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CLAIMPREVENT® BLOG

Property Management Ads and Screening of Applicants: ClaimPrevent Summary #8

Fair Housing Act and Housing Ads

Real estate licensees and property managers need to be aware of and comply with the Fair Housing Act. This legislation prohibits discrimination or the publishing of advertisements that indicate a preference, limitation or discrimination based on race, color, nation of origin, religion, sex/gender, familial status, and disability. The Act applies to all areas of housing — including renting. 

  • Examples of advertising that may violate the Act include saying “no wheelchairs,” which indicates disability discrimination, or “no children,” which indicates discrimination based on family status.  

Criminal Background in Housing Ads

Under the Fair Housing Act, blanket prohibition of any criminal background needs to be avoided. If your housing ad says, “clean criminal background required” or “no felonies required,” those can be considered unlawful discrimination. 

  • Instead, use something generic, like “background check required.” Don’t represent one way or another to a potential renter whether a particular criminal conviction will result in a denial or acceptance. 
  • Say to any applicant who asks that the landlord or property manager is requiring a background check in addition to a credit check, work history check, etc.

Testers who have no actual intention of renting will pose as a renter for the purpose of collecting evidence of unlawful practices. If they find an ad that says no criminal background permitted, they can contact the real estate licensee and say, “Is this true?” If the agent says, “Yes, that’s true,” that in and of itself can create liability and create a lawsuit that the broker will lose under the established law.

The chance of being sued can be greatly reduced if certain practices and procedures are put into place, including:

  • Have a management level employee review HUD, “Office of General Counsel Guidance on Application of Fair Housing Act Standards to the Use of Criminal Records by Providers of Housing and Real Estate-Related Transactions” (April 4, 2016).   https://www.hud.gov. 
  • Create an internal written policy that all employees or licensees that are involved in the advertising and screening of applicants must understand and follow.   
  • If a real estate professional is asked by a client (such as a landlord or an HOA) to insert a blanket prohibition on criminal history or other discriminatory language, a licensee should be able to carefully explain why it won’t be possible.  

Applications

  • Never have application questions that ask about prior arrests that did not result in a conviction. 

Taking Tenant Applications in California

A landlord or his or her property manager in California at most can charge a potential tenant fifty dollars and ninety-four cents ($50.94) as an application fee, where the fee cannot exceed the actual cost for the application considering the Consumer Price Index which changes on a yearly basis. The application fee is the cost to process a potential tenant’s application for the advertised rental. 

The application fee should state that it is not refundable if that is the landlord’s intent, and that it is not part of the tenant’s security deposit if the landlord approves the rental application. The landlord must have receipts documenting the charges for the tenant application fee and provide such to the applicant. (See California Civil Code §1950.6). 

Any payments beyond the application fee by the potential tenant are part of his or her security deposit if the applicant is accepted as a tenant. No application fee can be charged for a unit that is not going to be available for rent in the near future.

Many residential tenancy applications used in California contain a provision allowing a background check to be run on a residential tenant applicant. To run a background check on an applicant, there must be signed and dated consent by him or her to do so beforehand. 

If the applicant requests any information acquired in the screening of the application by the landlord or his/her property manager, the information must be given to the applicant. Such information would consist of, but is not limited to, the background check result, references, and the credit report.

In California, it is illegal to deny an applicant if his or her credit reports are frozen. Consumers are allowed in California to place a security hold on their credit reports preventing release of such information by a credit reporting agency to third parties without the consumer’s written consent. 

Consumers with frozen credit reports can allow a release of their report to a potential landlord. If the tenant applicant does not allow a release of his or her credit report to a potential landlord, the tenancy application is incomplete, and the landlord can reject the applicant for this reason.

The criteria for a residential tenant that the property owner can state for an applicant are:

  1. The rental is a non-smoking unit
  2. No prior evictions of the applicant
  3. No pets unless the applicant’s pet is a documented service animal
  4. The tenant must comply with all zoning laws for the rental in effect as to the number of inhabitants
  5. Income requirements such as 2.5 monthly income as the rent. 

In California, the security deposit can be twice the monthly rent as a maximum for an unfurnished rental and three times the monthly rent for a furnished unit. The landlord or property manager must be consistent in the requirements for all applicants as to required forms, deposits, pets, and the like. Inconsistency can lead to claims of discrimination. 

The key documents in offering a residential rental in California are:

  1. Tenant rental application. On it in bold print, include a statement that “ALL QUESTIONS MUST BE ANSWERED”. If a line in the tenant application is left unanswered, the absence of an answer suggests that the applicant has something to hide which allows a landlord to eliminate a potentially bad applicant from the start.
  2. Landlord tenant lease agreement (the California Association of Realtors® Form LR Revised 12/19).  Have the lease state that the landlord will have a yearly inspection by a third party expert to ascertain the condition of the rental to remedy any condition issues.

The move-in checklist should be signed and dated by the tenant and landlord documenting the condition of the rental at occupancy. Likewise, at the end of the tenancy, there should be a move-out checklist documenting the rental’s condition at the end of the tenancy. 

Screening of Applications

  • When running a background check on an applicant, evaluate whether all the financial and other qualifications have been met before evaluating an individual’s criminal record.   It may not even be necessary to evaluate the applicant’s criminal history if the applicant is already disqualified for other reasons.  
  • Once a background check is run, examine and evaluate each application individually, and make sure that everyone is treated the same.
  • Criminal background screening can be done. Where it becomes unlawful is if it fails to distinguish conduct that: indicates a risk to the housing provider such as resident safety or is considered a risk to the housing provider.
  • Make certain that employees, client landlords, and applicants all understand that the policy is to carefully evaluate and consider each applicant on a case-by-case basis.  

Section 8 Housing Vouchers

Prospective tenants may ask a real estate licensee if the landlord will accept part of their rent through the Section 8 Housing Choice Voucher Program. Before giving a response, determine whether there is a local law that bars the landlord from turning away a prospect for that reason. 

The state of California and several Florida counties now have laws prohibiting discrimination based on source of income. Your landlords may need to be educated on current laws.

Protections are in place for Housing Choice Voucher families for units funded under certain federally funded housing programs, including: the HOME Program, Low Income Housing Tax Credit Program, National Housing Trust Fund and the Capital Magnet Fund. 

Testers may text or email the licensee and ask if Section 8 vouchers will be accepted by a particular landlord. If you answer “no”, the text or email serves as a record and can make you liable for violating the law.

  • Always give the same answer each time a prospect calls or emails inquiring if Section 8 is accepted. “All applicants are evaluated on the basis of the same criteria, and we do not discriminate based upon source of income – please feel free to fill out an application.”   
  • Avoid “Steering” Section 8 applicants. Deciding to accept Section 8 applicants but only renting apartments to them in certain floors or areas of the building is still illegal because it involves “steering,” which limits applicants’ housing choices. 

Note that Section 8 applicants can still be turned away based on other non-discriminatory screening criteria — but they can’t be turned away solely because they have Section 8 vouchers if that is prohibited in your market area.  

Love Letters to the Landlord

Prospective tenants may attempt to obtain an edge on their competition by writing and sending letters to the landlord. These letters describe the renters, their immediate family, and why they would be perfect tenants for the listed property being offered for rent.  Some tenants include photographs of their family with their rental application. 

The renter’s hope is that the “love letter” to the landlord will make that person stand out from other interested parties for the property. 

California law requires the potential tenant’s agent to deliver any such letters to the landlord’s agent, and that agent must give them to his or her landlord client. 

The danger arises when these real estate “love letters” are read by the landlord of a property, and the writer doesn’t end up renting the property. When this happens, a claim for discrimination under Federal and California law based upon ethnicity, gender, religion, familial status, national origin, disability, sexual orientation or any other protected areas under federal and state laws could be made, leading to costly litigation that the landlord never anticipated. And that litigation most likely will involve the respective real estate licensees. 

To try and protect yourself from a discrimination lawsuit . . .

Renters’ brokerage and agent: The renters’ agent and his or her brokerage should have a written disclosure for his or her clients to be signed and dated, clearly stating that:

  • Real estate “love letters” are not recommended to be submitted to the landlord, because they tend to distract from the goal of ending up with a valid contract by letting emotions become involved. 
  • The client should be advised to consult with an attorney on this issue
  • The dated and signed document should be kept in the brokerage’s transaction file.

Renting brokerage and agent: The renting agent and his or her brokerage should have a written disclosure for his or her landlord clients to be signed and dated, clearly stating:

  • Real estate “love letters” are not recommended to be submitted to the landlord, because they tend to distract from the goal of ending up with a valid contract by letting emotions become involved. 
  • Any “love letters” to the landlord client by a potential buyer or tenant will be sealed when submitted to the renting brokerage and agent, to be given to the landlord client unopened.
  • The landlord client is advised to consult with an attorney on this issue, with the recommendation that the sealed envelope not be opened until after the property is rented.  (This procedure helps curtail any potential discrimination claim down the road with respect to any submitted “love letters”.) 

The dated and signed disclosure should be kept in the brokerage’s transaction file, along with a dated and signed receipt for the landlord’s acceptance of the sealed “love letter”.

A follow up email to the landlord client should be sent, suggesting that the sealed letter not be opened until after the property is leased out, with a copy saved in the transaction file.

Don’t Manage Properties without Property Manager’s E&O 

If you’re involved in any type of rentals – whether as a property manager or as a real estate salesperson who is asked by a client to handle a rental – you need Errors and Omissions insurance for property managers to protect you from specific-to-property-management risks.

As part of one of the largest insurance brokers in the world, CRES has access to more property manager E&O options than just about anyone. Let us find the best coverage at the best price to fit your specific property management activities.

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