Before signing a lease with potential tenants you must screen them to help ensure they can pay the rent and are responsible. That will help minimize the chances of wasting time and money trying to evict them and make repairs to the property.
First, you want to review their credit rating and their income. You can check income by requesting pay stubs, W2 forms or filing with the IRS a Form 4506, Request for a Copy of Tax Return, with the prospect’s permission. You will also want to talk to a previous landlord.
In addition, there are several factors to look for, including:
Competence. The business owner or entrepreneur should be able to answer some questions as soon as you ask, such as:
- What demographics are you pursuing?
- Who is your target market?
- What is your occupancy cost?
- How much money do you have earmarked for this operation?
- Who are your main competitors?
Based on their answers, you can usually tell if they are prepared to open a successful operation. If they struggle for answers, they may not even have a formal business plan. Ask for a copy.
Their Eyes. It is much harder to lie or mislead someone while looking them right in the eye. Someone who looks around a lot while speaking may by lying or it may indicate a language barrier. It is up to you to determine.
Attitude. If the prospects come up with a lot of criticisms of the property, they may either be pointing out legitimate concerns, or they may be looking for items to help them negotiate. Comments they make and the way they make them can indicate whether they may be troublesome tenants who you may want to evict at some point. (See right-hand box for a brief on eviction.)
Eagerness. If they consistently and repeatedly give you information intended to convince you they can pay the rent, despite a poor financial record, they may be low-risk, high-yield individuals even if they don’t have a solid financial history. Ask yourself whether the person seems to be trying to convince you or present a consistent set of verifiable facts. If there are valid facts presented objectively that go beyond the financial documents, it may pay to listen and read between the lines.
Common sense says that if a person or business is recently licensed or just obtained large amounts of venture capital, equity funding, or loan dollars to grow or expand business operations, then the credit history and prior year tax returns won’t do justice. This individual may be getting turned down by other landlords for lack of credit history and prior year income, and may be frustrated.
If the facts show promise, your understanding may lead to a solid, good, longstanding relationship that is mutually beneficial and leads to other opportunities for you down the road. If the current income is verifiable, you may be breeding loyalty if you give the new tenant a chance.
Readiness. If the individuals know they want the property, are they ready to put down a deposit or do they have to think about it? Keep in mind, if a person or business is recently licensed or just obtained large amounts of venture capital, equity funding, or loan dollars to grow or expand the credit history and other financials may not do justice to the individual’s real situation.
In any event, make sure you are protected by a good lease. Ask your legal professional to draw up, review, or recommend a good lease document that you can use again and again, to protect your investment interests and keep you from making unnecessary trips to court. Consult with your attorney about extending lease terms to a person or company with insufficient credit history or prior year’s income.
Eviction Is a Losing Proposition
If you err in leasing space to a bad tenant, you may have no alternative but to evict.
In an eviction, you may spend money and energy on a legal process that may, depending on your location, take many months. During the process, you cash flow can be seriously disrupted and even drop into negative territory as you incur legal and administrative fees.
Knowing the laws of your state can help you avoid a costly court battle. For example, some states allow landlords to enter a tenant’s space at any time without giving notice. Other states require landlords to make an appointment at a time that is convenient for the tenant. Some jurisdictions allow the tenant to change the locks at will, but give you a copy.
Contact your attorney to learn all you can about the nuances of landlord-tenant laws in your state and how they apply in every situation you may encounter.
Sometimes, a seemingly minor facet of the law in principle or practice can make the difference between going to court, and your ability to get a bad tenant out quickly without having to involve the courts.
Please contact Thomas Burton via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.