For tenant background checks, you should make it a policy to do a background check for all tenants. You can hire a company to do this for you. I believe Trak-1 is a company that does that. You need to keep in mind that their are a lot of things to check for about a tenant. Let’s go over some of those now. I am from the school of thought like many other investors, that if you get enough money down, in other words double deposit, option money, or a big down payment on a contract for deed, that really reduces the chance of major problems down the road.
Whether you go with a renter, contract for deed, or lease option (rent to own) is a whole other topic I will discuss some other day. Let’s just go over tenant checks for now. First off you will want to run a criminal/background check, and credit check. First off I think you are going to want to eliminate anyone with a terrible criminal background. There are too many other renters to choose from out there where you should be able to have other choices than taking on drug problems, felonies, or anything really bad not mentioned here. You just don’t want a tenant that has been known to cause violence, it just puts you, the landlord, at too much risk. Also you have to see if the tenant is a legal alien of this country.
You will want to check for U/D (unlawful detainer). Unlawful Detainer just means that an eviction was filed against this person and/or spouse, who was on the lease. You just have to ask if you want to take the increased chance to have that happen to you. Yes you could probably get them out of the property in 3-4 weeks if you do it the right way, but most people wait 30-60 days of late payments before they decide. Also do you want to take someone who has recently filed bankruptcy? Do you want to take someone that has recently or in the past had a foreclosure? These are decisions you have to make yourself. Now my personal opinion is I am afraid to take on any major felonies or violence as a tenant due to the problems and liability. Anyone with a non-violent history, that just had a “money problem” in the past, I may be able to see past that if they put enough money upfront, so I feel protected. That’s how I have felt over the years at least about the money. Over the years though I have felt the need to add on to this. First example if I have a rent to own tenant put a substantial amount of money down, maybe $12,000-$15,000 and their credit is 450 and they have 12-18 months to get financing to buy the house, that may not be a reasonable timeframe. Don’t get me wrong I am a big believer their can be a lot accomplished through credit repair, but if finaning of 600-680 is needed in the future, that could be tough. What I will also say is over the years, I really watch how I spend my time, and I don’t want to put someone in my house, and go through the motions if they never are going to have a chance to buy the house 18 months from now, it’s just not worth all the time to go through that. There are also people with drinking problems in their background, their are houses that specialize for just that, a sober housing alternative. If you pick the wrong tenant you really could have a nightmare, so you should get in the habit of doing a credit/background check on every tenant. You may need to charge a $15-35 application fee for this so it doesn’t cost you so much.
If for one moment you think that a tenant can’t be a problem beyond what you can imagine, please just talk to a landlord who has had 50 tenants or has been in the business 10+ years, they will have stories for you. Now their are some pretty good methods also to protect yourself with tenants with ACH for checks, or accepting credit cards, money orders, etc. I will also tell you if you buy rental properties in marginal neighborhoods, you are less likely to be selective of who wants to live in your property, and your group selection may be worse than the average tenant. If I was in another state that took 3-4 months to get rid of a tenant, I would certainly think about all of this even harder.
Another thing you can do is ask for previous references. You can’t just ask the current landlord, he/she may just want them out of their and say they are great, just so you take them. You will also want to talk to the previous landlord before the current landlord. You will want to see if they give their proper notice before moving out, if they don’t by habit, they may also do it to you. Another question is, if they are paying $800 currently for rent now, and yours is $1400/mo, is that a good idea for them to jump such a high amount in rent. I would also check if they have the deposit now, or if they have to get it from the previous landlord. Also if I take on a rent to own buyer, I am all about helping them improve their credit, and their financial lives, so they can own the property someday, after all this business is about helping people out. If you need a company to do a background tenant check for you please email me ron@minnesotainvestors.com and I will help.
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