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Choosing The Right Tenants To Avoid Future Lawsuits

Choosing the right tenants is one of the biggest challenges property managers face. When done right, it can significantly minimize your risk of a lawsuit or Errors and Omissions claim down the road.

What Makes a Good Tenant?

Ideally, your clients (the landlords you manage properties for) are looking for a person who has the ability to pay their rent on time. They want someone who will keep the property clean and neat, and who won’t cause major conflicts with neighbors or the landlord.

Before you can attract a great tenant, you need to be clear on who your target market is for a particular property. Is it a 2 bedroom aimed at young professionals or a 4 bedroom/2 bathroom aimed at growing families? Knowing who your target market is and what they’re looking for paves the way for a great property/tenant match. You’ll be able to describe a property in terms that appeal to your ideal renter. However, be careful of discrimination when marketing and interviewing candidates.

Tenant Screening

To find the right tenant, you need to collect detailed information about your prospects. Are they employed? What is their monthly wage? What is their property history? A consistent application process to collect this information is key. You must have uniform qualifying standards for all applicants. If you ask one person a question, you must ask all your prospective tenants the same question. If you don’t, you may find yourself accused of discrimination and potentially facing a lawsuit.

The Federal Fair Housing Act exists to protect tenants (and buyers) against discrimination.   Be sure your screening process complies. You cannot discriminate because of:

  • Race and skin color
  • Nation of origin
  • Religion
  • Gender
  • Familial status (which includes asking about someone’s pregnancy or discriminating against people with children)
  • Disability

Keep in mind the Fair Housing Act prohibits discrimination in your property advertising, screening process, and in your decision-making about a tenant. It also strictly prohibits any interference, intimidation, or coercion on discriminatory grounds.

California legislation prohibits discrimination in all areas prescribed in the Fair Housing Act. It also additionally covers discrimination based on sexual orientation, gender expression, marital status, genetic information, or source of income. You can check the housing legislation and tenant rights information for any state in the USA via the Federal Department of Housing and Urban Development’s website.

It’s sometimes easy to inadvertently cross the boundaries in general conversation with your prospective tenants. Avoid questions or statements (whether in writing or in verbal conversation), such as:

  • “I wouldn’t recommend this apartment for a woman.”
  • “The landlord would prefer to have a Catholic family because it’s a Catholic neighborhood.”
  • “Are your children noisy? Because it’s a very quiet neighborhood.”
  • “We’re looking for a single professional with no children for this home.”

As part of your screening process, you will collect information relevant to these three core considerations to evaluate a tenant’s suitability:

  • Can they afford the monthly rental payments?
  • What is their character and are they likely to look after the property?
  • What is their rental history and evidence of previous rental behavior?

To check capacity to pay, you can verify your prospective tenant’s current employment and wage. According to the US Department of Housing and Urban Development, families who pay more than 30% of their income in rent may suffer from “housing stress”. That is, they might have difficulty affording other necessities in life, such as food, clothes, transportation and medical care. So, this might be a consideration (although may need to be adjusted for your market area). You can also do a credit check with their permission, and follow up on rental references.

You must keep any information obtained through your tenant screening process confidential, and screening reports must be properly disposed of. Applicants for tenancy are protected by the Fair Credit Reporting Act under Federal law. The Act also gives applicants the right to receive a copy of their credit or tenant report, along with the reason they were denied the rental if they were not selected as tenants.

Rental Agreement Must Haves

Just as you need to get information from the tenant, you also need to provide full disclosure about the property. Details and disclosure are essential if you’re looking for a great tenant/property fit, that won’t lead to a potential claim situation later.

Document in writing within tenant agreements all inclusions and exclusions, and any issues with the property. Be upfront about any extra costs, such as utilities or yard maintenance fees. If traffic noise could be an issue, don’t downplay it. You’ll only end up with unhappy tenants and need to spend more time and money finding a new tenant — or worse in a lawsuit situation.

To protect your interests (and your clients), one of our CRES Risk Management Attorneys suggests you include the following in your lease agreements:

  • A due diligence provision for the tenant, so the responsibility is on them to ascertain the condition of the rental and neighborhood conditions. It’s recommended that tenants drive through the neighborhood at all hours of the day before finally committing to the lease.
  • A provision that makes it clear the property manager is not the landlord. As such, the landlord signs the lease agreement, addendum, or any other document — not the property manager.
  • A clause for annual inspections by a third-party expert or licensed contractor to check the condition of the property (paid for by the landlord)
  • The name of  all tenants and the restriction on the number of people living in the property. This is a zoning issue and ensures you won’t have 15 people living in a 1,500 square foot rental.
  • Noise, decorum and cleanliness provisions.
  • A provision allowing 24 hours advance notice for an inspection absent an emergency.

Be careful with Attorney’s Fees clauses. Our attorney says if you must have them, ensure they are capped to just a few thousand dollars to the prevailing party. Eliminating all Binding Arbitration clauses between the landlord and tenant is also recommended.

What to Do When Things Go Wrong

Sometimes, despite a property manager’s best efforts, things can and do go wrong. If a tenant or landlord does point a finger at you and involve you in a lawsuit, you’ll want to be prepared. An Errors & Omissions (E&O) Insurance Policy specifically designed for property managers can deliver a range of resources to help you defend against claims and cover them, so you’re not paying thousands of dollars out of pocket.  

CRES E&O + ClaimPrevent® offers a customized solution. You can choose your own policy limits and the activities you want covered. This means you won’t need to pay for things you don’t need. Your E&O policy with CRES also includes a legal hotline available 7 days a week. You’ll have access to local expert legal advice whenever you need it! Whether you need help with a tenant contract or a complaint that you think could turn into a claim, it’s all about being proactive in your real estate business.  We help you resolve issues BEFORE they become big problems.

Contact CRES at 800.880.2747 to speak to a property management insurance professional today. Protect yourself against the unexpected.

What other strategies do you use to find the right tenants? Have you experienced issues where a tenancy has gone wrong? Share your story and join the conversation.

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