SS256: How to Spot and Minimize Tenant Fraud

SS256: How to Spot and Minimize Tenant Fraud

As a landlord or property manager, it is imperative to identify tenant fraud as soon as possible. In this episode, Charles discusses tenant fraud, the red flags that property managers should look out for, in addition to creating a written process for reviewing tenant applications.

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Talking Points:

  • Since COVID, the amount of tenant fraud has skyrocketed, and this is an episode I have been thinking about making for years. After reading an article by MRI Software, it reminded me of the significant impact of tenant fraud. The article stated that 9 out of 10 property managers on their platform have experienced tenant fraud. I actually feel this is low. Personally, I believe that if you have been a multifamily landlord for five years or more and have rented to ten or more tenants, the chances are that you have experienced some level of tenant fraud is guaranteed.
  • I break down tenant fraud into 2 buckets: pre-move-in fraud and post-move-in fraud. Our goal as property managers and landlords is to identify tenant fraud as soon as possible during the screening process.
  • Pre-Move-in Tenant Fraud
    • 1. Fake Documents: Applicants may submit fake pay stubs, bank statements, tax returns, and employment letters under the guise of demonstrating financial stability. To verify this, simply ask for multiple months and look between them. I personally would have emailed it to us, and over the years, I have realized that it is easy to fake one pay stub or bank statement, but when you start asking for two or three, it becomes much more difficult to format them the same. We actually save all fake documents we receive in a file to share with new team members.
    • 2. Employment and Income Fraud: Applicants could list an employer and income that is inaccurate. The first step is to verify that the company is real. To do this, research the company online, call the numbers listed on their website, Google listing, and any online review websites. Call different numbers and speak to multiple people on different days. Possibly utilize a third-party payroll verification service.
    • 3. Identity Fraud: Applicants who have stolen another identity. Ensure you run all necessary checks and do not accept a criminal background or credit check from a tenant. Confirm that your background check pulls records from both state and federal agencies, and verifies the tenant’s ID with the motor vehicle department. When you check someone’s credit and a fraud alert appears, this is a red flag. Some online tenant application software will utilize an ID verification process that requires applicants to answer questions about the color of previous cars they have owned, the street they lived on in 2010, and other similar details to help verify their identity.
    • 4. Fake References: I personally do not put stock in references since they are so easy to fake, or if you are actually speaking to their previous landlord, they might want to get rid of the tenants, and there is no way of knowing this.
  • Red Flags
    • Fraud alerts when checking credit.
    • Applicant does not want to speak on the phone or meet in person. The easiest way to weed out bad or fraudulent applicants is to get them on the phone as soon as possible. It takes a few minutes, and most fraudsters try to avoid the phone.
    • Unrealistic urgency. If the tenants have an urgent need to move in immediately. Even if they are legitimate, why do they need to leave their current apartment so fast?
    • Inconsistencies or conflicting information with their documents or story. 
    • Want to pay for their deposit and first month’s rent by personal check. Never, never accept a non-guaranteed form of payment for move-in, because once a tenant takes occupancy of your unit, they gain tenant protections, and you will need to evict them, even if their check bounces.
  • If you want to learn more about effective tenant screening, check out episode SS203.
  • Post-Move-in Tenant Fraud
    • 1. Illegal Subletting. With the growth of online rental platforms, illegal subletting has become a more common occurrence. Additionally, a fraudster could move in and then sublet the property to unsuspecting subtenants, posing as the owner.
    • 2. Illegal Roommates. Illegal roommates don’t sound like fraud, but it definitely is. I am not talking about guests who stay here and there; I am talking about people who actually live in the property. It took me years of managing my own properties to wonder why the boyfriend was left off the lease and background checks during the application process, oh, he’s a convicted felon. As a landlord, you are providing a safe environment for your tenants and their families. You do not want people with questionable pasts appearing at your property who have not been vetted. Think about it from the neighboring tenants’ point of view: Do you want a violent criminal or sex offender living across the hall from where your spouse and daughter live?
    • 3. Professional Tenants. Professional tenants understand how to navigate the system and avoid eviction.  
  • Bad debt losses are a part of the apartment rental business; however, with strong upfront screening and an experienced property manager, these losses can be minimized.

Transcript:

Charles:
Tenant fraud isn’t a rare risk. It’s a guarantee if you run properties long enough. The only question is, will you catch it before cost two thousands. Welcome to Strategy Saturday. I’m Charles Carillo, and today we’re breaking down how to spot and minimize tenant fraud. It’s one of the biggest challenges that landlords face, and the key is knowing the warning signs before you hand over the keys. So let’s get started. So since COVID, the amount of tenant fraud has skyrocketed, and this is an episode I’ve been thinking about making for years. And after reading an article by MRI software, it reminded me of the significant impact of tenant fraud. And this article states that nine out of 10 property managers on their platform have experienced tenant fraud. And I actually feel this is low. Personally, I believe that if you’ve been a multi-family landlord for five years or more and have rented to 10 or more tenants, the chances are that you have experienced some level of tenant fraud is guaranteed.

Charles:
Now I break down tenant fraud into two buckets, pre-move in fraud, and then post move in fraud. So our goal as property managers and landlords is to identify tenant fraud as soon as possible during the screening process. So let’s start with pre-move in tenant fraud. Number one are fake documents. So applicants may submit fake pay stubs, bank statements, tax returns, and employment letters under the guise of demonstrating financial stability. And to verify this, simply ask for multiple months and look between them. I personally would have them emailed it to us. And over the years I’ve realized it’s very easy to fake one pay stub or one bank statement, but when you start asking for two or three, it becomes much more difficult to format them the same. And we actually save all the fake documents we receive in a file and we share with new team members so they can really start noticing it themselves when these documents appear.

Charles:
Number two is employment and income fraud. So applicants could listen, employer income, that is inaccurate. And the first step is to verify that the company is real and to do this. And you research the company online. You call the numbers lifted on their website, not on the application, the Google listing and any other online review websites and call different numbers and speak to multiple people on different days, possibly utilize a third party payroll verification service. This is something a little bit more difficult because some potential tenants that are legitimate would might have issues of verifying their payroll. So you have to know that you might upset your tenants because they have to verify it. And if they have issues doing it, you might lose a possibly good tenant. But, so this is just one of the things you have to keep in mind when you’re utilizing any type of third party for verifying a payroll.

Charles:
Number three is identity fraud. So applicants who have stolen another identity and you ensure you run all the necessary checks and do not accept a criminal background. Check credit check from a tenant of self. Some say, oh, I just ran one. You can just have it and you want to confirm the background. Check pulls records from both state and federal agencies. Verify the tenant ID with the motor vehicle department. And when you check someone’s credit and are fraud alert appears this is a red flag, some online 10 application software like utilize an ID verification process that requires applicants to answer questions about the color of previous cars they’ve owned. You know, the street they lived on in 2010 and other similar details to help verify their identity. And this is another great way of doing that that anybody can answer. If you fail that test, that’s not the right person.

Charles:
Number four are fake references. I personally do not put stocking references since they are so easy to fake or if you’re actually speaking to their previous landlord, they might wanna get rid of the tenants and there’s no way of knowing this. So just keep that in mind. I personally have never called a reference when it comes to vetting a tenant just for this reason. So let’s talk about some red flags. So fraud alerts when checking credit, applicant does not wanna speak on the phone or meet in person. And the easiest way to weed out bad or fraudulent applicants is to get them on the phone as soon as possible. It takes only a few minutes and most frauds are gonna avoid the phone. They’re gonna want to keep on talking. You know, they’re on talk online, they don’t wanna see you face to face, they don’t wanna look at the unit, they’re trying to avoid any contact.

Charles:
Once you get a fraudster on the phone and they start talking, you’re gonna be able to weed out anything. And I’ve had people just hang up on me, and this means that you’ve just done it successfully. That’s a hundred percent true that you do not want this person renting from you. Unrealistic urgency if the tenants have an urgent need to move in immediately. And even if they’re legitimate, why do they need to leave their current apartment so fast? And this is unrealistic. Urgency is with any type of scam, really, if someone’s pushing something, you just have to kind of put on the brakes. And if they want you to invest in something, they want you to pay something, they want to move in somewhere, you just have to kind of put the brakes on and see exactly what’s going on. Inconsistencies or conflicting information with their documents or their story.

Charles:
So if they’re sending you something, if the names aren’t matching, if they’re using someone else’s name as a different boss or manager, this is stuff that you want to take note of and you’ll pick this up much easier on the phone call. It’s much harder to have all your ducks lined up on the call versus if they write the email and then they review it over and over before sending it to you to make sure everything, all the fraudulent information is correct. If you’re on the phone with ’em, they most likely are unable to do that. They want to pay for their deposit in the first one’s, rent by personal check show. Never, never accept a non-guaranteed form of payment from move-in because once a tenant takes occupancy of their unit, they gain tenant protections and you’ll need to evict them, fully evict them, even if their check bounces.

Charles:
We’ve never had this problem when I was a property manager myself, or when I managed my own properties myself. I had this with my first property manager after a few years, they did it with one tenant and the tenant left. They were luckily enough to get out. I think they called the police on the tenant, but they had a new person in the office that accepted a personal check. It was like on a Friday afternoon, right? Again, urgencies, right? And they had to move in. They didn’t want to go down, they couldn’t get a money order, whatever check came back. You never take anything that’s not secured for the first month of rent. And if you wanna learn more about effective tenant screening, you check out episode SS 2 0 3. That’s SS 2 0 3. So now let’s talk about the second bucket, which is post move tenant fraud.

Charles:
And this is probably where a lot of people that are landlords are going to see this first before they see the pre-move in fraud. This is illegal subletting. So with the growth online rental platforms, illegal subletting has become a more common occurrence. Additionally, a fraudster could move in and then sublet the property to an unsuspecting subtenant posing as the owner. So now you have two people that you have someone that initially their information was stolen to for the fraudster to actually rent the property illegally. And now on the other hand, now you have someone, a new tenant that you don’t even know you didn’t even rent to. That’s now at the property too. So now you have multiple parties, you have to verify that this isn’t happening. And obviously all these are gonna be parts of your lease too. And number two is illegal roommates.

Charles:
So illegal roommates don’t sound like fraud, but it definitely is. And I’m not talking about guests who stay there or hear, I’m talking about people who actually live in the property. It took me years of managing my own properties to wonder why the boyfriend was left off the lease and the background checks during the application process, always convicted felon. So as a landlord, you are providing a safe environment for all your tenants and families. You do not want people with questionable paths appearing at your property who have not been vetted. Now think about this from the neighboring tenant’s point of view. Do you want a violent, criminal or sex offender living across the hall from where your spouse and daughter live? So if something happened, you as a landlord are going to be liable for that because you did not do your due diligence on who’s living in the property.

Charles:
So this is very important that you do this and speaking to people that are moving in and verifying during the call, you’ll see this a lot. Somebody might put in, oh, I wanna rent your apartment. And I put down one person. You get ’em on the call, this is just for one person, and then you speak to them, and then they will most likely break in the first few minutes and oh, well, you know, it’s, I have something that stays with me here or there, or whatever it is. Or like something like this. That’s something that they would leave out of an email you wouldn’t even know. And they’re gonna leave it off that online application of whatever, you know, website it came from. But it’s something that you won’t pick up while speaking to that person. Number three are professional tenants. So professional tenants understand how to navigate the system and avoid eviction, and they usually really grow in really tenant friendly areas because it’s so hard for them to evict.

Charles:
You’re gonna have less of these issues in landlord friendly states. Bad debt losses are part of the apartment rental business. However, with strong upfront screening and an experienced property manager, these losses can really be minimized. So I hope you enjoyed. Please remember to rate, review, subscribe, just make comments and potential show that is globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. And look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS203: Insider Tips for Effective Tenant Screening

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