With the likely recession coming due to COVID-19, now is the time for property managers to protect their rental income. The challenge of rent collection and evictions were hard enough before the pandemic. Now that many municipalities and some states are temporarily halting evictions due to the crisis, property managers are now being held responsible for lost rent revenue for an extended period.
According to a Transunion Study, 50% of evictions could have been prevented with the proper fraud detection protocol. At $7,000-plus per eviction, that’s a costly source of revenue leakage. If that weren’t enough, we have seen applicant fraud increase of 9% month over month since the COVID-19 crisis hit. This is a direct response to the current economic climate as well as recent changes to local and state eviction moratoriums.
I think it is worth taking a moment to examine the reasons why rental fraud rises during a recession, why current fraud detection methods may be lacking in the current economic environment, and how you can protect yourself in the coming months.
Why Recessions Increase Tenant Fraud
According to a 2011 study published by Harvard University, the Great Recession significantly increased the cost burden on tenants. The rate of “severely cost-burdened” renters, defined as paying more than 50% of income for housing, rose to 29.4%. As tenants pay more of their monthly income on rent, they are less able to overcome unexpected occurrences, which puts them at risk for default and future evictions.
Lost Income: A major unexpected occurrence caused by COVID-19 is becoming the major loss of jobs. During the Great Recession, nearly 8.8 million people lost their jobs—and the COVID-19 pandemic has nearly doubled the number of jobs lost, so fraudulent income figures will be on the rise.
Forced Relocation: With very little advance notice, nearly 600,000 college students needed to find new housing in March after their dorms kicked them out.In such a situation, desperation can often lead to submitting fraudulent applications.
All of this points to the fact that finding and stopping tenant fraud is important, especially today. However, most common fraud detection techniques used by property managers may not work in this ever-changing landscape.
Current Fraud Detection Tools are Inadequate
In-person screening and reference verification are two of the most common fraud detection techniques property managers utilize. Both can be at risk in the current quarantined environment.
In-Person Screening: With social distancing a key to staying safe, many organizations have had to stop all in-person leasing operations. This moves all applications to a digital format that is 40% more likely to contain fraud, according to a recent survey we conducted. Thus, organizations can’t use in-person screening to detect fraud.
Validating References: The traditional way of validating references was all based on the applicants providing a phone number for their current employer. The challenge is that it is self-supplied, so property managers have no way of knowing whether they are talking to the “employer” or a friend who could be in on the fraud. A way around this is for property managers to locate and call the employer’s office line directly and ask about the applicant. With the work-from-home model in place, calling the office is no longer a strong option.
So, if in-person screening and reference verification techniques are no longer meeting the needs, if they ever did, what can property managers do to detect and stop fraud in the application process?
Fraud Detection for the New Era
Visual Detection: As most major banks use similar formatting and layout for bank statements and pay stubs, one Bank of America statement should look visually like another Bank of America statement. Thus, a property manager can check the formatting and file quality of submitted statements to gauge authenticity. If you are a property manager, consider the following key questions when evaluating application documents:
- Does the file look like the original digital document or a scanned version?
- Do the transactional details align or are they shifting between documents?
- Do similar document types match the expected formatting?
Cross-Check the Math: Property managers also can cross-check the math between submitted statements. If an applicant gets a direct deposit from their workplace to their bank, the amount they earn should be reflected in equal measures across both statements. Also, reviewers should ensure that the ending balance of one month matches the beginning balance of the next month. Similarly, a reviewer can run the math on the applicant’s pay stubs to ensure that the year-to-date earnings reflect the proper income from statement to statement.
Due Diligence Takes Time: As savvy fraudsters can defeat both visual and math reviews, a committed property manager should research the company and the applicant via sources such as LinkedIn, Open Corporates, and SBA.gov. A thorough investigation can reveal a thin working history or a company that exists only on paper, indicating a fraudulent applicant.
While both of these can be effective, they are time-consuming and not core to the property manager’s job responsibilities. The good news is that there’s a targeted solution.
Fraud Detection Must be Data-Driven
As more and more parts of our lives are being digitally transformed it is more important than ever to leverage data-driven fraud detection solutions that offer a new approach. Instead of spending hours vetting an application, property managers can spend minutes uploading digital documentation for analysis and a data-driven review using algorithms specifically tuned to catch document manipulation. Within 24 hours, property managers can receive a report certifying whether applicant documentation is fraudulent or not, saving time and significantly reducing fraud.
Taking Crucial Action, Today
The rental landscape is being altered by COVID-19, and now is the time to take action to protect rental revenue. According to our recent survey, a 10,000-unit portfolio would expect $1.5 million in lost revenue due to preventable fraudulent applications—and this will get worse as we enter a recession. The real question property managers should be asking is “Can we afford not to implement modern fraud detection solutions?”
