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Over the past three years, fraud has surged to unprecedented levels as the global COVID-19 pandemic drove companies to conduct business remotely and normalized a lack of in-person interaction.

In the U.S., reports of fraud, identity theft, and other deceptions spiked by 67% between 2019 and 2021, according to the Federal Trade Commission. The grifts range from cyber and payment fraud to lying on bank loan applications and, more recently, supply chain and even ESG reporting fraud, according to PwC.

In the apartment industry, the prevalence of fraud has coalesced around a central point: the leasing application process, the moment when renters first get their foot in the door.

Take the experience of Rachel Palmer, chief administrative officer at Tampa, Florida-based American Landmark Apartments, which counts 35,000 units in its portfolio.

She reports about four in 10 of the applications her team vets each month are fraudulent. Most come in the form of altered bank statements and bogus pay stubs, documents that are easily obtained online today, but are hard to spot with the naked eye.

With an average rent of $1,500 a month across the units she manages, that translates into $21 million in revenue that’s at risk every 30 days if she doesn’t stop those applicants from becoming her tenants. “It’s not pocket change,” Palmer says.

It’s not cheap for the average portfolio, either.

Nationally, the typical eviction costs $7,685 after unpaid rent, legal fees, and other charges are taken into account. With one out of every eight applications—12.5%—fraudulently altered today, that translates into an avoidable expense of $2.8 million per year for a 3,000-unit portfolio.

Those numbers haven’t gone unnoticed in the industry. Like Palmer, apartment managers are increasingly aware of the problem: 85% now report being targeted by application fraudsters, compared with 66% pre-pandemic.

At Alpharetta, Georgia-based Pegasus Residential, area vice president Ellie Norton is responsible for approximately one-third of the firm’s 33,000 units, including the application vetting process.

But since the advent of COVID-19, that part of her job has become significantly more challenging, with the cost of bad debt and avoidable evictions rising to more than $20,000 a year per door and when someone submits bogus documents and then can’t pay rent.

But due to concerns over running afoul of Fair Housing and Fair Credit requirements, these same managers often feel powerless to confront the issue head on.

“It is incredibly important in our business to ensure that we're not in any way, shape, or form violating Fair Housing,” Pegasus’ Norton told us. “But oftentimes, the fraudulent applicants are the ones that fight back the hardest.”

Tracking Application Fraud

Palmer and Norton aren’t alone.

Many of those fake applications are now slipping through the process undetected, leading to expensive—and avoidable—eviction costs. Pre-COVID-19, managers estimated one in 10 fraudulent applications got through. Now, that win rate for fraudsters has increased to one in four—a 25% “success” ratio.

To gain insight into how managers are tackling these application screening challenges today, and get a handle on their biggest pain points along the way, application fraud detection firm Snappt commissioned a survey of 230 institutional property managers nationally.

Dallas-based Eleven Market Research talked with some of the largest apartment operators in the U.S., with 40% of respondents managing more than 10,000 units. All of them focus on the application vetting process in their jobs, with most, 84%, leading teams of professionals who qualify rental applications themselves.

The 2022 Snappt State of Apartment Application Screening Survey shines a light on exactly how big the problem is, what property managers can do to combat it, and the tools and tactics they’ve enlisted to fight this ever-escalating war.

A Crisis Within a Crisis

When it comes to managing apartments in the current environment, MDU property professionals have had their hands full. During the COVID-19 crisis, as application fraud has increased, government-mandated eviction moratoriums have squeezed landlords, and now—as we exit the pandemic—rents are rising.

While higher rents may seem like a positive, it also means operators are taking on more risk with every lease they approve. If they get it wrong and let fraudsters through the door, more money is on the line when they can’t collect, driving the cost of preventable evictions even higher.

Since property managers see this behavior on a daily basis, we wanted to ask them what is driving these trends.

Five out of six of them, 85%, said it was due to the increasing prevalence of fraud in our society, and the ease with which false documents can be obtained online by apartment applicants today.

Another 78% cited the rise in rents—and the pressure it puts on prospects to “stretch” on their applications—while three-fourths, 75%, pointed to eviction moratoriums being somewhat or extremely significant as contributing factors. The COVID-19 pandemic was a significant driver for 70%, while two-thirds ranked less in-person contact with applicants—the growing sense of anonymity in society—in the same way.

Application Vetting Goals and Challenges

Given this landscape, it’s no wonder 89% of survey respondents said making sure applicants can afford the rent and avoiding future payment issues and evictions were somewhat or extremely important goals of their application vetting process. Reducing criminal activity, 86%, and avoiding disruptive tenants and property damage, 85%, took similar priority for managers in the survey.

But the challenges of hitting those goals today are daunting due to the ease with which bank statements and pay stubs can be altered.

Altered documentation was the biggest problem identified in the survey, with 84% of respondents saying it was a somewhat or extremely significant challenge. The next largest percentage—79%— ranked running afoul of the Fair Housing Act in the same category.

In tandem, these two largest challenges underline the Catch-22 managers find themselves in when fighting application fraud: choosing between a potential Fair Housing violation or the risk of letting a fraudster in the door.

Given these issues, property managers do what they can to stop fraud before it gets inside the building, including:

  • Asking for financial statements such as pay stubs and bank statements, 78%;
  • Using tenant screening software, 66%;
  • Running credit checks, 61%;
  • Implementing ID verification, 59%;
  • Using a solution to detect fraudulent docs, 59%;
  • Checking references, 56%;
  • Running a criminal background check, 56%;
  • Checking prior convictions, 56%; and
  • Linking bank accounts to avoid payment issues, 33%.

But even after taking these steps, managers said fraud was still slipping through the cracks.

More than three-quarters of respondents, 78%, said the fact that their process wasn’t spotting bad applicants was a somewhat or extremely significant challenge, while 75% put screening reports that contain faulty information in the same tranche.

Meanwhile, 72% said potential Fair Credit violations, as well as erroneously denying good applicants, were similarly difficult hurdles. Finally, the staff time it takes to vet applicants was among the most significant challenges for 69% of respondents. (Previous surveys indicate property staff spend between four and 10 hours on the vetting process for each applicant.)

Three Core Components of Application Vetting

The length and complexity of the process speaks to the severity of the challenges property managers face. The good news is, just three of these steps took the majority of time for property staff to complete, constituting the core of application vetting.

Those three areas were:

  • Verifying bank statements (72%);
  • Verifying pay stubs (67%); and
  • Checking references (67%).

These were also the most important steps of the entire process.

For 90% of respondents, verifying the accuracy of a pay stub was somewhat or extremely important, while nearly the same cohort, 89%, put authenticating an applicant’s bank statement in the same tier.

Indeed, only verifying an applicant’s ID—i.e., confirming the person is who they say they are—was seen as more critical to the process, with 92% of respondents ranking it with the highest degree of urgency.

Takeaways and Solutions

There are steps owners can take to protect themselves, including leveraging tools that scan the computer code inside PDF documents of pay stubs and bank statements to see if they have been altered. Using this solution to target two of the three most critical aspects of application vetting turns the hours staff spend vetting documentation into minutes.

And because it can be applied consistently to all applicants, it provides an easily referenced audit trail to fend off Fair Housing and Fair Credit violation claims.

But revisiting the basics of good property management helps, too.

  • Set the bar higher for applicants by requiring two months of pay stubs or bank statements with an application;
  • Look for variable dates for when a pay stub was issued and when the deposit hit the applicant’s account;
  • Pick up the phone and call employers to confirm an applicant works where they claim; and
  • Incentivize your team to prioritize legitimate applications by tying future bonuses to a property’s on-time rent payment score, not just new leases.

With rents on the rise, it may look like landlords are living on easy street. But the increased risks of apartment application fraud, and the lingering impacts of the pandemic, mean managers have to work harder than ever to make sure they’re not actually accumulating record levels of bad debt, instead of higher rent rolls.