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A report from the Federal Trade Commission (FTC) found that fraud, identity theft and other deceptions increased by 67% in the United States between 2019 and 2021. According to Snappt, a sizable portion of these descriptions occurred in the rental housing, according to Snappt, which estimates that 11 million fraudulent rental applications were submitted in the United States in 2021. Additionally, its 2022 Apartment Tenant Status Screening Survey found that 85% of apartment managers Apartment Owners believes consumers are more comfortable committing rental 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 also negatively impact your personal life. Potential 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 or income information using fake pay stubs or employer references to appear financially stable and meet rental criteria.
There are also subletting scams, where tenants sublet the property without the landlord’s permission, causing damage or legal problems; overpayment scams, in which a tenant or prospective tenant overpays with a check and then gets a refund of the overpayment before the original check bounces; and repair scams, in which tenants intentionally cause damage to the property and offer to repair it, only to ask for rent reductions or refunds.
In this digital age, where it is 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 fraud and how can landlords prevent it? Here are 3 tips from the experts.
Use a formal rental application process
It is critical to have a standardized, formal application process to gather the information needed to properly evaluate candidates and set a professional tone from the beginning of the relationship. It’s an opportunity to communicate the landlord’s rental expectations and policies, but it also demonstrates professionalism, setting a tone that is more likely to attract high-quality tenants.
A formal application should be designed to gather all the information you need 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 a candidate’s history or gaps in information, which could warrant further investigation or serve as a reason to eliminate that candidate.
There are many other benefits to having a formal application process that serves to mitigate risk. For example, it can help identify applicants who may not pay rent, cause property damage, or engage in illegal activity 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 reduces risk seems difficult, you may want to consider seeking help from a professional property manager who has the experience and resources to do it properly. If this option is too expensive, property management software (especially one with customizable options) can automate the process for you, saving you time and money while ensuring the safety of your investment.
Conduct thorough background checks
Arguably the most critical part of preventing rental fraud is conducting thorough background checks on prospective tenants. This includes running credit checks, verifying employment, checking criminal and eviction reports, and reviewing references from previous landlords. Background checks help identify fraudulent actors, as well as evaluate applicants’ trustworthiness and reliability, and assess how likely they are to pay rent on time and treat the property with respect.
Credit checks are the most common part of background screenings. They provide information about the applicant’s financial background, including history of timely payments and outstanding debts. Finding renters who demonstrate financial stability suggests they have a lower risk of rent default. However, background checks shouldn’t end there.
A thorough background check should screen applicants for criminal records. Knowing if an applicant has a criminal record is critical to the safety of the property and other tenants or neighbors. However, you must comply with fair housing laws and regulations regarding the use of criminal records in rental decisions.
Gathering references from previous landlords can also help identify applicants who have a history of property damage or other lease violations. Selecting reputable tenants not only reduces the risk of rental fraud, but also reduces evictions, lease breakups and tenant turnover, which means fewer vacancies and more stable rental income.
Verify identity, income and assets
A crucial and often overlooked part of the application and background screening processes is verifying identity, income and assets. Identity verification confirms that the applicant is indeed the person they claim to be. This is critical to avoid identity theft scenarios where a scammer could use stolen personal information, such as counterfeit or stolen IDs and financial statements, to pass a background check.
Verifying government-issued identification documents, such as a driver’s license or passport, is a common method of identity verification, but as cases of identity theft have nearly tripled over the past decade, it is important match these documents to the applicant’s face. It is best to meet tenants in person, when possible, to verify their identity and assess their sincerity and trustworthiness. If that’s not possible, set up a Zoom or video call and ask them to turn on their camera 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 is helpful to establish a good financial picture of a potential tenant. Reviewing an applicant’s pay stubs, bank statements or investment accounts ensures that they have the financial resources to pay rent consistently. However, these documents can also be falsified and applicants may not want to share such personal information (which is understandable as this can lead to fraud against them too). This is another case where advanced technology can help. Look for software platforms that can seamlessly verify prospective renters’ income and assets without requiring the exchange of sensitive documents.
Protect personal and financial information
Real estate investors must also take steps to protect their personal and financial information, as well as that of their tenants. First, limit information sharing to only what is necessary and use secure, encrypted communication methods to exchange sensitive information. If you need 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 your software to ensure you are using the latest versions that include patches for security vulnerabilities; use strong, complex, and unique passwords for all online accounts; implement two-factor authentication for accessing online accounts to add an extra layer of security; use secure networks such as Virtual Private Network (VPN) when accessing your information on public networks; and regularly monitor bank accounts, credit reports and other financial accounts for any unauthorized or suspicious activity.
Get informed and stay informed
Finally, one of the best ways to protect yourself from fraud is to stay vigilant by continually educating yourself and staying informed and up-to-date on the latest fraud tactics in the rental industry. For example, understanding local rental laws can help you spot inconsistencies or illegal requests in questions or conversations. Informing yourself about the various types of fraud, as well as new trends and how old trends are evolving, is the first step towards prevention.
If you have no real estate management experience or feel overwhelmed by the effort it takes to protect yourself from fraud, consider hiring a professional service. Technologies are available that can automate and simplify most of the practices and processes described above. However you choose to do it, taking proactive steps to protect your investments will limit, if not eliminate, your exposure to rental fraud.