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Peter Lewis: Selecting a new tenant

Tuesday, June 04, 2019

IMG CREDIT: UNSPLASH

 

Acquiring a new tenant for a residential rental is always a stressful time, stressful for both those applying for the tenancy and for the landlord.

The landlord is generally in the position that he is receiving no rental income from that property, but of course his costs in the form of rates, insurance, and most likely mortgage interest relentlessly continue every day. Thus the landlord must balance his desire to rent the property quickly and so restore his cash flow against his need to select the most suitable applicant available.

In basic terms, what a landlord requires from a tenant is that they pay the rent in full and on time, and that they do not damage the property. All the work of screening and all the time-consuming sifting and checking of application forms is actually devoted to minimising and wherever possible eliminating that risk. Given that the landlord is about to hand over sole possession and day-to-day occupation of a valuable asset worth several hundreds of thousands of dollars to a total stranger with a bond security legally restricted to less than one half of one percent of its value, is it any wonder that he would require as much information as they can get about that person?

Any experienced landlord knows, usually from bitter and expensive personal experience, that it is essential to put any worries about the steadily mounting costs of leaving the property vacant to one side and instead concentrate on finding the low-risk tenant, the careful tenant, the tenant who can show that they are both fiscally competent and careful with other people’s property. As with all of human nature, the best indicator of someone’s future behaviour is their behaviour in the past. As the saying goes, leopards don’t change their spots.

I have, in the past, been guilty of haste in my tenant selection. I have accepted as tenants people who have been unable or unwilling to provide proof of past performance. I have fallen for sob stories. I have taken in people who have sworn that they have seen the light and now wish to reform. Almost without exception, these people have left me out of pocket, with expensive damage to repair, filth to clean, stolen fixtures and fittings to replace, and substantial rent arrears that I can spend frustrating years in futile attempts to recover.

So now, I am slow and careful in my tenant selection process. If an applicant is in a hurry and can move in quickly, that rings an alarm bell. Why are they in haste? Sure, there may possibly be a legitimate reason, but it is far more likely that someone else wants to get rid of them, and if so, why? Do I really want a tenant someone else is keen to throw out. Conversely, if an applicant is already renting elsewhere, and knows that they need to give at least the legally required 21 days notice to depart from their present tenancy, then I consider that to be a good indicator that they are aware of their obligations as a tenant and are willing to abide by them. If everything else checked out satisfactorily I would hold my property vacant for that tenant. Quality is worth the wait.

So when a person applies to me for a tenancy I want to know as much as possible about that person in order to minimise my risk. Some factors are irrelevant. I don’t care about their sexual preferences or orientation or their ethnic background. They may or may not be legally married to their partner, belong to any religion or none, vote for this political party or that, I don’t need or even want to know. What I do want to know is that they will pay the rent in full and on time, and not damage the property. Anything that detracts from that desirable outcome will influence my decision. As such I will adopt the positive expectation of a negative outcome. Unless you can prove good behaviour I will assume bad behaviour.

Privacy Commissioner John Edwards has recently provided a guide to what information that landlords may require from prospective tenants and also what should not be required. Now Mr Edwards is most likely a fine and upstanding fellow, but as a career lawyer and latterly a public servant I feel not only does he lack the ‘street smarts’ that would be needed to properly develop such a listing, but he has seemingly failed to consult any individual or organisation that is actively involved in the residential rental business. Thus his list is substantially academic, idealistic, and would be dangerous for any property manager or self-managing landlord to follow to the letter.
 
He also indicates that the more intensive screening of tenancy applicants is due to the current shortage of rentals. This is false, two other factors are at play.
Firstly, by carrying out my assiduous search for the bad bits of an applicants life and history I am protecting myself from yet another loss. Landlord’s insurance policies these days usually include a clause that the landlord must keep written records of the tenant’s application for the tenancy, and show proof that the landlord has carried out sufficient and adequate research into the information provided in that application and the tenants background to be reasonably sure that the tenant is a fit and proper person to be granted the tenancy. If I don’t do that, I invalidate my insurance and can have my claim turned down.

Secondly, there is actually a shortage of good tenants. In the past, I have tended to give some applicants the benefit of the doubt. If they have a Vodafone bad debt from five or more years ago and nothing since, I have figured that they learnt their lesson, reformed, and will probably not do such a thing again. However, now that the current Government seems hell-bent on making it much more difficult to get rid of tenants who turn out to be unsatisfactory then I and most other experienced landlords will minimise that risk by rejecting any applicant with anything less than a 100% squeaky clean record. As a result, we are all fighting to attract the relatively few excellent tenants while the feral, the incompetents and the undesirables are already lengthening the queues at Housing New Zealand’s door.

It is interesting that the Reserve Bank is cautioning the trading banks of New Zealand that they must carry out full and intensive appraisals of their customers including complete details of their income and banking history, in accordance with the Responsible Lending Code, before granting them loans of tens of thousands of dollars or they may be held liable for not acting with due care. Yet we as landlords are being cautioned that we can be penalised if we attempt similar appraisals on our customers before we lend them assets worth hundreds of thousands of dollars.

One regime for the powerful and well-connected corporates, and another for small-time private individuals? You decide.

 

This is a guest blog submission from APIA member Peter Lewis. Guest submissions are a way for APIA members to share their views and experiences with each other and do not necessarily reflect the views and position of the APIA.

 


ABOUT THE AUTHOR

Peter Lewis

Peter is the Vice President of both the Auckland Property Investors' Association and the New Zealand Property Investors' Federation. He is not an accountant. 


 

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