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A Federal Trade Commission (FTC) report found that fraud, identity theft and other deceptions spiked 67% in the U.S. between 2019 and 2021. A sizable portion of those descriptions occurred in the rental housing industry, according to Snappt, which estimates that 11 million fraudulent rental applications were submitted in the U.S. in 2021. Furthermore, its 2022 State of Apartment Tenant Screening Survey found that 85% of apartment property managers feel consumers are becoming more comfortable committing application fraud.
As a real estate investor, there are many types of rental fraud and scams that can have serious financial and legal implications on your business, which can negatively impact your personal life as well. Prospective tenants may provide fraudulent information to gain access to your property. This includes using false identification or someone else’s identity to pass background and credit checks. Some may falsify employment information or income by using fake pay stubs or employer references to appear financially stable and meet the rental criteria.
There are also subletting scams, where tenants sublet the property without the landlord’s permission, causing damage or legal issues; overpayment scams, where a tenant or potential tenant overpays with a check and then obtains a refund of the excess amount before the original check bounces; and repair scams, where tenants intentionally cause damage to the property and offer to repair it, only to demand rent reductions or refunds.
In this digital age, when it’s easier than ever for bad actors to steal identities and perpetrate deceptive practices in the rental industry, real estate investors must adopt these smart and savvy practices to protect themselves from rental fraud.
Related: What Is Rent Payment Fraud and How Can Landlords Prevent It? Here Are 3 Expert Tips.
Use a formal rental application process
It is imperative to have a standardized and formal application process to gather the information necessary to properly evaluate applicants and set a professional tone from the beginning of the relationship. It is an opportunity to communicate the landlord’s expectations and rental policies, but it also demonstrates professionalism, setting a tone that is more likely to attract high-quality renters.
A formal application should be designed to collect all the necessary information required to make the most informed decision, including employment history, credit information, past rental history and references. Red flags to look for during this information-gathering process include inconsistencies in an applicant’s history or gaps in information, which might warrant further investigation or serve as a reason to weed out that candidate.
There are many other benefits to having a formal application process that serves to mitigate risk. For instance, it can help identify applicants who might default on rent, cause property damage, or engage in illegal activities on the premises. It can also help ensure compliance with local and federal housing laws and promote organization and good record keeping.
If setting up a formal application process that is thorough, compliant, and mitigates risk seems overwhelming, you may want to consider seeking help from a professional property manager who has the experience and resources to do it properly. If that option is too costly, property management software (particularly one with customizable options) can automate the process for you, saving time and money while ensuring the security of your investment.
Conduct thorough background checks
Probably the most critical part of preventing rental fraud is conducting comprehensive background checks on potential tenants. This includes running credit checks, verifying employment, checking criminal and eviction reports and reviewing references from previous landlords. Background checks help to detect fraudulent actors as well as assess the reliability and trustworthiness of candidates and gauge how likely they are to pay rent on time and treat the property respectfully.
Credit checks are the most common part of background screenings. They provide insights into the applicant’s financial background, including their history of timely payments and outstanding debts. Finding renters who demonstrate financial stability suggests they present a lower risk of rent defaults. However, background checks shouldn’t end there.
A thorough background check should screen applicants for a criminal history. Knowing whether a candidate has a criminal background is crucial for the safety and security of the property and other tenants or neighbors. However, you must comply with fair housing laws and regulations regarding the use of criminal history in rental decisions.
Collecting references from previous landlords can also help identify applicants who have a history of causing property damage or other lease violations. Selecting reliable tenants not only lowers the risk of rental fraud but also reduces evictions, lease breaks, and tenant turnover, which means fewer vacancies and more rental income stability.
Verify identity, income and assets
One crucial and often overlooked part of the application and background screening processes is identity, income and asset verification. Identity verification confirms that the applicant is indeed the person they claim to be. This is crucial in avoiding identity theft scenarios where a fraudster might use stolen personal information, such as forged or stolen IDs and financial statements, to pass a background check.
Verifying government-issued IDs, such as a driver’s license or passport, is a common method of identity verification, but given that identity theft cases have nearly tripled in the last decade, it’s important to match these documents with the applicant’s face. It’s best to meet tenants in person, whenever possible, to verify their identity and gauge their sincerity and reliability. If that’s not possible, set up a Zoom or video call and require that they turn their camera on for the meeting. This reduces identity fraud by forcing applicants to produce government-issued IDs that match their faces.
Income and asset verification is another important component of this process. It’s helpful to establish a good financial picture of a prospective tenant. Looking at an applicant’s paystubs, bank statements or investment accounts ensures that they have the financial resources to pay rent consistently. However, these documents can also be faked, and applicants may not want to share such personal information (which is understandable as that can lead to fraud against them as well). This is another instance where advanced technology can help. Look for software platforms that can seamlessly verify the income and assets of prospective renters without requiring the exchange of sensitive documents.
Secure personal and financial information
Property investors must also take steps to secure their, as well as their tenants, personal and financial information. First and foremost, limit information sharing to only what is necessary and use secure, encrypted communication methods for exchanging sensitive information. If it’s necessary to store personal information, keep physical documents in a secure location, such as a locked filing cabinet or safe and use encrypted digital storage solutions for digital documents.
Other precautions include regularly updating software to ensure you’re using the most current versions that include patches for security vulnerabilities; using strong, complex and unique passwords for all online accounts; implementing two-factor authentication for accessing online accounts to add an extra layer of security; using secure networks such as virtual private network (VPN) when accessing your information on public networks; and regularly monitoring bank accounts, credit reports, and other financial accounts for any unauthorized or suspicious activity.
Educate yourself and stay informed
Finally, one of the best ways to protect yourself against fraud is to remain vigilant by continuously educating yourself and staying informed and up to date with the latest rental fraud tactics. For instance, understanding local rental laws can help you spot inconsistencies or illegal requests in applications or conversations. Reading up on various types of fraud, as well as new trends and how old trends are evolving, are the first steps towards prevention.
If you’re not experienced in property management or feel overwhelmed by the effort required to protect yourself from fraud, consider enlisting a professional service. There are technologies available that can automate and streamline most of the practices and processes outlined above. However you choose to do it, taking proactive steps to secure your investments will limit, if not eliminate, your exposure to rental fraud.
