Your Lease and Rental Documents Companion

1.  Preparing a Lease or Rental Agreement

• Which Is Better, a Lease or a Rental Agreement?
• Getting All the Rent Under a Lease Isn’t a Sure Thing
• Instructions for Completing the Lease or Rental Agreement Form
• Renters’ Insurance
• Instructions for Signing the Lease or Rental Agreement
• Lease-Option Contracts (Rent-to-Buy)

2. Choosing Tenants: Your Most Important Decision

• How to Advertise Rental Property
• Renting Property That’s Still Occupied
• Accepting Rental Applications
• Checking References, Credit History, and More
• Protect Personally Identifiable Information
• Avoiding Illegal Discrimination
• Choosing—and Rejecting—an Applicant
• Choosing a Tenant-Manager
• Property Management Companies

3.  Getting the Tenant Moved In

• Inspect and Photograph the Unit
• Send New Tenants a Move-In Letter
• Cash Rent and Security Deposit Checks
• Organize Your Tenant Records
• Organize Income and Expenses for Schedule E

4.  Changing or Ending a Tenancy

• How to Modify Signed Rental Agreements and Leases
• Ending a Month-to-Month Tenancy
• How Fixed-Term Leases End
• Returning Security Deposits When a Tenancy Ends

Appendixes

A: State Landlord-Tenant Law Charts

B: How to Use the Downloadable Forms on the Nolo Website

• Editing RTFs
• List of Forms Available on the Nolo Website

C: Forms

• Month-to-Month Residential Rental Agreement
• Month-to-Month Residential Rental Agreement (Spanish version)
• Fixed-Term Residential Lease
• Fixed-Term Residential Lease (Spanish version)
• Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards
• Disclosure of Information on Lead-Based Paint and/or Lead-Based Paint Hazards
• (Spanish version)
• Protect Your Family From Lead In Your Home Pamphlet
• Protect Your Family From Lead In Your Home Pamphlet (Spanish version)
• Rental Application
• Consent to Contact References and Perform Credit Check
• Tenant References
• Notice of Denial Based on Credit Report or Other Information
• Notice of Conditional Acceptance Based on Credit Report or Other Information
• Landlord-Tenant Checklist
• Move-In Letter
• Tenant’s Notice of Intent to Move Out
• Move-Out Letter

Index

Chapter 2
Choosing Tenants: Your Most Important Decision

Choosing tenants is the most important decision any landlord makes. To do it well and stay out of legal trouble, you need a good system. Follow the steps in this chapter to maximize your chances of selecting tenants who will pay their rent on time, keep their units in good condition, and not cause legal or practical problems.

How to Advertise Rental Property

You can advertise rental property in many ways:

• posting a notice online (see “Online Services,” below, for details)
• putting an “Apartment for Rent” sign in front of the building or in one of the windows
• taking out an ad in a local newspaper
• posting flyers on neighborhood bulletin boards
• listing with a local real estate broker that handles rentals
• buying ads in apartment rental guides or magazines, or
• hiring a property management company that will advertise your rentals as part of the management fee.

What will work best depends on a number of factors, including the characteristics of the rental property (such as rent, size, and amenities), its location, your budget, and how soon you need to find a tenant.

While large-scale landlords have great success with paid, nationally oriented advertising, many smaller landlords find marketing their rentals on a more personal level to be a better strategy. If you’re renting only a few properties, you usually don’t need (or want) to spend a lot of money on advertising—sometimes free is best. For example, you can spread the word about your rental through local social media and by word of mouth. Friends, colleagues, neighbors, and even current tenants can be great sources for finding tenants.

No matter how you let people know about the availability of your rental units, you want to follow these simple rules to stay out of legal hot water:

Describe the rental unit accurately. For practical reasons, avoid abbreviations and real estate jargon in your ad. Include basic details, such as:

• rent and deposit
• size—particularly number of bedrooms and baths
• location—either the general neighborhood or street address
• move-in date and term—fixed-term lease or month-to-month rental agreement
• special features—such as fenced-in yard, view, washer/dryer, fireplace, remodeled kitchen, furnished, garage parking, doorman, hardwood floors, or high-speed Internet
• pets (whether you allow them, and any restrictions, such as dog breeds that your insurance prohibits)
• phone number, email, or website for more details (unless you’re going to show the unit only at an open house and don’t want to take calls), and
• date and time of any open house.

If you have any important rules (legal and nondiscriminatory, of course), such as no smoking, put them in your ad. Letting prospective tenants know about important policies can save you from talking to a lot of unsuitable people.

Be sure your ad can’t be construed as discriminatory. The best way to do this is to focus on only the rental property—not on any particular type of tenant. Specifically, ads should never mention sex, race, religion, disability, or age (unless yours is legally recognized senior citizens housing). And ads should never imply through words, photographs, or illustrations that you prefer to rent to people because of their age, sex, or race. (See “Avoiding Illegal Discrimination,” below, for more on the subject.)

Quote an honest price in your ad. Or, put another way, if an applicant who is otherwise acceptable (has a good credit history and impeccable references and meets all the criteria explained below) shows up promptly and agrees to all the terms set out in your ad, that person should be able to rent your property for the price you have advertised. By contrast, if you suddenly find a reason why it will cost significantly more, you are likely to be in violation of your state’s false advertising laws. This doesn’t mean you are always legally required to rent at your advertised price, however. If a tenant asks for more services or significantly different lease terms that you feel justify more rent, it’s fine to bargain and raise your price, as long as your proposed increase doesn’t violate any rent control laws.

Don’t advertise something you don’t have. Some large landlords, management companies, and rental services have advertised units that weren’t really available in order to produce a large number of prospective tenants who could then be directed to higher-priced or inferior units. Such bait-and-switch advertising is illegal under consumer fraud laws, and many property owners have been prosecuted for such practices.

Don’t overhype security measures. Don’t exaggerate your written or oral description of security measures. Not only will you have begun the landlord-tenant relationship on a note of insincerity, but your descriptions of security might legally obligate you to actually provide what you have portrayed. Or, if you fail to do so, or fail to conscientiously maintain promised security measures in working order (such as outdoor lighting or an electronic gate on the parking garage), a court or jury could find your failure to be a material factor that allowed a crime to occur on the premises. And, if this happens, chances are good you will be held liable for a tenant’s losses or injuries.

Renting Property That’s Still Occupied

It’s always easier to wait until the old tenant moves out before showing a rental unit to prospective tenants. This gives you the chance to refurbish the unit and avoids problems such as promising the place to a new tenant, only to have the existing tenant not move out on time or leave the place a mess.

To eliminate any gap in rent, however, you might want to show a rental unit while current tenants are still there. This can create a conflict; in most states, you have a right to show the still-occupied property to prospective tenants, but your current tenants are still entitled to a reasonable level of privacy. (For details, see Clause 15 of the lease and rental agreement in Chapter 1.)

To minimize disturbing your current tenant, follow these guidelines:

• Before implementing your plans to find a new tenant, discuss them with outgoing tenants so you can be as accommodating as possible.
• Give current tenants as much notice as possible before entering and showing a rental unit to prospective tenants.
• Try to limit the number of times you show the unit in a given week, and make sure your current tenants agree to any evening and weekend visits.
• Consider reducing the rent slightly for the existing tenant if showing the unit really will be an imposition.
• If possible, avoid putting a sign on the rental property itself, because this almost guarantees that your existing tenants will be bothered by strangers. Or, if you can’t avoid putting up a sign, make sure any sign clearly warns against disturbing the occupant and includes a telephone number for information. Something on the order of “For Rent: Shown by Appointment Only. Call 555-1700. Do Not Disturb Occupants” should work fine.

If, despite your best efforts to protect their privacy, the current tenants are uncooperative or hostile, it really is best to avoid hassles and wait until they leave before showing the unit. Also, if the current tenant is a complete slob or has damaged the place, you’ll be far better off to apply paint and elbow grease before trying to rerent it.

Accepting Rental Applications

It’s good business, as well as a sound way to protect yourself from future legal problems, to carefully screen prospective tenants. To avoid legal problems and choose the best tenant, ask all prospective tenants to fill out a written rental application that includes information on the applicant’s employment, income, credit, and rental housing history, including up-to-date references. It’s legal (and a good idea) to ask for the applicant’s Social Security and driver’s license numbers or, if the applicant doesn’t have one of these, some other form of identifying information. For example, instead of a Social Security number, you could accept an ITIN (Individual Taxpayer Identification Number), which is issued by the IRS to persons who are required to file income taxes but who can’t obtain a Social Security number (SSN). ITINs are issued to nonimmigrants (people who are in the United States legally but don’t have the right to live here permanently). Almost anyone planning on staying in the United States long enough to rent an apartment (like someone with a student visa) will have an ITIN. If you refuse to rent to someone who has an ITIN but not an SSN, you might be courting a fair housing claim. You can also ask if the applicant has declared bankruptcy or been evicted. (You’ll also get much of this information from a credit report, as discussed below.)

Before giving prospective tenants a rental application, complete the box at the top, filling in the property address, the first month’s rent, the rental term, and any deposit or credit check fee that tenants must pay before moving in. (Credit check fees are discussed later in this chapter.) If you’re charging any other fee, such as a nonrefundable cleaning deposit, note this as well—if you are sure that the nonrefundable fee is legal in your state. (See “Don’t Charge Nonrefundable Fees” in Chapter 1 for details.)

Here are some basic guidelines for accepting rental applications:

• Each prospective tenant—everyone age 18 or older—should completely fill out and sign a separate written application. This is true whether you’re renting to a married couple or to unrelated roommates, a complete stranger, or the cousin of your current tenant.
• Always make sure that prospective tenants complete the entire rental application, including Social Security number, driver’s license or other identifying information (such as a passport number), current employment, bank, and emergency contacts. You might need this information later to track down a tenant who skips town leaving unpaid rent or abandoned property. Also, you might need the Social Security number or other identifying information, such as a passport, to request an applicant’s credit report.
• Request proof of identity and immigration status. Many landlords ask prospective tenants to show their driver’s license or other photo identification as a way to verify that applicants are using their real names. Except in California (Cal. Civ. Code § 1940.3) and New York City (NYC Admin. Code § 8-107(5)(a)), you may also ask applicants for proof of identity and eligibility to work under U.S. immigration laws, such as a work permit, a passport, or a naturalization certificate, using Form I-9 (Employment Eligibility Verification) from the U.S. Citizenship and Immigration Services, or USCIS, a bureau of the U.S. Department of Homeland Security. This form (and instructions for completing it) are available from the USCIS website at www.uscis.gov/i-9, or by phone at 800-375-5283. Under federal fair housing laws, you may not selectively ask for such immigration information—that is, you must ask all prospective tenants, not just those you suspect might be in the country illegally. It is illegal to discriminate on the basis of race, color, or national origin, although you may reject someone on the basis of immigration status.
• Be sure all potential tenants sign the rental application, authorizing you to verify the information and references and to run a credit report. (Some employers and banks require written authorization before they will talk to you.) You might also want to prepare a separate authorization, signed and dated by the applicant, so that you don’t need to copy the entire application and send it off every time a bank or employer wants proof that the tenant authorized you to verify the information.

Finally, note that this application does not ask applicants for their dates of birth (DOB). Many fair housing experts believe that doing so is risky, should a disappointed applicant attempt to challenge your rejection as an instance of age discrimination—having the date on the application at least establishes that you knew of the applicant’s age. Some landlords still ask for the DOB, responding to credit reporting companies’ requests for this information. You should be able to order a credit report and a screening report using the applicant’s Social Security number; if vendors balk, you might want to ask for the DOB.

FORM
Reference and Credit Check Consent form. You’ll find a copy of the Consent to Contact References and Perform Credit Check in Appendix C of this book. You can download this form on the Nolo website; the link is included in Appendix B of this book.

Checking References, Credit History, and More

If an application looks good, your next step is to follow up thoroughly. The time and money you spend are some of the most cost-effective expenditures you’ll ever make.

Here are six elements of a very thorough screening process. You should always go through at least the first three to check out the applicant’s previous landlords and income and employment, and run a credit check.

Check With Current and Previous Landlords and Other References

Always call current and previous landlords or managers for references—even if you already have a written letter of reference from them. It’s worth the time if it helps you weed out a tenant who might cause problems down the road. Also call employers and personal references listed on the application.

To organize the information you gather from these calls, use the Tenant References form, which lists key questions to ask landlords, employers, and other references.

Take notes of all your conversations and keep them on file. You can indicate your reasons for refusing an individual on the Tenant References form—for example, negative credit information, bad references from a previous landlord, or your inability to verify information. You’ll want a record of this information so that you can survive a fair housing challenge if a disappointed applicant files a discrimination complaint against you.

Verify Income and Employment

Obviously, you want to make sure that all tenants have the income to pay the rent each month. Call the prospective tenant’s employer to verify income and length of employment. Make notes on the Tenant References form, discussed above.

Before providing this information, some employers require written authorization from the employee. You will need to send the employer a signed copy of the release included at the bottom of the rental application form or the separate Consent to Contact References and Perform Credit Check form. If for any reason you question the income information you get by telephone—for example, you suspect a buddy of the applicant is exaggerating on the applicant’s behalf—you may also ask applicants for copies of recent paycheck stubs.

It’s also reasonable to require documentation of other sources of income, such as Social Security, disability payments, workers’ compensation, welfare, child support, or alimony.

How much income is enough? Think twice before renting to someone if the rent will take more than one-third of their gross income, especially if they have a lot of debts.

Obtain a Credit Report

Private credit reporting agencies collect and sell credit files and other information about consumers. Many landlords find it essential to check a prospective tenant’s credit history with at least one credit reporting agency to see how responsible the person is about managing money. Jot your findings down on the Tenant References form, discussed above.

How to Get a Credit Report

A credit report contains a gold mine of information on a prospective tenant. You can find out, for example, if a particular person has a history of paying rent or bills late or has gone through bankruptcy, or ever been evicted. (Your legal right to get information on evictions, however, might vary from state to state.) Credit reports usually cover the past seven to ten years.

Depending on the type of report you order, you might also get an applicant’s credit score (the most popular being the “FICO”), a number that purports to indicate the risk that an individual will default on payments.

To run a credit check, you’ll normally need a prospective tenant’s name, address, and Social Security number, or ITIN (Individual Taxpayer Identification Number). Three credit bureaus have cornered the market on credit reports:

• Equifax, Equifax.com
• Experian, Experian.com, and
• TransUnion, TransUnion.com.

Although you generally cannot order a credit report directly from the big three bureaus, the bureaus have other options you might find helpful. For example, Experian has an option called “Experian Connect” (https://connect. experian.com) that allows prospective tenants to buy their credit report and credit score online, and give you access. This service provides you with a VantageScore, another type of credit score that’s similar to FICO.

TransUnion also allows you to get credit information about potential tenants by creating a “SmartMove” account (MySmartMove.com). You send applicants an online invitation through the account. Once applicants receive the invite, they supply their personal information, and you can then view their credit report, a criminal report (subject to federal, state, and local laws that limit or restrict access to some records), an eviction report, a leasing recommendation, and a “ResidentScore.” A ResidentScore is similar to a credit score, but TransUnion created it specifically for tenant screening purposes. ResidentScores range from 350 to 850, the same range that FICO and newer VantageScore models use. The higher the score, the better.

You can also get credit information about an applicant by going through a tenant screening service (type “tenant screening” into your browser’s search box). Look for a company that is reputable (consider checking the company’s rating with the Better Business Bureau along with any online customer reviews), has been in business for a while, and provides clear and informative reports.

Your state or local apartment association might also offer credit reporting services.

Tenant screening services and credit reporting agencies often provide reports the same day you request them. The costs of these reports depends on what type of and how many reports you order.

Tenants who are applying for more than one rental are understandably dismayed at the prospect of paying each landlord to pull the same credit report. They might obtain their own reports, make copies, and ask you to accept their copies. Federal law does not require you to accept an applicant’s copy—you can require applicants to pay a credit check fee for you to run a new report. However, certain states—Wisconsin and Washington, for example—are exceptions: State law in Wisconsin forbids landlords from charging for a credit report if, before the landlord asks for a report, the applicant offers one from a consumer reporting agency and the report is less than 30 days old. (Wis. Adm. Code ATCP 134.05(4)(b).) In Washington, landlords must advise tenants whether they will accept a screening report done by a consumer reporting agency (in which case the landlord may not charge the tenant a fee for a screening report). Landlords who maintain a website that advertises residential rentals must include this information on the home page. (Wash. Rev. Code Ann. § 59.18.257.)

Credit Check Fees

It’s legal in most states to charge prospective tenants a fee for the cost of the credit report itself and for your time and trouble. Any credit check fee should be reasonably related to the cost of the credit check—$20 to $30 is common. Check your state law for any limits. California, for example, sets a maximum screening fee per applicant and requires landlords to provide an itemized receipt when accepting a credit check fee. (Cal. Civ. Code § 1950.6.)

Some landlords don’t charge credit check fees, preferring to absorb the cost as they would any other cost of business. For low-end units, charging an extra fee can be a barrier to getting tenants in the first place, and a tenant who pays a fee, but is later rejected, is likely to be annoyed and possibly more apt to claim that your rejection was based on a discriminatory reason.

The rental application form in this book informs prospective tenants whether you charge a credit check fee. Be sure prospective tenants understand that paying a credit check fee does not guarantee the tenant will get the rental unit.

What You’re Looking for in a Credit Report

It makes sense to be leery of applicants with lots of debts—especially people whose monthly payments plus the rent obligation exceed 40% of their after-tax income. Also, look at the person’s bill-paying habits, and, of course, pay attention to lawsuits and evictions.

Sometimes, your only choice is to rent to someone with poor or fair credit—or even no credit (for example, a student or recent graduate). If that’s your situation, you should still adopt sensible screening requirements such as these:

• positive references from previous landlords and employers
• a creditworthy cosigner of the lease (see the discussion on cosigners at the end of Chapter 1)
• a good-sized deposit—as much as you can collect under state law and the market will bear (see Clause 8 of the form agreements in Chapter 1), and
• proof of specific steps taken to improve bad credit—for example, enrollment in a debt counseling group.

Verify Bank Account Information

If an individual’s credit history raises questions about financial stability, you might want to double-check the bank accounts listed on the rental application. If so, you’ll probably need an authorization form such as the one included at the bottom of the rental application, or the separate Consent to Contact References and Perform Credit Check form (discussed above). Banks differ as to the type of information they will provide over the phone. Generally, without a written authorization, banks will only confirm that an individual has an account there and that it is in good standing.

Review Court Records

When prospective tenants have previously lived in your area, you might want to review local court records to see if collection or eviction lawsuits have been filed against them. Checking court records might seem like overkill—some of this information might be available on credit reports—but now and then it’s a valuable tool. You won’t violate antidiscrimination laws as long as you check the records of every applicant who reaches this stage of your screening process. Because court records are kept for many years, this kind of information can supplement references from recent landlords. Talk to the court clerk at the local court that handles eviction cases for information on how to check court records.

Use Megan’s Law to Check State Databases of Sex Offenders

Not surprisingly, most landlords do not want tenants with criminal records, particularly convictions for violent crimes or crimes against children. Checking a prospective tenant’s credit report, as recommended above, might be one way to find out about a person’s criminal history.

“Megan’s Law” can also be a useful source of information. This federal crime prevention law charges the FBI with keeping a nationwide database of persons convicted of sexual offenses against minors and violent sexual offenses against anyone. (42 U.S.C. §§ 14071 and following.) Every state has its own version of Megan’s Law that requires certain convicted sexual offenders to register with local law enforcement officials who keep a database on their whereabouts.

For information on your access to this type of database, and restrictions on your use of information derived from a Megan’s Law database, contact your local law enforcement agency. California landlords may not access their state’s database unless they are doing so to protect a person “at risk.” This means that routine checking is not legal. (Cal. Penal Code § 290.46(j)(1).) Massachusetts, Nevada, and New Jersey have some restrictions, too. To find out how to access your state’s sex offender registry, you can also contact the Parents for Megan’s Law (PFML) Hotline at 888-ASK-PFML, or check this organization’s website at www.parentsformeganslaw.org.

Protect Personally Identifiable Information

When screening applicants, you’ll collect a lot of personal and potentially sensitive information, including names, Social Security numbers, and more. Because the misuse of this personally identifiable information (known as “PII”) can be so harmful to victims, many states require those who handle PII—including landlords—to follow security protocols and to report the unintended leaking of PII. Even if your state has not imposed specific requirements on use and handling, you should to take steps to protect the PII you obtain.

What Is PII?

PII is any information that someone could use to identify a particular person. For example, knowing a name and birthdate, someone might be able to tie that information to an actual person. Driver’s license numbers, Social Security numbers, and email addresses are just a few examples of PII landlords often collect.

As a general rule, ask only for what’s necessary to determine who will be a good tenant. The information we’ve suggested that you obtain during your screening process is the minimum amount you’ll need to confidently evaluate your applicants.

Storing PII

Most landlords’ records contain PII. (For information about what items should be in your records and how to maintain records, see “Organize Your Tenant Records” in Chapter 3.) State PII laws often require PII holders to take “reasonable steps” to protect PII. What’s reasonable for your business depends on factors such as how you collect PII, how you store it, and how many people have access to it. At the very least, give others access to PII only when necessary, and consider developing a set of written rules for how to store PII. Whenever possible, password-protect PII, encrypt messages containing PII, and keep physical documents containing PII in one secured place with limited access.

Destroying PII

Deciding when to destroy PII can be a tough call—you need to maintain thorough records, but you also don’t want to hold on to PII longer than necessary. For most landlords, it’s safe to destroy rental records four years after the tenancy ends. You’ll also need to consider how long you should keep records for tax purposes. Beyond these basic recommendations, consider scheduling regular audits of your files to check for unneeded PII.

No matter how long you keep rental records, you should have written procedures on how to destroy PII. Some examples of PII destruction practices are:

• Destroy PII as soon as it’s no longer needed.
• Black out and shred documents containing PII before throwing them away or recycling.
• Delete or overwrite unneeded electronic files. Hitting “delete” might not be enough to permanently delete files, so consult with an internet technology professional if you have any questions about permanently removing data.

What to Do If PII Is Stolen

Even if you take reasonable security measures, the PII of your applicants (and tenants) might become exposed. If this happens, check your state law—some states require you to report PII security breaches to affected consumers and even to the state itself, depending on the number of people affected by the breach. In any situation, you’ll want to determine what PII was exposed, who was affected, and whether it’s likely the PII will be misused. If you have any reason to believe the PII will be misused, contact the people whose information was taken as soon as possible. You should also evaluate how the PII was accessed, and take measures such as changing passwords or moving files to make sure it doesn’t happen again.

Avoiding Illegal Discrimination

Federal and state antidiscrimination laws limit what you can say and do in the tenant selection process. Basically, you need to keep in mind three important points:

1. You are legally free to choose among prospective tenants as long as your decisions are based on legitimate business criteria. You are entitled to reject people for the following reasons:
• poor credit history
• income that you reasonably regard as insufficient to pay the rent
• negative references from previous landlords indicating problems—such as property damage or consistently late rent payments—that make someone a bad risk
• convictions for relevant criminal offenses
• inability to meet the legal terms of a lease or rental agreement, such as someone who can’t come up with the security deposit or who wants to keep a pet when your policy is no pets, or
• more people than you want to live in the unit—assuming that your limit on the number of tenants is clearly tied to health and safety or legitimate business needs. (See Clause 3 discussion of occupancy limits in Chapter 1.)
2. Antidiscrimination laws specify clearly illegal reasons to refuse to rent to a tenant. The federal Fair Housing Act and Fair Housing Amendments Act (42 U.S.C. §§ 3601–3619, 3631) prohibit discrimination on the basis of race or color, religion, national origin, gender, age, familial status (pregnancy or children), and physical or mental disability (including recovering alcoholics and people with a past drug addiction). Many states and cities also prohibit discrimination based on marital status, source of income, military status, sexual orientation, or gender identity.

3. Consistency is crucial when dealing with prospective tenants. If you don’t treat all tenants more or less equally—for example, if you arbitrarily set tougher standards for renting to a member of an ethnic minority (such as requiring a higher income level or proof of legal residence status), you are violating federal laws and opening yourself up to expensive lawsuits and the possibility of being hit with large judgments. On the other hand, if you require all prospective tenants to meet the same income standard and to supply satisfactory proof of their legal eligibility to work (as well as meet your other criteria), you will get the needed information, but in a nondiscriminatory way.

Choosing—and Rejecting—an Applicant

After you’ve collected applications and done some screening, you can start evaluating applicants, using the basic criteria discussed above. Start by eliminating the worst risks: people with negative references from previous landlords, a history of nonpayment of rent, or poor credit or recent and numerous evictions. Then make your selection.

Assuming you choose the best-qualified candidate (based on income, credit history, and references), you have no legal problem. But what if you have a number of more or less equally qualified applicants? Can you safely choose an older white man over a young black woman?

The answer is a qualified “yes.” If two people rate equally, you can legally choose either one without legal risk in any particular situation. But be extra careful not to take the further step of always selecting a person of the same sex, age, or ethnicity. For example, if you are a larger landlord who is frequently faced with tough choices and who always avoids an equally qualified minority or disabled applicant, you are exposing yourself to charges of discrimination.

Information You Should Keep on Rejected Applicants

It is crucial that any tenant-screening system you implement documents how and why you chose a particular tenant.

Note your reasons for rejection—such as poor credit history, pets (if you don’t accept pets), or a negative reference from a previous landlord—on the tenant references form or other document so that you have a paper trail if a tenant accuses you of illegal discrimination. You want to be able to back up your reason for rejecting the person. Keep organized files of applications and other materials and notes on prospective tenants for at least three years after you rent a particular unit. (See “Organize Your Tenant Records” in Chapter 3.) Keep in mind that if a rejected applicant files a complaint with a fair housing agency or files a lawsuit, your file will be made available to the applicant’s lawyers. Knowing that, choose your words carefully, avoiding the obvious (slurs and exaggerations) and being scrupulously truthful.

Information You Must Provide Rejected Applicants

If you do not rent to someone because of an insufficient credit report or negative information in the report, you must give the applicant the name and address of the agency that reported the negative information or furnished the insufficient report. This is a requirement of the federal Fair Credit Reporting Act (FCRA). (15 U.S.C. §§ 1681 and following.) The notices are known as “adverse action reports.”

In these cases, you must tell applicants that they have a right to obtain a copy of the file from the agency that reported the negative information, by requesting it within the next 60 days, or by asking within one year of having asked for their last free report. You must also tell rejected applicants that the credit reporting agency did not make the decision to reject them and cannot explain the reason for the rejection. Finally, you must tell applicants that they can dispute the accuracy of their credit report and add their own consumer statement to their report. The law doesn’t require you to communicate an applicant’s right to disclosure in writing, but it’s a good idea to do so (and to keep a copy of the rejection letter in your files). That way, you’ll have irrefutable proof that you complied with the law if you’re challenged in court. Use the Notice of Denial Based on Credit Report or Other Information form, shown below, to comply with the federal Fair Credit Reporting Act when you reject an applicant because of an insufficient credit report or negative information in the report.

Exceptions: The federal requirements do not apply if you reject someone based on information that the applicant furnished or that you or an employee learned on your own.

Conditional Acceptances

You might want to make an offer to an applicant but condition that offer on the applicant paying more rent or a higher security deposit (one that’s within any legal limits, of course), supplying a cosigner, or agreeing to a different rental term than you originally advertised. If your decision to impose the condition resulted from information you gained from a credit report or a report from a tenant screening service, you have to accompany the offer with an adverse action report (described in the section immediately above).

Choosing a Tenant-Manager

Many landlords hire a manager to handle all the day-to-day details of running a rental property, including fielding tenants’ routine repair requests and collecting the rent. If you hire a resident manager, make sure to get a completed rental application and check references and other information carefully. If you use a property management company, it will do this work for you. (See below.)

The person you hire as a manager will occupy a critical position in your business. Your manager will interact with every tenant and will often have access to their personal files and their homes. Legally, you have a duty to protect your tenants from injuries caused by employees you know (or should know) pose a risk of harm to others. If someone gets hurt or has property stolen or damaged by a manager whose dubious background you didn’t check carefully, you could be sued, so it’s crucial that you be especially vigilant when hiring a manager.

When you hire a manager, you should sign two separate agreements:

• an employment agreement that covers manager responsibilities, hours, and pay, and that can be terminated at any time for any reason by either party, and
• a month-to-month rental agreement that can be terminated by either of you with the amount of written notice (typically 30 days) required under state law.

Whether or not you compensate a manager with reduced rent or regular salary, be sure you comply with your legal obligations as an employer, such as following laws governing minimum wage and overtime.

Property Management Companies

Owners of large apartment complexes often use property management companies, as do absentee owners. Some absentee owners hire property managers simply because they live too far away to be involved in everyday details; others hire property managers out of necessity—some states require owners who live out of state to hire local, licensed property managers. If you’re considering renting out property you own in another state, be sure to research whether that state requires properties to have an in-state manager.

Property management companies generally take care of renting units, collecting rent, taking tenant complaints, arranging repairs and maintenance, and evicting troublesome tenants. Of course, some of these responsibilities can be shared with or delegated to resident managers who, in some instances, might work for the management company.

A variety of relationships between owners and management companies is possible, depending on your wishes and how the particular management company chooses to do business. For example, if you own one or more big buildings, the management company will probably recommend hiring a resident manager. But if your rental property has only a few units, or you own a number of small buildings spread over a good-sized geographical area, the management company will probably suggest simply responding to tenant requests and complaints from its central office.

One advantage of working with a management company is that you avoid all the legal hassles of being an employer: paying payroll taxes, buying workers’ compensation insurance, and withholding income tax. The management company is an independent contractor, not an employee. It hires and pays the people who do the work. Typically, you sign a contract spelling out the management company’s duties and fees. Most companies charge a fixed percentage—about 6% to 12%—of the total rent collected. (The salary of any resident manager is additional.) This gives the company a good incentive to keep the building filled with rent-paying tenants.

Another advantage is that good management companies are usually well informed about the law, keep thorough records, and are adept at staying out of legal hot water in such areas as discrimination, invasion of privacy, and returning deposits.

The primary disadvantage of hiring a management company is the expense. For example, if you pay a management company 10% of the $14,000 you collect in rent each month from tenants in a 12-unit building, this amounts to $1,400 a month and $16,800 per year. While many companies charge less than 10%, it’s still quite an expense—even if you adjust for the fact that the property manager’s fee is tax deductible. Also, if the management company works from a central office with no one on-site, tenants might feel that management is too distant and unconcerned with their day-to-day needs.

Management companies have their own contracts, which you should read thoroughly and understand before signing. Be sure you understand how you’ll pay the company and its exact responsibilities.

Shop around for a management company—not all are created equal. A management company with a reputation for treating tenants poorly or ignoring service requests can hurt your chances of finding high-quality tenants. And, even though a management company is an independent entity, under certain circumstances a court could find you partially responsible for its misdeeds. Interview people at the company and ask them about past lawsuits or complaints. Ask other landlords in the area about their experiences with the company. In particular, try to learn the eviction rate in buildings they manage. Unusually large numbers of evictions might spell sloppiness in tenant screening or, worse, deliberate indifference. Keep in mind that many management companies get paid apart from their monthly fee every time they advertise and screen applicants, giving them an incentive to perform that task as often as possible.

And, finally, be sure to check online reviews. Online reviews will give you insight into what tenants think about the management company. Give the reviews whatever weight you think is appropriate, keeping in mind that most reviews are written either by people who the company asked for reviews or who had terrible experiences.

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