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Screening in a Soft Market

After a historically good run, the multifamily sector has shown some recent signs of softening.

The national occupancy rate declined for five straight months before rising slightly in February to end the month at 94.5 percent. But that number is still less than February 2016's mark of 94.7 percent.

Additionally, the national effective rent grew by 2.3 percent on an annual basis in February. One year earlier, the growth was 4.1 percent.

Of course, context is key: the apartment industry is still very healthy. But softening fundamentals should prompt operators to consider how they may relax their screening standards for new residents to keep occupancies up in a sluggish market.

One thing is certain, though. Regardless of how an operator reduces its thresholds for factors like credit scores, employment history and income, it needs to incorporate rental payment history in its lease-application evaluations and to share the payment history of its residents with other apartment managers. 

Put simply, doing these things is critical to determining just how risky a prospect is and to recovering bad debt should a resident skip out on a lease.

Expanding on the Credit Score Picture

Loosening your screening standards is often a necessary tactic for navigating a downturn in the market. But if you do so, you should have a crystal-clear view of the risk an applicant poses. 

Generally speaking, credit scores are highly predictive of likelihood to default on rental payments. However, in certain cases, a high credit score doesn’t equate with a likelihood to pay rent on time and in full, and a lower score doesn’t always translate into a propensity to default. Additionally, there are an estimated 64 million thin-file and no credit file consumers in the United States who don’t have a credit score.

An Experian RentBureau® analysis of 755,000 residents who initiated leases between 2006 and 2012 shows the impact of combining credit scores and rental payment history into applicant screening. One of the critical findings: operators who do so can differentiate between high- and low-risk applicants within the same credit score range.

According to the study, applicants with high credit scores (between 700 and 799) who also had negative rental payment history were more than four times as likely (7.31 percent) to default as those with positive rental history (1.76 percent). 

Meanwhile, residents with positive rental payment history and credit scores ranging from 500 to 599 exhibited nearly half the default rate (14.96 percent) of their counterparts in the same range who had negative rental payment history (29.23 percent).

In a nutshell, combining credit scores with rental payment data provides a clear understanding of an applicant’s risk profile and, specifically, his or her likelihood to pay rent as agreed. Rental payment data also can be used to differentiate between higher- and lower-risk applicants within the same credit score range. 

To Catch a Skipper

If operators decide to accept riskier applicants, it stands to reason they are going to have to deal with more residents who skip out on their leases or who stay for their full lease term but leave a community while still owing some money. 

However, when operators share the payment history of their residents with other community managers, they can significantly increase their odds of recovering that bad debt. That's because when those former residents apply for leases at other properties, the operators of those communities will learn about that debt and can refuse to rent to them until it's paid off.

A Big Help in Tough Times

When vacancies rise because of economic and market conditions, operators often have no choice but to adjust their screening criteria and methodologies. But, in markets both soft and strong, they should access and share rental payment history. Doing so will allow them to understand exactly how risky a certain applicant may be, and it will provide a powerful weapon to recover bad debt when it happens.

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