GLS500

It’s the golden rule of rental applicant screening technologies: Whatever happens, don’t get caught with your approval parameters down. Incremental adjustments to screening parameters, including credit scores, employment status, income, criminal background, and rental payment history, have long been used as a strategy for operators seeking to manage occupancy and bad debt matrices. The macrotactic is simple: too much vacancy, and you dial down your acceptance thresholds; too much bad debt in unpaid or overdue rent, and you kick your thresholds up a notch. In practice, however, many property managers often “set it and forget it,” inviting drastic consequences for a community’s renter demographic, occupancy, bad debt, and collections efforts.

“The big risk is you have a property that’s having a problem with occupancy and [its managers] open up their settings and forget about it,” explains David Carner, president of Carrollton, Texas–based RealPage’s LeasingDesk resident screening and rental insurance division. “A year later, you’ve turned over the entire demographic of that property, increased your bad debt load, and, consequently, you’ve lowered the value of that asset.”

For operators emerging from the recession and attempting to push rents, the situation has never been more relevant, particularly as most property managers made strategic adjustments to their credit approval thresholds in recent years to account for the flood of rental prospects coming out of a collapsed single-family housing market with default and foreclosure dings on their credit reports.

“[Before], we were really fighting to get prospects to move in, and our screening processes were quite different in terms of how much we were approving prospects with conditions,” says Peggy Hale, vice president of sales, marketing, and training for Morgan Properties, a King of Prussia, Pa.–based owner/operator of approximately 30,000 apartment units. “We were fighting to help those folks get into our community, but right now, with the amount of prospects coming at our limited inventory, we’re in the driver’s seat and no longer need to take those risks. The rental pool is larger than rental availability in multifamily housing right now, and I’d hope that everyone is getting more stringent so that overdue collections are reduced.”

When it comes to the rental screening process, however, it’s never too late to make sure you’ve got the right parameters in place. These days, that means moving beyond a three-digit credit score and focusing on additional factors, be they a rental payment track record, credit history, or the ability to provide ancillary revenue. Indeed, screening providers and property managers say those are better indicators of a prospect’s quality—and a safer bet for long-term portfolio health.

Screen Holistically

While the connection between bad debt and lowered credit thresholds is an obvious one, less palpable is the link between lowered screening parameters and the ability to push rents. Sure, manipulating applicant screening parameters is a powerful—and often seductive—way for property managers to boost occupancy, but the importance of using screening technology in a more global effort to manage rents, revenues, vacancy, and bad debt risk across a property increasingly shouldn’t be ignored.

“We’re very sensitive and tied in to pricing at individual properties and at individual unit levels and are constantly watching the supply and demand metrics and bad debt,” says Chris Jenkins, vice president of financial planning for Chicago-based Equity Residential, a REIT with 121,974 units under ownership. “We approach screening with a focus on how all the parameters are interacting [with each other], with the conscious idea that we may give up a little here and there, but we’ll make enough on the revenue side that will more than cover what we may give up in a little bit of additional bad debt or vacancy. It’s more of a holistic view: We’re not trying to chase occupancy simply by reducing our acceptance levels on credit.”

According to a June 2011 study of 1,252 property managers conducted by Chicago-based credit bureau TransUnion, apartment firms that had more difficulty finding qualified renters (and ostensibly were using higher applicant approval thresholds) nonetheless were able to increase rental prices in 2010 compared with industry peers that were having less difficulty finding qualified renters.

The results—which also closely mirrored a dichotomy between large property managers overseeing 200-plus units and smaller property managers with 200 units or fewer—showed that 64 percent of operators that were more stringent on screening parameters were able to increase 2010 rents, compared with only 36 percent in the occupancy-first group.

Screening pros also stress the importance of tying ancillary revenue opportunities to applicant screening by applying security-deposit and rent increases to renters who eke through the screening process with conditional approval. “At the high end of the scoring spectrum, you get an apartment with standard deposits and rent, but if you fall down lower in the spectrum, we can still approve you with higher levels of deposits or rent,” Jenkins says. “We’ve been doing that for quite a while.”

A New Look at Credit

In and of itself, credit may no longer even be the best indicator of a rental applicant’s suitability for approval. As a lagging economic indicator, consumer credit scores typically don’t reflect current market conditions and may not even react to economic conditions in an intuitive way at all. “Creditworthiness has remained consistent over the past two years despite the recession,” says Jay Harris, vice president of business services at Rockville, Md.–based multifamily screening firm CoreLogic SafeRent. “On Class A, they’ve even gone up. What’s more pronounced is the seasonality when it comes to credit score variation. We’re finding that the best applicants typically come in the second and third quarters.”

Still, apartment screening firms say rental payment history, not raw credit scores, is quickly emerging as the preferred metric for approving apartment prospects during the screening process.

While credit history is still an important consideration for leasing agents looking to approve would-be renters, screening companies suggest that in some cases it could be more beneficial to NOI and asset value if approvals are granted to prospects with stellar payment histories, even if their overall credit is lousy.

Costa Mesa, Calif.–based Experian Rent Bureau now includes rental payment history as part of the firm’s overall credit scoring system and also provides payment history data sets to its screening company partners. “We have information on how renters paid rent responsibly in the past as well as if they paid late, if they skipped out, if they left owing money, or if they left damages,” says Experian Rent Bureau vice president and managing director Brannan Johnston. “It’s a unique data engine that helps drive increased occupancy where operators can approve individuals they might not have had any information on in the past or decline individuals who may have skipped out on another property manager.”

At RealPage, Carner is pulling data from the firm’s other property management software and is constantly in search of additional data partners. “I have 25,000 apartment communities using OneSite out there posting rents, and all of that data flows right into my database that I use to screen people,” Carner says. “So one out of every four people screened through LeasingDesk has rental history data, which is the most exciting data set we have, because the end-all be-all and best predictor of how someone is going to pay their rent is how they have paid it in the past.”