So if you are a landlord in Naperville, then you already know that finding a good tenant for a rental property can be difficult. For owners of single family homes and multi unit apartment buildings, finding a tenant is often the easy part, but finding the right tenant is a different story. In this post we will go over the basic principles of tenant screening and the rules that are in place for screening in Naperville.
The biggest financial decision that you make as a rental property owner is deciding who to rent your property to. We talk to a lot of rental property owners here at Yellow Key who are dealing with issues relating to vacancies, lease clauses, and proper rental property pricing. It can be very difficult to find a tenant for your rental property, and it can be very frustrating as well. But by having a solid process in place for screening potential tenants, you can end up finding the perfect tenant to fill your vacancy and pay rent on time every month.
This post is designed to inform the Naperville Rental Property Owner on tenant screening criteria, Naperville rental property laws, and more importantly why a structured screening process is so valuable to protect your Naperville rental property investment. Many smart rental property owners rely on these rules and combine them with smart lease agreements. However, a disciplined and structured tenant screening process will do far more to protect your rental property than a lease agreement.
In This Guide
- Urgency Is Your Biggest Risk in Tenant Screening
- The Income Standard That Actually Protects You
- Credit Checks, Background Checks, and What They're Actually Telling You
- Fair Housing Law: It's Not Optional! And The Penalties Can Be Severe!
- Reading Rental History the Right Way
- Illinois Security Deposit Rules and Why They Matter at Screening Time
- Adverse Action Notices and Screening Documentation
- Under 1% Eviction Rate. Why?
Urgency Is Your Biggest Risk in Tenant Screening
Many landlords allow their properties to sit vacant for a couple of weeks. Then, when the calendar seems to be turning into money, they are stressed by the pressure to fill the vacancy quickly. So they process the application of the next warm body who looks good and has a credit report that clears a very minimal review of credit worthiness. They fill the vacancy in a couple of weeks, but it turns out to have cost them $6,800 for the year in lost rent.
Naperville rental homes in the $1,800 to $3,200 per month price range for 1-4 bedrooms are highly competitive right now. It can feel very expensive with the calendar ticking away for every week that a property sits vacant. However, every owner's worst nightmare is finding a tenant that will cause problems and fill their investment with financial losses and stress. Approving the next warm body that clears a basic credit check just to fill a vacancy quickly can end up causing financial losses and stress in the long run.
A Downers Grove single family home was managed by a landlord for 2 years. He found a tenant based on a gut feeling after talking with the applicant on the phone. No formal credit check or income verification was done. Eight months later the tenant stopped paying rent. After a grueling 3 months of Illinois eviction proceedings (30 to 90 days from filing of the eviction action to the eviction being carried out and the tenant removing from the property) the landlord finally got back his property and was out $6,200 for lost rent and legal fees.
Screening tenants in order to fill a vacancy in your rental property quickly is NOT the same as finding the right tenant in order to protect your rental property investment.
The Income Standard That Actually Protects You
3x income is the commonly accepted benchmark for rental payments as a percentage of a potential tenant's income. This means that for a $1,800 monthly rental payment, the tenant should have an income of at least $5,400 per month before you consider renting to them. Note that this is gross income, not net, so do not subtract things like taxes from the potential tenant's reported income.
We have seen owners in slow markets relax the income requirements to fill up their properties. The owner of this multi-unit property in Elmhurst approved a tenant who earned 2x the monthly rent of $1,800. After four months, the tenant started to fall behind on his rent payments. For the better part of a year, the owner dealt with partial payments. In the end, the owner was forced to non-renew the tenant's lease agreement. That two year tenancy agreement would have counted as two effective months of vacancy had the owner done a more thorough search for the right tenant.
Juan at Yellow Key caught a discrepancy in a tenant's paystubs recently. The paystubs did not match the employer that the prospective tenant had listed on the application. This was caught prior to lease sign up during our verification of income process. This is just an example of a small detail but a detail that could have potentially cost thousands of dollars if not for being diligent in the screening of the prospective tenant.
Credit Checks, Background Checks, and What They're Actually Telling You
A credit report will reveal how a potential tenant handles their financial responsibilities and you can use this information to search for patterns of behavior as opposed to simply relying on a credit score. For example, a single, past due medical collection is very different from a history of late utility payments and/or charged off accounts.
The typical cost of a tenant screening is $25-$50 per applicant through the portal you are using for tenant applications (Rentvine in this case). Once you do the math and understand the true cost of a poor tenant, it quickly becomes apparent that waiting an additional week or two to find the right applicant is in fact cheaper in the long run.
Some may say it is better to "ban the box" regarding criminal background checks. For private housing in the state of Illinois there is no statewide ban the box legislation, but there is the possibility of blanket denial of tenants based on past convictions in suburban Cook County with the potential for Fair Housing Risk. In terms of proper screening and Fair Housing compliance, conducting individual assessments for each applicant of the nature of the crime(s) in question, the amount of time that has elapsed from the completion of sentence to the current time and whether or not the past behavior is relevant to tenancy are typical methods for landlords to follow in this regard and can be applied consistently to all applicants to avoid potential trouble with Fair Housing.
Fair Housing Law: It's Not Optional! And The Penalties Can Be Severe!
Criteria must be applied consistently to all applicants (the "consistent application standard") under the Illinois Human Rights Act. Screening criteria cannot be waived for any applicant for any reason. Even if an owner were to rent to an applicant who makes the owner comfortable because that owner reminds the owner of another comfortable tenant from five years ago, the owner would still be in violation of the Act if the owner applied different criteria to that applicant than to other applicants.
For those in suburban Cook County, the Cook County Human Rights Ordinance also prohibits discrimination on the basis of source of income. In terms of how you're going to qualify tenants based on income, that becomes a more complicated process for Section 8 holders because you cannot automatically deny someone based on their source of income. How you establish your income verification criteria, and how you apply that to all applicants, has to be very consistent.
Violations of Fair Housing can result in significant fines from $10,000 to $100,000 or more, depending on the severity of the violation and the jurisdiction in which the violation occurred. This could quickly erase years of rental income.
Writing down the screening criteria and verifying information in a consistent manner will protect against potential discrimination and form a paper trail should any discrimination occur and a fair housing complaint is filed.
“They fill the vacancy in a couple of weeks, but it turns out to have cost them $6,800 for the year in lost rent.”
Reading Rental History the Right Way
Eviction(s) from prior rental(s) are considered 'red flags'. Reviewing an applicant's rental history in detail can reveal whether or not the prior rental(s) were ended properly. Other factors can include: did the applicant provide prior written notice of intended departure from rental property; did applicant provide complete and accurate forwarding contact information for return of renter's security deposit(s); and does landlord(s) of prior rental(s) seem hesitant or even fearful to discuss prior tenant in detail. Why?
Those hesitations are data.
On Yellow Key Property Management phone calls to prior owners/property managers of applicants, we are typically asked what specific questions that we are asking on the prior owner/property manager's phone call. We tell them that we ask the basic questions in order to assess/validate whether or not the prior owner/property manager would be willing to be a reference for the prior tenant. The most telling of the questions we ask is typically "Would you re-rent to this person again?" The prior owner/property manager will typically be very candid in their response – Either positive or negative. We typically ask follow up questions regarding their negative response(s).
The owners and managers that we work with receive numerous references from family members and friends of applicants. These "previous landlords" always seem to give excellent references. In our experience it is best to cross reference the property address against public records to verify if the previous landlord is actually a previous landlord or not. If not then prior evictions and/or violent crime would definitely be a red flag for us and for the Yellow Key property owner.
Illinois Security Deposit Rules and Why They Matter at Screening Time
Security deposit policy is a screening tool, not just a financial buffer. Knowing what you're legally allowed to collect and what you're required to do with it keeps you out of trouble down the road.
Unlike 36 states, and the District of Columbia, there is no maximum security deposit amount allowed in Illinois; however, there are very specific time frames, established by the Illinois Security Deposit Return Act, with which you must comply when returning a security deposit to a tenant. Failure to return a security or petition for return of a security deposit within the time allowed (30 to 45 days) after the expiration of a lease could result in your liability for the double amount of the security deposit plus attorney's fees.
Another important item to consider when creating your rental criteria is to include or exclude pets from your consideration as applicants. For years, one of our owners had a strict "no pets" policy. That worked for him until he partnered with us to start managing his properties. He was worried that he would decrease his pool of applicants, but within our average time on market of 8 days, he was receiving a sufficient amount of qualified applicants to fill any vacancies. When an applicant with pets does move-in, the owner only has to pay out the refundable pet deposit in the event of any damage caused by the pet. In the case of this one owner, the only damage was some minor carpet cleaning, and he didn't have to spend a dime.
Adverse Action Notices and Screening Documentation
If an owner were to deny a applicant for fair housing reasons, the owners' documentation of how the owners applied their screening criteria to all applicants would serve as sufficient evidence to indicate that the owner had conducted the screening process fairly. However, an owner who denied an applicant for credit reasons would be required to provide an adverse action notice to that applicant within 30 days of the applicant's rental application having been denied. That notice must include a copy of the consumer report that was used by the owner in its review of the applicant as well as the name and address of the consumer reporting agency that had prepared that report. Many software products for screening rentals automatically prepare and send such notices as part of the owner's screening process.
Pursuant to the federal Fair Credit Reporting Act, an adverse action notice must be given to all applicants for credit (including rental housing) who are denied based on information in their credit report. In such a case, the adverse action notice must be given within 30 days after the denial and include the following: (1) a statement that the application was denied based on information in the credit report of the applicant, (2) the name and address of the consumer reporting agency or agencies that compiled the credit report or reports used in connection with the application, and (3) a statement that the applicant may obtain a copy of the credit report or reports used in connection with the application by contacting the consumer reporting agency or agencies at the address or addresses specified in the notice. The adverse action notice frequently is forgotten by the self-managing landlord, often because he or she is not even aware that it is required. Most tenant screening software packages automatically generate adverse action notices for denied applicants.
Utilizing good screening software can help track criteria for each applicant. Rentvine for example will track each applicant and provide a report that outlines how each applicant meet specific criteria for rental property. This report can serve as documentation should landlord be questioned about criteria used to not rent to an applicant.
Under 1% Eviction Rate. Why?
The eviction rate for Yellow Key-managed rentals is below 1% and continues to fall. Nationally, the average eviction rate for self-managed single-family homes and multi-family homes is around 2-3%. This difference can be attributed to the hard work put into screening applicants to ensure they will be able to pay on time and prove to be responsible tenants in the long run.
The other piece of knowledge we have gained from working with 150+ properties is that the majority of the rental housing in the area are single family homes, town homes and condos. This means that every placement decision carries more weight, as a single eviction on a four unit building is a 25% vacancy rate for the owner of that building.
Just as with any form of marketing, the time spent finding the right applicant(s) can serve to offset or even add to the time spent processing an application(s). This is why we've seen that, when done correctly, the average time an owner's properties are on the market is only about 8 days.
We work with a lot of owners who manage rental real estate on their own and they just don't know how property management in Naperville or in surrounding Illinois suburbs actually works. If you fit into this category then Yellow Key would love to speak with you regarding your real estate holdings.
FAQ
How much does tenant screening typically cost a landlord in Illinois?
Most property management companies and tenant screening vendors charge in the $25 to $50 range per applicant. We've found that some property owners will have the applicant pay for the screening reports as part of their application fee. This is typical in most of Illinois, and generally permitted by law.
What income-to-rent ratio should I require for tenants applying to rent houses and townhomes in the Naperville and Aurora area?
For Naperville rentals, we have found that the income-to-rent ratio that generally meets the needs of the applicant and protects the owner's interest is an 3 times the gross rent amount per month (3x gmr). Using a $2,000/month gmr amount, that would translate to an applicant earning $6,000.00 per month in gross income. With the first payments due typically 30-60 days after the lease commencement date, and the majority of delinquent payments becoming past due within the first 90 days of tenancy, we find that when an applicant's income falls below this amount, payment problems often surface within the initial lease term.
Can a landlord in Cook County reject an applicant for using a Section 8 voucher?
No. Cook County Human Rights Ordinance, which covers all suburbs in Cook County, forbids landlords from discriminating against applicants on the basis of "source of income" (i.e. Section 8 housing vouchers). So in suburbs of Naperville which are in Cook County, a blanket policy of not renting to Section 8 tenants would be illegal.
How long does an eviction take in Illinois?
Eviction proceedings via Forcible Entry and Detainer process average thirty to ninety days in the State of Illinois. Payments to which an owner is otherwise entitled would cease throughout the time eviction proceedings are ongoing. In addition, attorney's, court costs and other charges would, in effect, amount to an additional $3,500 to $7,000 or more per eviction.
What happens if a landlord doesn't return a security deposit on time in Illinois?
Illinois Security Deposit Return Act Requires Return of Security Deposit Within 30 to 45 Days of End of Lease Term. Landlord's failure to return security deposit on a timely basis can subject landlord to double the amount of security deposit returned plus attorney's fees.
Does Illinois require landlords to notify applicants when they're denied based on a credit report?
Yes. The federal Fair Credit Reporting Act requires landlords to notify applicants of any adverse action taken as a result of information contained in a consumer credit report, such as denial of rental based on credit report. Notification must be given within 30 days of denial of rental, and must include name and address of credit reporting agency used for evaluation of applicant. Notice required to be sent to all applicants who were considered as part of evaluation process.
