The financial strength of your property management firm, for example cash flow from leases, largely depends on your tenants and the relationships that you build with them. By understanding who your ideal tenant is, and ensuring that you select the best tenants possible, you can reduce risk and improve your company’s bottom line.
For many other businesses, it can be tempting to simply take on every customer that shows interest in their products and services. That is because in most cases, more customers will mean increased profits. But, what would happen to a property management company if they started taking on low quality tenants, tenants that didn't fulfill lease obligations or required debt collection to be initiated?
Deciding to take on new tenants without effective screening can be incredibly risky.
A big part of the risk is financial - If you do not take the time to screen your tenants and ensure that they are financially stable, or in the case of commercial leases, that the company is legitimate, you could find yourself spending unnecessary time and money attempting to collect on overdue payments.
But, the risk doesn’t stop there.
Effectively screening your tenants can ensure you are not jeopardizing your property's standing in the property market. Proper tenant due diligence will ensure your tenants maintain their lease requirements. Effective due diligence will enable you to determine whether your property is a good match for your tenant's requirements. This can ensure you are developing relationships with those who have a higher likelihood of becoming long-term lease holders.
Lastly, active due diligence will give you a better understanding of your tenant, helping you to recognize unusual activity throughout the entirety of your relationship so that you can act on it accordingly.
The Benefits of Effective Tenant Screening
One of the most effective forms of property management due diligence is an in-depth tenant screening report.
With a comprehensive tenant report, you can measure the level of business risk that is associated with your lease holder.
Benefits include:
- Increasing cash flow and property value
- Minimizing risk of income loss due to frequent turnover
- Decreasing risk of damage, fraud, or theft
- Driving down number of rent concessions, lease modifications/ terminations, subleases and assignments
- Reducing number of defaults, evictions and midnight moves
- Determining when to request personal guarantees, letters of credit and security deposits
- Dedicating resources to achieve the property owner’s goals rather than on dispute resolution and problem-solving
- Reducing exposure to legal claims by or against delinquent tenants
What If My Tenant Comes with Risk?
If you detect fraud, previous legal actions, find out that your property is not the right fit for their business, or believe that the way they conduct business could tarnish your brand in the rental market, it may be better to wait for a higher quality tenant.
However, negative information doesn’t have to end the prospective landlord-tenant relationship. It's a question of how much risk may exist.
If you feel that the prospective tenant could be a good fit, but also adds an element of risk, the best solution may be to formulate customized terms that ensure you have mitigated those risks. This could include variations in security deposits, lease indemnification, additional regulations, references, shorter term leases, and specified review periods.
Taking the time to review a tenant doesn’t mean you are looking for reasons to turn them away, but instead gives you the opportunity to optimize your occupancies with easy to work with tenants that enhance your property's image.
How Quality Credit Reporting Can Help Property Managers
At Quality Credit Reporting, we provide comprehensive due diligence property management reports that will help you determine whether your potential tenant poses a risk to your company.
With over 25 years of experience, Quality Credit Reporting will help you uncover the tenant information you need to make the best decision possible on a property lease application.
To find out more about our comprehensive screening reports for tenant due diligence, or any of our other services for property managers, contact us today!
Tags: Property Management
