The opinions expressed by Entrepreneur authors are their very own.
AND Federal Trade Commission (FTC) report. found that fraud, identity theft and other scams increased by 67% in the US from 2019 to 2021. According to Snappt, which estimates that much of these descriptions took place in the apartment rental industry In 2021, 11 million fraudulent rental applications were submitted in the US. Moreover, the 2022 housing tenant survey showed that 85% of residential property managers consider that customers are increasingly likely to engage in app fraud.
As a real estate investor, yes many kinds of rental scams and scams this can have serious financial and legal consequences for your enterprise, which can even negatively impact your personal life. Potential tenants may provide false information to gain access to your property. This includes using false identification or the identity of one other person to conduct background and credit checks. Some may falsify employment or income information by using fake pay stubs or employer references to appear financially stable and meet rental criteria.
There are also subletting scams, where tenants sublet a property without the landlord’s consent, causing damage or legal problems; overpayment fraud, in which a tenant or prospective tenant overpays on a check and then receives a refund of the excess before the original check bounces; and repair scams, where tenants intentionally cause damage to a property and offer to repair it, only to demand a rent reduction or refund.
In the digital age, when it is easier than ever for bad actors to steal identities and engage in deceptive practices in the rental industry, real estate investors must adopt these smart and thoughtful practices to protect themselves against rental fraud.
Use the formal rental application process
It is essential to have a standardized and formal application process in place to gather the information obligatory to properly evaluate candidates and set a skilled tone from the starting of the relationship. This is an opportunity to communicate the landlord’s expectations rental rulesbut it also conveys professionalism, setting a tone that is more likely to attract high-quality tenants.
The formal application must be designed to gather all the obligatory information required to make the most informed decision possible, including employment history, credit information, rental history and references. Red flags to be careful for in the information gathering process include inconsistencies in an applicant’s history or gaps in information which will warrant further investigation or be a reason to exclude an applicant.
There are many other advantages to a formal application process that serves to mitigate risk. For example, it might help discover applicants who could also be failing to pay rent, causing property damage, or engaging in criminality on the premises. It can even help ensure compliance with local and federal housing regulations and promote organization and good record keeping.
If creating a formal application process that is thorough, compliant and reduces risk seems overwhelming, you might want to consider searching for help from a skilled property manager who has the experience and resources to do it right. If this option proves too expensive, property management software (particularly one with customizable options) can automate the process for you, saving you time and money while ensuring the security of your investment.
Conduct a thorough background check
Probably the most significant a part of stopping rental fraud is conducting comprehensive background checks on potential tenants. This includes credit checks, employment verification, checking criminal and eviction reports, and reviewing references from previous landlords. Background checks help detect fraudsters and also assess candidates’ trustworthiness and trustworthiness and the likelihood that they may pay rent on time and treat the property with respect.
Credit checks are the commonest a part of a background check. They provide insight into an applicant’s financial situation, including a history of on-time payments and outstanding debts. Finding tenants who exhibit financial stability suggests that they pose a lower risk of rent default. However, background checks shouldn’t end there.
A radical background check should screen applicants for criminal history. Knowing whether an applicant has a criminal history is crucial to the safety of the property and other tenants or neighbors. However, you have to comply with Fair Housing laws and regulations regarding the use of criminal history in making rental decisions.
Collecting references from previous landlords can even help discover applicants who have a history of causing property damage or other breaches of contract. Choosing reliable tenants not only reduces the risk of rent fraud, but also reduces evictions, lease breaks and tenant turnover, which implies fewer vacancies and greater stability in rental income.
Verify your identity, income and assets
One of the key and often neglected parts of the application and background check processes is verifying identity, income and assets. Identity verification confirms that the applicant is indeed the person he or she claims to be. This is crucial to avoid identity theft scenarios where a fraudster could use stolen personal information, equivalent to forged or stolen identity documents and financial statements, to perform a background check.
Verifying government-issued ID documents, equivalent to a driver’s license or passport, is a common approach to verifying identity, but provided that Identity theft cases have almost tripled over the past decadeit is necessary that these documents match the applicant’s face. If possible, it is best to meet with tenants in person to confirm their identity and assess their honesty and reliability. If this is not possible, arrange a Zoom or video call and require them to turn on their camera for the meeting. This reduces identity fraud by forcing applicants to show government-issued identification that matches their face.
Verification of income and assets is one other necessary element of this process. It is helpful to establish a good financial picture of a potential tenant. Checking an applicant’s pay stubs, bank statements or investment accounts ensures they have the financial means to pay rent commonly. However, these documents will also be forged and applicants could also be reluctant to share such personal information (which is comprehensible because it could also lead to fraud against them). This is one other case where advanced technology might help. Look for software platforms that may seamlessly confirm potential tenants’ income and assets without having to exchange sensitive documents.
Secure personal and financial data
Real estate investors must also take steps to secure their and their tenants’ personal and financial information. Above all, limit sharing information only to what is obligatory and use secure, encrypted communication methods to exchange sensitive information. If it is obligatory to store personal information, store physical documents in a protected place, equivalent to a locked filing cabinet or protected, and use encrypted digital document storage solutions.
Other precautions include updating your software commonly to make sure you are using the latest versions with patches for security vulnerabilities; using strong, complex and unique passwords for all online accounts; implementing two-factor authentication for accessing online accounts to add an additional layer of security; using secure networks equivalent to a virtual private network (VPN) when accessing information on public networks; and commonly monitoring bank accounts, credit reports and other financial accounts for any unauthorized or suspicious activity.
Learn and not sleep to date
Finally, one of the best ways to protect yourself from fraud is to remain vigilant by continually educating yourself and staying up to date with the latest rental fraud tactics. For example, understanding local rental laws can assist you to spot inconsistencies or illegal requests in applications or conversations. Learning about the several types of fraud, in addition to recent trends and the evolution of old trends, are the first steps towards prevention.
If you are recent to property management or feel overwhelmed by the effort required to protect against fraud, think about using a skilled service. Technologies are available that may automate and streamline most of the practices and processes described above. No matter the way you do it, taking proactive steps to protect your investment will reduce, if not eliminate, your exposure to rental fraud.