No longer just a means to weed out bad tenants, screening software boosts closing ratios, reduces liability and increases efficiency
By Mike Fickes

Trying to determine if a prospective tenant will fulfill his or her lease has been an ongoing challenge for apartment owners ever since someone first hit on the idea of leasing apartments. Technology has increased the predictability and effectiveness of the inexact science of tenant screening and helped residential real estate companies weed out potential default risks from the quality applicants in a more efficient manner.

While all real estate sectors incorporate some form of tenant screening, the complexity of the screening process and the judgements that need to be made have been particularly arduous for multifamily companies. Historically, multifamily real estate companies have looked at tenant screening as an operational burden. After gathering data from an application, property managers pull and study credit reports. Next comes calls to employers and previous landlords, verifying other information provided on the application. Finally after all that, managers attempt to make an objective judgment, taking care to remain consistent and within the boundaries of governmental mandates regarding fair housing and fair credit reporting practices.

During this cumbersome, time-consuming process, prospective tenants—many of them qualified applicants—usually head back into the marketplace, looking at properties owned by competitors.

"No other credit business operates this way," says Dennis Smillie, president of Multifamily Solutions, Inc., a Philadelphia-based firm that assists real estate owners in selecting and applying technology. "No other business puts so much of its marketing efforts behind driving prospects through the front door, showing the product, gaining an agreement that this is what a customer wants, and then releasing the customer back into the marketplace. Auto dealers don't do this. They make the deal while the customer is sitting there. A customer can walk into a dealership and drive out with a $35,000 automobile. Same with department stores—they will issue a $5,000 credit line on the spot."

The credit tools that auto dealers and retailers use to make on-the-spot sales decisions have been available to multifamily companies for several years but are just beginning to be adopted on a broader scale. Part of the adoption problem has been that the necessary software can be cost prohibitive for smaller companies.

"The average size of the properties using our tenant-screening services is well over 200 units. So we do a lot of business with REITs and professionally managed companies with 15 to 20 properties or more," says Michael Lapsley, president and CEO of screening technology provider RentGrow. Lapsley added that the larger companies can factor the cost of the software over a greater number of properties making it easier to justify the purchase than for a single-property owner.

Many screening services claim to be so accurate at screening that the calls to landlords or employers are no longer needed.

Turning a Chore into a Score

Especially in markets where multifamily companies face higher vacancy rates, screening potential tenants in an efficient manner is critical. Manual scoring of credit reports, the alternative to technology, is an arduous chore to say the least.

"Credit reports are complicated to read," notes Rich Schreiber, president and chief operating officer of screening software provider Credit Retriever. "A credit report lists an applicant's lines of credit and rates them numerically. An R-1 rating for a credit line means the applicant has paid on time for that revolving credit account. An R–9 means the applicant is in collections on that line." Credit reports also rank installment credit with designations of I–1 (great) through I–9 (terrible).

Multifamily property managers typically score these credit reports by assigning points for the various ratings. An R-1 might earn the applicant five points. An R-9 might deduct five points. Positive points would also come from a solid income-to-rent ratio.

If the prospective tenant's score reaches a certain target, say 25 points, the manager will accept the application and set out to make a deal—a week or so after the applicant's submission. Delays arise because the credit reports must be acquired, employer information must be checked and managers must find time to do the work.

In this time, many candidates that would make strong tenants have found other options. "In the old days, making a decision could take three to seven days," says Deirdre Kuring, senior vice president of asset management with multifamily REIT BRE Properties, Inc. "But with web screening, we can get an answer back within minutes. This helps us lock in customers immediately, and there is less risk that they will look elsewhere."

By speeding approvals, technology can improve the percentage of qualified applicants that sign a lease and at the same time reduce cancellation rates for a multifamily company, according to Multifamily Solutions' Smillie. "If you educate sales people to set customers' expectations for instant approval up front, you will increase closing ratios," Smillie says. "If you release candidates back into the marketplace without creating closure, then your cancellation rate is probably higher than if you close the deal on the spot."

BRE began using web-based screening in late 2000 allowing its property managers to improve closing ratios. Within a few minutes of submitting an application, a recommendation appears on the screen, and the manager gives the applicant a thumbs-up or thumbs-down.

Cornerstone Realty Income Trust, Inc. equipped the property management offices for 27 of its Texas properties with tenant-screening software provided by SafeRent, Inc., and established a screening program with Credit Retriever in 42 of 50 properties in the company's Eastern U.S. portfolio.

Establishing and abiding by a consistent screening process can help companies avoid lawsuits…

David Carneal, senior vice president for operations with Cornerstone, says the company has found both programs help streamline other components of the approval process. "The credit check is only part of the manual process," he says. "We also check references from the applicant's employer and current and prior landlords. But with both SafeRent and Credit Retriever, we no longer initiate those calls." Many screening services claim to be so accurate at screening that the calls to landlords or employers are no longer needed. Cornerstone does require accepted applicants to bring a pay stub to the lease signing, just to make sure the new tenant still has his or her job.

Perhaps even more important, tenant-screening technology can change the nature of property management work. "Today, on-site personnel tend to be jacks-of-all-trades," says RentGrow's Lapsley. "They can administrate and sell. They are good all-around people. But I believe the staff in the management office should focus 100 percent on customer service and sales. The goal should be filling every empty apartment and retaining every existing tenant. That's a sales job, not an administrative job. By handling more of the administrative work, technology can free personnel to focus more on these marketing jobs."

Managing Risk

The various screening products report results in different ways, but one common trait is that the software is customizable so that property owners can determine what level of risk they are comfortable with. For example, if a point scale of 1 to 1,000 (as used by SafeRent and Credit Retriever) is being used, a property owner will set several threshold values for applicants with different characteristics. For example, 650 points or above might lead to an unqualified approval, while 599 points or less might produce an unqualified refusal. Other products (like RentGrow) alter this approach and use letter gradations: A, B, C, D or reject: still allowing users to model risks.

No matter what scale is used, some applicants will fall into a "gray area" where they may or may not be qualified tenants. Property managers can control the risks taken with applicants falling into this gray area by setting conditions on leases with applicants receiving less than unqualified approval. These conditions might include a good employer reference, a higher security deposit or even a co-signer.

Tenant-screening services help residential property owners adapt their acceptable risk models to changing conditions through the ability to construct reports showing how tenants falling into certain risk categories perform.

"Suppose we apply a cut-off point of 660 points [based on a 1,000-point system] to our credit screening process," Cornerstone's Carneal says. "Six months later, I might ask a property or a regional manager for a list of accounts that have gone bad over that period. That report might show that 80 percent of the accounts that went bad were people that scored between 660 and 670."

This might lead a manager to consider raising the cut point. Before doing that, however, Carneal suggests checking the other side of the equation. How many tenants scoring between 660 and 670 performed on their leases? Ratcheting up the required score for acceptance might reduce bad debts. On the other hand, it might also increase vacancy rates. "By using these reports, you can make judgments that help you balance occupancy and revenue with bad debts," he says.

Keeping It Fair

Whether it is counting presidential ballots or judging Olympic figure skating, any time human judgement is involved there is the potential for trouble. When it comes to screening tenants, software programs can help regulate the process and lower the risk of running afoul of fair housing regulations, which demand consistency when evaluating credit reports.

"In raw form, credit reports are like snowflakes—no two are identical," Smillie says. "The odds of being able to treat that data consistently are very bad with manual scoring. Add to this the fact that most raw credit information used in the multifamily industry was designed for the credit card industry, and it becomes even more difficult to interpret and be consistent."

Adding to the difficulty are certain market pressures that threaten consistency. Suppose executive management is pressing a property manager to get to a 95 percent occupancy rate. A property manager dealing with a 92 percent occupancy rate will likely respond differently to applicants than a property manager sitting on a 96 percent occupancy rate.

"Setting a strategy to generate more leases is not a bad thing," Smillie says. "But when you make changes related to such a goal, you have to do it in a systematic way that can be documented and quantified. Today's tenant-screening technologies do this."

No one takes this obligation lightly, given the penalties that may follow inconsistent screening techniques. According to Deborah Bayles, chief legal officer of SafeRent, inconsistent screening that produces a discriminatory effect, even if unintentional, may lead to civil law suits by consumers as well as state and federal officials.

Penalties in a civil suit filed by a consumer may include actual as well as punitive damages, if the inconsistent actions prove to be intentional. Verdicts in these suits may also require payment of attorney's fees, Bayles says.

"The U.S. Attorney General as well as the attorney generals of the various states may also sue under the Fair Housing Act," Bayles says. "Called a civil enforcement action, these suits can lead to fines. For a first offense, the fine cannot exceed $50,000. Fines for subsequent offenses cannot exceed $100,000. But these fines are per violation. If it is determined that something is wrong with a company's screening practices and the company has screened a half dozen people, the fines can add up."

Establishing and abiding by a consistent screening process can help companies avoid lawsuits in the first place and defend themselves if an action does happen to be brought.

Integrating Screening into Other Applications

A key to leveraging the full benefits from any technology application is incorporating it into as many corporate functions as necessary. The products for tenant screening are no different, and many of the vendors have built their systems with an eye toward integration with other services and technologies.

In terms of services, for example, Credit Retriever has integrated its product with Qcorps Residential, Inc. and Sure Deposit. Qcorps automates the process of ordering apartment services such as telephone, cable television, electric and gas. Sure Deposit provides residents with the opportunity to replace their traditional cash security deposit with an insurance bond, which costs substantially less than a traditional security deposit, but guarantees property owners with the protection associated with a cash deposit.

If the apartment company offers the Qcorps and Sure Deposit services, the Credit Retriever application includes links allowing access to those services. If the tenant decides to use Sure Deposit, for example, a keystroke or two allows all the pertinent data to flow into the Sure Deposit system and the customer receives instructions for paying his or her security deposit.

Most tenant-screening services also plug into multifamily enterprise resource planning (ERP) platforms. Cornerstone, for instance, is currently pilot-testing two ERP platforms, and both will accept data from SafeRent and CreditRetriever.

"Everyone is looking for integration," Smillie says. "And the screening companies will integrate their products into these larger platforms. The advantage of this kind of integration involves operational ease—the ability for single data input to roll from application to application, from guest card to application, to lease, to accounting. Along the way, certain pieces of data may drop out, while others are added."

A second advantage to integration is data mining, adds Smillie. With a broadly integrated system, a multifamily company can mine data about applicants as well as tenants and explore new marketing directions. For example, a company might generate a report to find out which zip codes produced the applicants receiving the highest screening scores. From there, the company could direct marketing efforts into those zip codes. "The more integration you have, the more opportunities you have to improve performance through data mining," Smillie says.

Ultimately, the integration of tenant-screening software with other tools could enable a prospective tenant to visit a company's web site, view an apartment, complete an application, receive a credit approval, and show up on a specified date to sign a lease and move in. At the time this hypothetical tenant accepts the deal, the system could remove that apartment from inventory and adjust the pricing on the remaining apartments.

Far fetched? "Think about the needs of our increasingly mobile population," Smillie says. "If I live in one city and want to move from one apartment to another, it is easy for me to drive to various locations. But if I'm moving from Atlanta to Chicago and am pressed for time, I will want to rent remotely and be certain that I have a place to live when I arrive. As multifamily technologies become more integrated, this kind of leasing will become common. It's not here yet, but sooner or later, it will be."