family members
• any additional details believed to be relevant to the approval process
This information will help landlords gain a better understanding of the tenant's characteristics. More importantly, however, it gives the landlord some good contacts to track down the tenant if they should disappear. Visit http://hopestreet.ca/rental_resources/ for a free download of a comprehensive Rental Application Form.
Move-in inspection report
This is the second-most important document in the landlord-tenant relationship. Unfortunately, it is often overlooked.
Most provinces require a landlord and tenant to complete a move-in report upon onset of a tenancy. This quantifies and documents the condition of a property so that, when the tenant leaves, any damage caused is clear. A thorough and concise move-in report card is a sure-fire way of avoiding significant disputes over tenant-related damage. Most provinces require a landlord to produce this report prior to deducting any funds from a tenant's security deposit.
Residential tenancy agreement
As the name suggests, this document will establish the terms of the working relationship between the tenant and landlord. In general, the more detail it provides the better, and sourcing a free online residential tenancy document is not sufficient to cover a landlord's interests.
Most local rental associations will sell well-written and well-researched versions of residential tenancy agreement documents with several carbon copies for each party. Landlords and tenants fill in various fields relating to names, address, and rental amounts.
Addendum to residential tenancy agreement
This can be a small side document that forms part of the agreement and sets out additional rules for items such as pets, smoking in the unit, or penalties for late rental payments. These documents are harder to enforce but establish good guidelines for the day-to-day operations of a rental property.
2.) What to look for when showing rental property
The first interaction with a tenant provides a great opportunity to gain an impression of them. During the initial showing, the tenant may be more concerned with looking around their new home than acting in a manner consistent with getting their application approved. Some careful observations by the landlord can be extremely useful when considering the tenant's application.
Here are a few things to look for:
Did the tenants arrive on time?
Tenants who are respectful of their landlord's time are good tenants to have. Common excuses for showing up late are that the tenant got lost, or was not able to round up family members or kids. Are these seemingly minor excuses reasonable? Probably not. Tenants who do not arrive on time for a showing are not likely to pay their rent on time either. Avoid these tenants at all costs.
Are the children well behaved?
Tenants who want something – in this case, to move into your rental property – are likely to be on their best behaviour. They will speak politely, act respectfully, and maintain a professional manner. Kids, on the other hand, can be cautioned numerous times to behave but have shorter attention spans. Are the kids bouncing around the property in a rambunctious manner? Be sure their behaviour will become much worse when the landlord leaves the premises. If the tenant's kids are behaving poorly during the showing, expect the property to be returned to you with obvious damage from rambunctious kids.
Did tenant take off their shoes?
If a landlord has to ask the tenant to remove their shoes, this is a good indication that they are not in the habit of doing so. While this may be a personal choice, and can be a cultural issue, tenants who remove their shoes are likely to cause less stress on the flooring of a rental property. Avoid tenants who plan to wear shoes inside their rental property.
What does the back seat of the tenant's car look like?
This is a tried and true technique for learning whether the prospective renter will keep the rental property clean, or let clutter, dirt and debris build up. Avoid tenants with garbage in their car, as this will mirror the cleanliness of their home.
3.) Verifying information in a rental application
The rental application contains the most comprehensive set of information about the prospective renters and should take the most time to review and confirm.
Renters are extremely unlikely to include information in their application that they know will hinder their chance of having it approved. In addition to thorough follow-up of the details in the application, follow the smell test for your rental tenants. If a landlord happens to smell a skunk hiding in the rental application, then the balance of probabilities suggests there is in fact a skunk hiding there. In practice this means that if a tenant's information seems too good to be true, it usually is. Ask the following questions:
Does the tenant's stated income seem unreasonably high?
Look for ways to confirm this income, such as a letter of employment from a reputable business. If the income is from self-employment, ask for a recent tax return to confirm it. Remember: the more intrusive the questioning, the less likelihood of a disaster or massive repair bill from a problematic tenancy.
Is the employer reputable?
A quick Google search to confirm the existence of the company or place of work provided by the tenant should be sufficient. If it does not exist or is extremely difficult to find online, then it is likely to have been made up. If the tenant claims to be self-employed, ask for a business card or marketing/promotional materials to prove the company's existence. If it cannot be confirmed, decline the tenant's application.
Are there gaps in the tenant's rental history?
If a tenant's application lacks previous landlord information for a period of time (typically six or 12 months), they may be trying to hide a less than positive past tenancy. If they refuse to provide comprehensive chronological information for the past two years, ask where they lived during the missing time. A backpacking trip overseas or living with parents are acceptable responses; disclosure of a problematic tenancy followed by court eviction is not an acceptable response.
Ask the current referees if they can provide names and contact information for other referees
Following these strategies will help you weed out undesirable applicants and greatly reduce, if not eliminate, the likelihood of a rental catastrophe.
From Canadian Real Estate Wealth Magazine, a monthly publication focused on building value through property investment, covering topics such as values and trends, mortgages, investment strategies, surveys of regional markets and general tips for buyers and sellers.