Ep013: The “Right” Approach to Tenant Screening

Chris McAllister: Hello everyone. And welcome back to the Landlord Profitability Playbook Podcast. I’m Chris McAllister and I’m here to create and coach business opportunities and strategies that support and add value to the lives of residential real estate investors.

Joining me today are my trusted co hosts, Laci LeBlanc and Gretchen Mitchell. Good morning, ladies. 

Laci LeBlanc: Good morning. 

Gretchen Mitchell: Good morning. 

Chris McAllister: Laci is our guru of all things marketing, specifically digital marketing, and Gretchen is our director of property management at ROOST Real Estate Company. So today we’re diving into part six of our series, “What to Expect From Your Property Manager.”

And this episode is titled, “Do They Have a Clear and Unbiased Selection process for Applicants?” We have to admit that this is one of the drier episodes that, uh, you know, We will have out there, but it is critical information. And if you are considering, um, hiring a property manager or switching property managers, this, this is definitely part of that interview and due diligence process. So what prompted this episode is, is that in April of this year, uh, 2024, HUD issued updated tenant screening guidelines.

And these new guidelines are designed to ensure fair and non discriminatory practices in, in the tenant screening processes. So, what I want to do today is, is kick off by revisiting fundamental principles of fair housing laws, and today we’re going to use, uh, Ohio’s law as an example. And knowledge and, and, and fundamental embracing of these Of these laws is it’s critical for any reputable property management company.

If you don’t comply with these, not only are you, you know, doing bad things, but you’re also outside of the law. And, uh, that kind of behavior of course, can really make a mess of your real estate investments. So we’re going to talk about the key points in the guidance, the responsibilities of housing providers and tenant screening companies to avoid discriminatory practices.

We’re going to talk about a bit about the impact of advanced technologies like artificial intelligence and tenant screening and ensuring that those technologies are not used in ways that are ultimately discriminatory. And we’re going to talk a little bit about best practices for fair and non discriminatory tenant screening.

And talk about actually focusing on the relevant and of course, accurate data that can be surfaced when the company does their tenant screening. Finally, we’re going to provide some practical tips on how to evaluate and ensure your property manager screening process is compliant. And again, on top of that, just to round out this rousing episode, we’re going to talk about developing clear written screening policies that are available to the public.

And ensuring that their data is accurate and and things to look for to make sure that this company is providing, uh, or the companies that you’re looking at are providing transparency as well as. Detailed explanations to applicants if they are turned down. 

Laci LeBlanc: Yeah. So this is like the, what to expect from your property manager episode.

But I feel like this is one is really very applicable to people who are doing it themselves too. Right. So this is. One of the advantages to having a property management company, right, is that they, they should, if, if they don’t, then you’re maybe with the wrong company, but they should have all of these systems and processes in place.

But one of the disadvantages to being one of the nanas out there, right, who’s doing their own property management, is that you don’t have all of these systems and processes in place necessarily. So I feel like DIYers are going to get a lot of value out of this one too. 

Chris McAllister: I think you’re right. It’s it is a little dull.

It is something I’m afraid that we tend to take for granted, and I do think it’s important that we get it out there. So just to kind of start from first Principles. And again, I’m going to use Ohio as an example, but I’m going to read this paragraph or two. And, uh, you know, a property manager licensed by the state they do business in, they, they live and die by this, right?

This is the thing that can just destroy a property management business and in turn, you know, really harm, um, in an, an investor’s rental business. So it is illegal pursuant to Ohio fair lousy law, blah, blah, blah, blah, blah. And again, I don’t even want to do that. I know it’s dull. I’m going to read it. It is illegal pursuant to the Ohio Fair Housing Law Division H of Section 4112.

02 of the revised code and the Federal Fair Housing Law 42 U. S. C. A. 3601 as amended to refuse to sell, transfer, assign, rent, lease, sublease, or finance housing accommodations, refuse to negotiate for the sale or rental of housing accommodations, or otherwise deny it. or make unavailable housing accommodations because of race, color, religion, sex, familial status, as defined in section 4112.

01 of the revised code. So familiar status is, they provide a little bit of additional detail throughout the statute. But in addition to those things, it’s also ancestry, military status, disability, national origin, and you can’t discriminate in the form of advertising the sale or rental of housing, in the financing of housing, or in the provision of real estate brokerage services.

It is also illegal to profit, to induce, or attempt to induce a person to sell or rent a dwelling by representations regarding the entry into the neighborhood of a person or person’s belonging to one of the protected classes. So that, that word salad basically says that you as a landlord, your property manager, and any of the vendors that you may employ to run your business, none of them in any way, shape or form, whether it’s, uh, it’s advertising, whether it’s the analytics, they use the AI they use can result in anything that could be constructed.

strewed as discriminatory against those protected classes. And I think it’s good to get scared every once in a while just to keep us straight. So I’m already feeling a little scared, Gretchen. 

Gretchen Mitchell: Of course, I’m scared of this every day, but we make sure we have those processes in place. So our fear is under control.

Chris McAllister: Yeah, but the cornerstone of any reputable property management company selection criteria is strict adherence to fair housing laws, federal, state, and local. There’s just, there’s nothing more important than what they do for you. And it’s imperative that you as a, as a, as a owner, as a client, confirm that the company does not discriminate based on race, color, religion, sex, familial status, ancestry, military status, disability, or national origin.

You can’t just take for granted that they’re not You have a responsibility to ensure that the company you’re hiring is not. It’s not just their problem. It’s your problem, Mr. Landlord. You have to ensure, and you should ensure, that the company has clear policies and training in place to uphold these principles, and that reflects their commitment to ethical and legal practices.

So we’re going to put the actual HUD guidelines what exactly what they published a link to that in our show notes of this episode, but it sort of comes back to what we talked about the last time we got together, where what you want to find in your property management company. Is an attitude that I think is best described that they want to screen in qualified applicants.

Their goal is not to screen out qualified applicants. So I, as we go through this, I just want to sort of keep that top of mind. Our job as property managers and leasing professionals is to screen in, not out. So I’m going to kind of go through quickly key points in that guidance. It’s I’m certainly not going to Read through that entire document, but I think it’s something that you should at least familiarize yourself with.

So, Key Point One, Fair Housing Act Compliance. Screening practices must comply with the Fair Housing Act, which prohibits discrimination on all of those things that we’ve been talking about. Both housing providers And tenant screening companies are responsible for ensuring non discriminatory practices.

So this new HUD update makes clear that it’s not just the landlord and the property manager, it’s the tenant screening company that is also responsible for ensuring non discriminatory practices. Tenant screening companies often use advanced technologies like AI, which can lead to less transparent processes.

And housing providers should ensure that these technologies are not, are not used in discriminatory ways. So again, according to HUD, the onus is on the property owner as well as their property manager and the whatever technology service or third party companies they’re using to run their business. As far as best practices, HUD urges all of us to use criteria When screening when screening in use criteria that are relevant to predicting whether applicants will comply with tenancy obligations.

So obviously what we’re looking at there is, will they pay the rent? Will they pay it on time? Will they pay it through the term of their lease? Will they leave the property? And in better shape when they leave than it was in when they moved in, you know, will they do they won’t do anything to restrict the quiet enjoyment of the of the neighbors and so forth.

So you’re only looking when you’re screening is to screen in folks that are going to be able to comply with the terms of the lease. Anything else, quite frankly, is discriminatory. So screen in, not out. 

Laci LeBlanc: It sounds like to me there that these so we all have our biases right like and and where you live and who you are and how you’re raised and whatever contributes to that but so we all have these things kind of subconsciously that we think about other people and you know if we don’t have these in place we’re going to apply those to the to the situation um just again subconsciously so it sounds like to me that like You Fair housing is important because fair housing is important.

You don’t want to, you know, break any laws and you don’t want to be punished for it. But also, it sounds like this kind of screening in versus out process is how you get the best. 

Chris McAllister: Again, I, I think that’s nice of you to say so, because it goes back to episode five, that, you know, you’ve, you’ve got to cast a wide net to find, you know, as many qualified applicants as you possibly can.

So, as we’ve discussed in the last episode, we, we come back to here, everything comes down to screening and not, not screening out. for your time. And all of these best practices are, are, are intertwined. It’s as 

Laci LeBlanc: much as it hurts to say that sometimes we’re, you know, our biases are wrong or we’re wrong, you know, it feels like, um, you know, having these, these processes in place in these systems in place can maybe challenge some of those and get us good tenants that maybe we wouldn’t have selected on our own.

Because you know, you know, you know what in the, the tenant history or the tenant record or their recommendations that you get from other landlords, what actually indicates that they’re going to pay their rent, that they’re going to, you know, stay through the lease, that they’re going to leave it better than they found it.

Um, so by not just relying on, you know, a number or, you know, a set of criteria and being a little more, um, You know, open about it. It sounds like you can really open yourself up to finding some better, better tenants, too. I think that’s a nice side effect. Yeah, you also have to kind 

Gretchen Mitchell: of ask those questions, too.

So if we run a credit report or a criminal background and something comes up that we’re kind of questioning, we always call that person and say, tell me what happened. What was the situation? Why is this on this report? And we have that conversation. Maybe it’s something that, you know, your mind goes to something immediately when you see, Okay.

You know, a charge on someone’s background. But if you have that conversation, you get the whole picture. And maybe it’s not as bad as what you thought originally. 

Chris McAllister: Yeah, it happens all the time. You’re absolutely right. And you live with it every day, Gretch. But so best practice, what HUD is, is basically telling us we have to do.

It’s not a proposal. It’s the law. So again, we have to use criteria, only criteria that is relevant to predicting whether applicants will comply with their tenancy obligations that landlord and the property manager have to ensure of the accuracy of the records they’re using in screening. So in other words, we as property managers just can’t take for granted whatever the screening company we might be using or, or the credit, uh, bureau that we’re using might be telling us and we have to avoid.

criteria that is so broad that it will unjustifiably exclude applicants. So again, screen in, not out, but also talks a lot about transparency and most importantly, consistent consistency. So your property manager needs to have clear detailed, and here’s a key point publicly available screening policies.

This isn’t us talking. This isn’t just doing good work. This is, this is HUD talking housing and urban development and you have to provide applicants with detailed reasons for denial and allow them to challenge negative information. How long does that, how often does that happen, Gretchen? 

Gretchen Mitchell: It does happen.

I mean, that’s just kind of what I, what I went back to, you know. We had to deny you because you’re your criminal background. Well, here’s what actually happened, or here I’m in the process of fighting this. Or, you know, yes, my landlord evicted me, however, here’s all the documentation that I have as to why I wasn’t paying my rent or I put it in escrow.

You just have to have those other conversations 

Chris McAllister: and it takes time and it takes effort. And I, I think a lot of times. It’s very, very easy for a property manager, a property management company to not go that deep into an applicant’s history or an applicant’s application. And it’s really easy to just skip over, quote, the hard ones.

And, and go to go look for the easy ones and at the end of the day that that can lead to a discriminatory outcome.

So housing providers have to read housing providers retain liability for discriminatory screening practices, even if they outsource screening to a third party. Screening companies can also be held liable for facilitating discriminatory decisions. So when you do sit down and you’re talking to a new property manager, a property management company, and you’re evaluating their process, have they developed clear screening policies?

Have they created clear policies? Detailed written screening policies that specify the criteria and standards used for tenant selection, have they ensure that these policies are publicly available to applicants and easily accessible. That’s, that’s a, you will find that not I, I would go on a limb to say not many property management companies have done that.

I can also say though, that the very best in the business have done that, and we’re going to provide copies of, uh, links to ours at Roo Real Estate Company. in the show notes. They also suggest, HUD suggests, and what we want you to ask and look for is, your property manager should avoid using, quote, off the shelf products from screening companies.

Instead, they need to customize the criteria and standards to align with, with HUD policies, their company policies, and avoiding overbroad exclusions.

Ensure accuracy and relevance. The property manager needs to regularly audit the data sources and processes used by the screening company to ensure accuracy and relevance of the information, and they need to exclude irrelevant records. Just as Gretchen you were saying, old or minor offenses, for instance, if it shows up on a criminal, and focus on the most.

Predictive criteria, which again is, do they have a history of paying the rent on time and taking care of the property that at the end of the day, talk 

Gretchen Mitchell: to those landlords talking to those landlords will get you that answer, but it also goes back to is that landlord just trying to get them to move? Do they want them to stay?

Are they going to tell the truth? But you know, we bring them in and we actually interview those people to that are applying and say, Hey, You know, here’s what we found, what’s going on, and just have that conversation with them. 

Chris McAllister: Transparency with applicants. Provide applicants with a clear explanation of the screening process and criteria before they apply.

Now, we do this basically with every single listing, you know, we have on the website. We say exactly what we’re looking for, um, in an applicant and what they have to bring to the table when they make their application. Basically three times so on and so forth, yeah. Right. And if an application is denied, the property manager has to be able to give detailed reasons and instructions on how to challenge the decision or, or they have the, the applicant gets the opportunity to provide mitigating information.

The property manager needs to train their staff on fair housing and non discriminatory screening practices, no matter how boring it’s, it’s just got to be in the fabric of the business. And they have to regular monitor their screening processes and outcomes to ensure compliance. Finally, does the property manager engage with the screening company?

You know, do they work closely with the, with their third party company to understand their methodologies, right? And ensure that they align with you, you, what you know to be correct policies. For your investment business. And obviously those, those have to be non discriminatory. And the other suggestion is to require a screening company to provide detailed reports and enforce, maintain, maintain transparency.

So, you know, I, I know you and, uh, Brenda all the time are challenged by. Um, owners, especially when, um, something’s not getting rented fast enough to, to be able to show, well, what kind of applications did you get? Why did you think that they were worthy and so forth? And I, I know that you guys, you and Brenda, our leasing manager work very, very hard to make sure that we always have that information at our fingertips in order to share that with our owners.

Gretchen Mitchell: We do. We do.

Chris McAllister: So again, we’ve added links in the show notes to the actual HUD dot and to the policies and procedures we’ve adopted at our company. So feel free to take a look at those, do with them as you will. We also, for us, it’s, it’s super important that we, I feel like we have an obligation to educate tenants. Now, you know, I, I, I, you know, everybody has to be responsible for themselves, but quite frankly, we meet applicants all the time of all ages and backgrounds that really don’t have a clue about what it means to be a successful tenant or to successfully apply for, for a place to live.

So I feel like we have a job, 

a 

Chris McAllister: part of our job is to educate tenants. And that sort of ties in with, you know, our, our, our thoughts about. Um, learn with ROOST and our new, uh, resource, um, uh, Oh, it’s a hub. Yeah. The hub, the hub, the all things real estate hub that Laci is working on actually this month, which is really about not just educating owners, but educating agents, educating buyers, sellers, and ultimately tenants as well.

So we’re going to put this in the show notes, but we have, we actually have the document ROOST real estate tenant screening guidelines. Okay. So this document, and again, I’m only going to try to hit the high points here, is designed to educate applicants and tenants. As as to how we do business at ROOST.

So of course it leads off with we are committed to fair and equal housing opportunities for all applicants. Our tenant screening process ensures a non discriminatory evaluation based on relevant criteria that predict the ability to comply with tenancy obligations. Here’s what you need to know. So we talk in there in this document about rental history, we consider past evictions only if they occurred within the last five years and were not due to circumstances unlikely to recur, i.

e. job loss or domestic violence. We prioritize consistent payment of rent and responsible behavior. Credit scores are considered, but are not the sole factor in our decisions. We also look at consistent income and government assistance, i. e. section eight, housing choice vouchers, etc. And we are required.

So, so if our general guideline is that an applicant has to make three times the rent amount and show us Um, pay stubs to support that there, that income can also include vouchers, right? So you know, if, if regardless of the percentage, if that voucher gets them to quote three times the rent amount or whatever your standard is, then that is considered legitimate income.

Credit issues related to one time events, medical emergencies, and domestic violence will be disregarded if properly documented. So this isn’t, you know, just a free for all that, that somebody gets to say, Oh, no, that’s not true. It was this, this and this. We’ve, we’ve, we’ve got to see something that supports that we evaluate criminal records based on the nature, severity and recency of offenses without blanket exclusions.

Applicants can present evidence of rehabilitation and mitigating circumstances. Arrests without convictions will not be considered. And that’s not just ROOST, that, that, that is HUD also. Income and employment. Our income requirements are reasonable and we consider all income sources including benefits and vouchers.

Employment history is reviewed for stability with understanding and flexibility for non traditional or intermittent employment. So again, it’s about a demonstrated history of paying the rent. We use criteria related to tenancy responsibilities, such as maintaining the property and adhering to community rules.

Again, the whole, the quiet enjoyment clause, we apply all criteria consistently to avoid discrimination. And then we go through the application process. You know, you must complete a rental application and provide the necessary documentation. If you don’t, your application will be discarded. We verify rental history, credit information, criminal records, income and appointment details.

You will be informed about our screening criteria and process when you apply. If your application is denied, you will receive a detailed explanation with reasons for the decisions and instructions on how to challenge. You can challenge any disqualifying information by providing evidence of inaccuracy or mitigating circumstances.

We make rental decisions based on relevant information to ensure compliance with fair housing laws. That is a public document for us that we make available on demand to any tenant applicant and in the show notes again, we’re making that available to you, the listener. 

Laci LeBlanc: So it sounds like we talk about being in the shelter business, right?

Um, and how that’s not just. Like this is, it feels good probably when somebody comes in and they have a, you know, a one time occurrence that you’re able, they’re able to explain and you’re able to, to give them housing. Because I know from, from helping, you know, Nana with her properties that a lot of folks out there, renters, Are frustrated, you know, well, I don’t have excellent credit.

Otherwise I’d buy a house or, you know, some things have happened in my past and, you know, I’m, I’m rehabilitated or it wasn’t my fault or whatever. There is a lot of frustration out there. So I do imagine it feels pretty good for, you know, you guys scratching in the office for somebody to get somebody in a home.

Right. But that’s not the point. The point is landlord profitability, right? So being in the shelter business, it feels good. Um, the way that you guys do it, but it’s also the most profitable way to do it. And I think that’s a really important point to make because this is a lot of work that most people don’t do.

And, you know, the feel good part of it that probably You know, make some people think, oh, well, they’re just, you know, that, that can’t be the best way to do it. It’s it’s too lenient or it’s too this, or it’s too that, or it just doesn’t live up to my expectations of what the process is supposed to look like.

But the point is. And that’s really in the end, your profitability and your, your owner’s profitability are the bottom line. I 

Chris McAllister: tell you, I, the last couple of weeks I’ve, I’ve come across, um, just some information as I do my own research and try to be open to what’s happening in the, in the market. But there seems a trend, certainly in Columbus.

For property management companies to sort of extend, um, COVID protocol into the indefinite future. And Gretchen, you and I both know, I think, um, we’ve counted three companies. That literally don’t have offices, or at least not offices where tenants can, uh, not just show up or make an appointment even, but where there’s literally nobody to talk to.

So, 

Chris McAllister: you know, there’s one extreme in this business where, um, people are trying to use technology, uh, people are trying to sort of, you know, run their property management company, sort of like an Amazon website where there’s as, As little human touch as possible. And I get that, you know, I would say, you know, if we have a thousand households that we’re looking after, I bet you, my gosh, it’s probably two to 3%, 20 or 30 tenants.

That Brenda or you or Marcy or Shannon spend the vast majority of their time with, and quite frankly, you know, from a profitability standpoint for us, those, those two to 3 percent of the people who have issues, um, it takes a lot of payroll. 

And I 

Chris McAllister: have to tell you, I personally, I think the other folks are being a bit short sighted.

I think that this. Is it people business? I think like everything else in life, we tend to, you know, we manage by exception, but the folks that hit that 23 maybe 5 percent on a bad month that we’re able to help set straight or on the other side of it, not Let’s put it this way. There’s two ways those, those, those people with issues can go, right?

We can, they can be, they legitimately can deserve our help and we can get them into a place. They’re happy. The owner’s happy. We’re happy. The other thing that happens when you take the time for that is, yes, there are times when you, um, you don’t put somebody in after doing the due diligence and it feels like it’s a waste of time, but that is also a benefit to the owner.

That we just didn’t take the easy way out and stick somebody in this should have been, but in there too. So I think that’s important, but when we talk about, you know, landlord profitability, that is critical and making sure that you never end up with a fair housing complaint or God forbid more than a complaint.

Um, that is critical also. So, you know, our company call it high tech, high touch. I feel like we use all of the technology that we need to use to facilitate. You know, belly to belly relationships and the day that, you know, we shut down and decide that we’re not going to allow conversations between us or our team and applicants or tenants is the day, quite frankly, I think I closed the doors.

Gretchen Mitchell: I think that’s fair. You still need to have people come in. And a lot of the times, honestly, it’s like the highlight of some of their months. So they come in, they get to see Marcy, they say hi. One lady brings in cookies. Sometimes, you know, they tell us about what happened that month. They have a good time coming in.

So it’s not always even complaints that you have to deal with. It’s also just, Hey, I get to see Deb from Riverview today. She’s coming in. 

Chris McAllister: And the other nice thing is all that now is, is, you know, rolling into our Google reviews, right? So that. That daily interaction or that monthly interaction or whatever.

I think that’s, what’s reflected in the, the, the quality of our Google reviews that we’ve been able to grow over the past few months. You know, it’s, it’s, it, the only reason we have those 4. 9 stars is because. Of the, of the people who are interacting on a daily basis with the tenants. And that’s Marcy.

It’s Shannon. It’s Brenda. It’s the maintenance guys. And you know, the, if you don’t do that and if, and if you don’t invite them to, you know, did I earn a five star review today, if you don’t approach the job with that type of attitude. It, it just has a, it’s just not good for the entire business. And when you do approach the job with that kind of attitude, the halo effect on the entire business, the brokerage business, the sales business, the management business, all of those things just gets better and better.

So anyway, I digress, but we’re not ready to give up on. On people. And I’m pretty sure that housing and urban development doesn’t want us to either. 

Right. 

Chris McAllister: So the wrap up. Okay, that brings us the end of the day’s episode. So a couple of key points here. Please make sure your property manager understands the importance of compliance with fair housing laws.

Discriminatory practices, intentional or not, are both illegal and unethical. Discriminatory practices, whether intentional or not, Are both illegal and unethical. And remember your property manager mistakes become your mistakes. It’s crucial for both housing providers and tenant screening companies to ensure non discriminatory practices.

Housing and urban development is cracking down as more and more managers rely on technologies and AI to do their jobs for them. And again, I, I, we are really seeing this happen in real time, um, certainly in Columbus, Ohio. So, as an owner, I urge you to stay informed about changes in fair housing laws and guidelines.

You know, subscribe to industry newsletters, follow the news, you know, whether it’s bigger pockets or some of the other, you know, huge websites out there that cater to investors or of course our, our blogs and, uh, our podcast stay, stay informed, stay up to date. Hiring a property manager does not mean that you give up responsibility for the overall health of your investments.

It’s like I’ve said many, many times, people think that real estate is a passive investment, but it’s, it’s, it’s not, you have to be involved. You have to collaborate with your team. Um, you’ve got to pay attention. So I hope this episode gives you, uh, more of what you need to get the best performance possible from your current or future property manager.

Thank you for turning into today’s episode. If you have any questions or want to dive deeper into any of these topics, feel free to reach out to us at www. InvestWithROOST. com. Don’t forget to subscribe to the podcast and leave us a review.

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