Advice for dumb first-time landlord who made a terrible mistake

[SillyPutty]

Before I get into what happened, please know that I recognize—and am embarrassed by—my naïveté/stupidity.

My SO and I bought a 2-unit in May. We live in the first floor unit and rent out the second floor. Our tenants had a month-by-month lease, and they've both recently given their notice. We're trying to fill the vacancy.

We posted an ad to Craigslist and talked to my best friend's father, who has been a landlord of several properties in the same town. He told us that in 25+ years of landlording, he's never run a credit or background check. He relies on meeting the potential tenants, calling references, and—in the past several years—reviewing social media sites. We decided to do the same, because it felt wrong to take $30-50 from every interested applicant. (Remember, I said I was dumb.)

We got a lot of interest in the apartment and set up showings for last Saturday. Had a few no-shows, a few disasters, and a few that seemed great. Out of those that seemed great, two of them found other apartments within a day or two of our showing.

That left us with only one option, so we quickly called their references, did some online research, and made the offer because we didn't want to lose them. It's a family—mom, dad, two kids.

The only previous landlord reference they had was the dad's mother. She (of course) gave a glowing review, though only after we "disconnected" (pretty sure she hung up on me to call her son and then called me back).

Like I said we didn't want to lose them, so last night we told them that they qualified for the apartment, and they accepted it this morning. That's it so far—they have not signed a lease.

Today, bored at work, I decided to go beyond my social media research and do a generic Google search. I found that the dad has a criminal record. About 7 arrests since 2005—mostly vehicle related in his early 20s (leaving the scene of an accident, no insurance, operating with a suspended license)—but in 2008 he was arrested for marijuana use and sale, and in 2007 he was arrested for criminal threatening. He's 34 or so now, and his last arrest was in 2014.

We've already verbally agreed to rent to them, and I don't know if I'm legally allowed to deny housing to someone with a criminal record.

Should I still rent to them? If not, how do I explain why we're withdrawing the offer?

Someone, please, help me make this better!

(No need to tell me what I should have done, cause sadly that boat has already passed.)

[hoping2retire35]

might need a lawyer to confirm you can do this since you already agreed but...

DO NOT RENT TO THEM!

Even if means losing a month (or a few) of rental income.

it would help to cancel if you asked on an app if they have a criminal record. You can also have more leeway since it has a closer proximity to you and you only have one unit.

[cchrissyy]

for next time, you should also consider "age 30something and only previous landlord was a relative" to be a big red flag too. that's probably a lie.

[tralfamadorian]

That's it so far—they have not signed a lease.

...and I don't know if I'm legally allowed to deny housing to someone with a criminal record.

Should I still rent to them? If not, how do I explain why we're withdrawing the offer?

Criminals are not a protected class (in my state- please check in your own state and city/county).  Do not under any circumstance rent to these people.  Tell them that the criminal record of one of the applicants has just come to light and per your policy, their application is denied.  End of.  No further contact and do not respond to any threatening or pleading responses they send you.   

[Another Reader]

Check your local laws first. Seattle is discussing (or may have already passed) laws that prohibit landlords from considering criminal records.

So when you rent to the child rapist whose record you could not consider and he murders the neighbor's child, who is liable?  Seattle will effectively make it impossible to be a landlord and will significantly reduce the number of rental units, driving up rents.  Incredibly short sighted of your city council.

[tralfamadorian]

Check your local laws first. Seattle is discussing (or may have already passed) laws that prohibit landlords from considering criminal records.

he was arrested for marijuana use and sale

When HUD issued some new guidelines encouraging landlords not to screen criminals from renting, they explicitly excluded illegal drug manufacturers and dealers.  Seattle may or may not have included the exception.  If they did, then SillyPutty has a rock solid reason for application rejection:
https://portal.hud.gov/hudportal/documents/huddoc?id=HUD_OGCGuidAppFHAStandCR.pdf

So when you rent to the child rapist whose record you could not consider and he murders the neighbor's child, who is liable?

It's not my market so I don't know all the details but I believe Seattle landlords can still exclude applicants if they can show that they have reason to believe the applicant may be a danger.  I agree that it's fucked up, particularly if you read the HUD document above and see that they explicitly mention that drug charges are always a reason to deny an applicant but do not mention violent crime at all.

[Another Reader]

"It's not my market so I don't know all the details but I believe Seattle landlords can still exclude applicants if they can show that they have reason to believe the applicant may be a danger.  I agree that it's fucked up, particularly if you read the HUD document above and see that they explicitly mention that drug charges are always a reason to deny an applicant but do not mention violent crime at all."

That's consistent with the HUD guidelines then.  It's the standard property managers in Phoenix are using.

We have always allowed people with one or two minor infractions or misdemeanors from many years ago and no problems since.  Kids screw up and if they get their lives together, no problem.  It's the people with the repeating pattern that get denied.

[joonifloofeefloo]

If people with a history of repeated criminal activity in adulthood are a protected group in your region, I would say, "I'm so sorry! We just learned the place is [infested/whatever] thus uninhabitable until we repair it." I would take two months' loss, then readvertise.

[Another Reader]

If people with a history of repeated criminal activity in adulthood are a protected group in your region, I would say, "I'm so sorry! We just learned the place is [infested/whatever] thus uninhabitable until we repair it." I would take two months' loss, then readvertise.

That approach will get you sued for discrimination.

[joonifloofeefloo]

How so, Another Reader?

The point is to circumvent the issue one is not allowed to be discriminating around, regardless of the validity of concerns, and to point to an issue unrelated to the criminal activity.

There are other issues with this (where I live), but I don't see being sued for discrimination being one.

[cchrissyy]

no don't lie about it being uninhabitable.

check in your city and state if you can deny somebody over their criminal record.  if so, write to them "sorry to say this, but your criminal records check just came back and we cannot rent to you after all. I apologize for the confusion."

also FYI, in some towns you can't discriminate for criminal record BUT you can if it it is a small property, such as this one, being a 2-unit where you live in the other one.  so, go find out the law where you are and make sure you are learning about this property not what rules apply to large apartment complexes.

[joonifloofeefloo]

I agree with the above where it is legal to do so.

What would folks recommend for a landlord in a region in which this discrimination is not legal? (Just in case tips for that are needed in this situation.)

[Lmoot]

Since you live on the premises, and only less than four units, then you have much more recourse  to deny renting to someone. You can even tell them the truth. After a background check, we don't think this will be a good fit.

[calimom]

Have they given you any money yet? If not, maybe tell them "you need to complete a little business first, just a formality" and have them fill out a credit report? Chances are they have a low credit score and you can deny them that way.

[tralfamadorian]

I agree with the above where it is legal to do so.

What would folks recommend for a landlord in a region in which this discrimination is not legal? (Just in case tips for that are needed in this situation.)

Find another reason to reject the application. This is what landlords do when people come with their three pit bull emotional support animals. There's always something else. For example, the OP's applicants have no landlord references except for a parent. So he could deny saying insufficient landlord references since a relative is bias. 

[joonifloofeefloo]

^ That's a good one!

[Another Reader]

How so, Another Reader?

The point is to circumvent the issue one is not allowed to be discriminating around, regardless of the validity of concerns, and to point to an issue unrelated to the criminal activity.

There are other issues with this (where I live), but I don't see being sued for discrimination being one.

Been a number of suits over the years over tactics like this, especially in markets like SF where housing is a big issue.  HUD is more than happy to get involved in these cases.

Set your standards so you have specific criteria for credit score and for what constitutes a potentially dangerous person.  When you turn down the child rapist, have those recidivism statistics on file as well as the arrest and conviction record of the individual if he did not get knocked out by credit score.  Be able to show you applied the same standards to everyone that applied.  That will make your attorney's job a lot easier.

[Cwadda]

it felt wrong to take $30-50 from every interested applicant. (Remember, I said I was dumb.)

You don't need to pocket the money. You only need an application deposit. If they are not chosen to move forward, you just refund the money. I also find it unethical to pocket people's money if you don't run their background/credit check.

Btw, you're safe. No obligation to rent to them on a verbal agreement. Has to be the lease.

Double check wth your state laws, but I'm pretty sure criminals are not a protected class. You can pay $20 for a background check so you have written evidence that there IS a criminal record there.

[joonifloofeefloo]

Been a number of suits over the years over tactics like this, especially in markets like SF where housing is a big issue.

We don't have the HUD, but this is one of the "other" issues I referred to as being relevant for my region. i.e., In my region, the vacancy rate is such that this family will still not have a place after two months, so would be reapplying after the "uninhabitable" break. But in a place where rentals are abundant, they will have moved on.

[hoping2retire35]

"I am sorry, at the time we did not know you had a history with drugs. We live in the other half of the unit and are uncomfortable with this. Best of luck." nothing else, maybe "yeah, sorry" "yeah, I know", "yep" "ok, hope it works out."

3 units or less and you live on site; you are fine.

[cchrissyy]

also for next time, instead of collecting background check $ yourself, use this service
https://biggerpockets.mysmartmove.com/SmartMove/login.page
the person pays directly online

[sequoia]

it felt wrong to take $30-50 from every interested applicant. (Remember, I said I was dumb.)

You don't need to pocket the money. You only need an application deposit. If they are not chosen to move forward, you just refund the money. I also find it unethical to pocket people's money if you don't run their background/credit check.

Btw, you're safe. No obligation to rent to them on a verbal agreement. Has to be the lease.

Double check wth your state laws, but I'm pretty sure criminals are not a protected class. You can pay $20 for a background check so you have written evidence that there IS a criminal record there.

I believe if you have verbal agreement, you can just cancel. The other guy may not be happy about it, but since it is not a signed lease, nothing he can do.

Before I get into what happened, please know that I recognize—and am embarrassed by—my naïveté/stupidity.

No need to be embarrassed. We are all here learning and sharing info! I do appreciate your post. For sure, now I know what not to do!

[SillyPutty]

Thanks for all your advice—much appreciated! We retracted our offer and they took it surprisingly well. We've decided to pull the unit for a month or so and do some work: new electrical, smoke alarms, floors, etc. When we advertise again, we'll most certainly be running credit and background checks.

Hopefully on the next go-round we'll get fewer criminals!

(Seriously, there were a ton. Almost every family who applied had a father with 5+ arrests, which we found online.)

[Lmoot]

Maybe after the updates, you can invest a little in cosmetic updates to raise the rent. Usually a higher amount will attract more variety. Unless of course the area that property is in will not support the cosmetic updates.

[Another Reader]

The general rule in rentals is if you are attracting the wrong sort of tenants, your asking rent is too high.  Bad tenants expect to pay higher rents for rentals that are not as well maintained.  They don't care, because they won't maintain the property either.  At some point they just aren't going to pay you anyway.  As long as your location does not attract only low quality renters, either make improvements that attract better quality tenants, or lower the rent.

When you deny an applicant, inform them of the legally permissible reason for rejecting the application.  That should stop any planned discrimination lawsuit.

[joonifloofeefloo]

Great that it's done and sorted, SillyPutty89!

Landlording can be tricky and stressful. With three of my tenants, everything checked out perfectly...and then they brought their friends over, oy! Everything resolved nicely in the end, but I sure understand the stress!

[Cwadda]

Thanks for all your advice—much appreciated! We retracted our offer and they took it surprisingly well. We've decided to pull the unit for a month or so and do some work: new electrical, smoke alarms, floors, etc. When we advertise again, we'll most certainly be running credit and background checks.

Hopefully on the next go-round we'll get fewer criminals!

(Seriously, there were a ton. Almost every family who applied had a father with 5+ arrests, which we found online.)

Good decision. Updating a house is always a good way to attract better tenants. I did that, furnished my units, and took great pictures.

I also recommend advertising WELL in advance. Like 6 weeks out. Statistics show that the highest quality tenants look for apartments very early on. I've found this to be the same case. The last tenant I signed I agreed to keep the apartment empty for her for an entire month. She was just that good.

[tralfamadorian]

Good decision. Updating a house is always a good way to attract better tenants. I did that, furnished my units, and took great pictures.

I also recommend advertising WELL in advance. Like 6 weeks out. Statistics show that the highest quality tenants look for apartments very early on. I've found this to be the same case. The last tenant I signed I agreed to keep the apartment empty for her for an entire month. She was just that good.

+1 

Start advertising again now for a future move-in date.  Good tenants have given their 6-8 week notice that they are leaving their previous rental and will want to line up their new one.  Unqualified tenants will want to move in immediately because 1) they're being evicted and want you to approve them before this information hits their background check, 2) they've been denied for every other place they applied at, and/or 3) they do not have the money for a security deposit so they are hoping that they will be able to get their security deposit from their previous rental on move-out day then turn around and give it to you the same day. 

Also, make sure you are pre-screening people.  When someone says they are interested, direct them to your online portal, whatever that is, that has additional pictures, application criteria and the date/time of your next open house.  Many people who do not qualify will weed themselves out.  I use a third party for background and credit checks that the applicant pays directly (cozy.co).  There should be no guilt if you lay out for them your requirements; if they choose to apply anyway if they don't qualify, then that's on them. 

[Lmoot]

The general rule in rentals is if you are attracting the wrong sort of tenants, your asking rent is too high.  Bad tenants expect to pay higher rents for rentals that are not as well maintained.  They don't care, because they won't maintain the property either.  At some point they just aren't going to pay you anyway.  As long as your location does not attract only low quality renters, either make improvements that attract better quality tenants, or lower the rent.

When you deny an applicant, inform them of the legally permissible reason for rejecting the application.  That should stop any planned discrimination lawsuit.

That makes sense actually.

[cchrissyy]

before you show it again, check out the advice here

https://forum.mrmoneymustache.com/real-estate-and-landlording/first-time-finding-a-tenant-cl-frustrations/msg1588266/#msg1588266

[rothwem]

Since you live on the premises, and only less than four units, then you have much more recourse  to deny renting to someone. You can even tell them the truth. After a background check, we don't think this will be a good fit.

Careful with that.  I've heard all kinds of advice about your rights as an owner-occupied landlord and I haven't found anything concrete, and I think it varies state by state.

[clarkfan1979]

I like applicants to fill out their free credit report at annualcreditreport.com

[Aimza]

I pre-screen all applicants over the phone before scheduling any viewings. All adult residents must have 650+ credit score, make 3.5x monthly rent, background and credit check done themselves through cozy.co (only if applicant has passed my phone screening and met me in person). Need to meet all family members and pets.

I also have a long detailed lease that they are required to sign, must complete W-9 to protect the security deposit in an escrow account.

These requirements weed out most losers before they even contact me through my ads. Make sure to do a written move-in checklist with the new tenants to make the move-out checklist easy to complete. Take thorough pictures and videos of every detail in the apartment before renting it out.

Good luck!

[joonifloofeefloo]

Wow... At 3.5x, here you wouldn't be weeding out most "losers", you'd be weeding out most humans!

[sol]

Bad tenants expect to pay higher rents for rentals that are not as well maintained.

I'll rent to anybody, for the right price.  Of course, I don't live on-site with my rentals, either, so maybe it's not a fair comparison.

We've never had an applicant fail a criminal background check, but our SFRs rent in the neighborhood of $2k/month.  I suspect that people who can afford to pay $24k/year to rent a place have their shit together well enough to have avoided criminal conviction.  We've certainly had people fail the credit/income test, though.  It boggles me that anyone who earns $35k/year would want to spend $24k of that on rent.  Maybe that's how they ended up with credit trouble in the first place.

Wow... At 3.5x, here you wouldn't be weeding out most "losers", you'd be weeding out most humans!

That's only a 28% cost/income ratio, which is the same standard banks use for making lending decisions.  Seems reasonable to me.  I want tenants who can afford to pay me.

[Cwadda]

Wow... At 3.5x, here you wouldn't be weeding out most "losers", you'd be weeding out most humans!

I get this comment a lot when I advertise a 3x monthly rent requirement. I require this for two reasons:
1) To protect the landlord against a missed mortgage payment
2) 3x is an HUD recommendation. This protects the tenant, allowing him/her to pay all of the bills and NOT get evicted.

For clarification, this number is split if there are multiple working adults on the lease. For my apartment renting $1150/month it'd require 2 people making working full time at $11/hour. It's very affordable.

[tralfamadorian]

I require a 700+ credit score and 3.5x rent for all except full time students with co-signers.  My rentals are all A/B houses in A/A- locations with rent that is slightly below market.  Knock on wood but so far the houses have been easy to fill with model tenants.

[joonifloofeefloo]

That's only a 28% cost/income ratio, which is the same standard banks use for making lending decisions.  Seems reasonable to me.  I want tenants who can afford to pay me.

It's certainly very reasonable, I agree. But where I live, rents are so high that many people are spending 50-70% of their income on housing (rent or mortgage +++). They're still reliable, trustworthy, organized, paying. They prioritize shelter costs, and go super lean on everything else...because they have to. If everyone was setting the 3.5x idea, many more reliable, conscientious, paying people would be homeless than already are.

Is there a way to consider financial responsibility without restricting to 3.5x?

[tralfamadorian]

Is there a way to consider financial responsibility without restricting to 3.5x?

It doesn't help the renters in the situation but as a landlord I check this when I'm considering a place to invest.  For example, last month I was looking at an area about an hour from me.  The median income is 65k; with my 3.5x requirement then I would want my rental to be max $1.5k to allow half the people in the area to qualify in that regard.  Then I look at whether that $1.5k rent would be sufficient to cover the rental costs + my personal minimum profit level. 

Personally, I think that 50-70% rent to (gross) income is unsustainable.  No matter has responsible a renter is, the numbers do not give them sufficient wiggle room to live comfortably.  At some point, something has to give.  Either the income rise, the rents stagnant or lower and/or the renters move to a lower COL area with a longer commute. 

[joonifloofeefloo]

The median income is 65k; with my 3.5x requirement then I would want my rental to be max $1.5k to allow half the people in the area to qualify in that regard.  Then I look at whether that $1.5k rent would be sufficient...

Smart!!!

Personally, I think that 50-70% rent to (gross) income is unsustainable. No matter has responsible a renter is, the numbers do not give them sufficient wiggle room to live comfortably. At some point, something has to give. Either the income rise, the rents stagnant or lower and/or the renters move to a lower COL area with a longer commute.

All of that is true. It's not sustainable without something else going, and the numbers don't give enough wiggle room to live comfortably. So what people are doing to pay reliably is people go lean in all the other areas. No car, eat at home, no child care, etc. Shelter is the big commitment. This is the new norm in many areas now. I'd hate to see the responsible people denied shelter regardless of their prioritizing.

[Bobberth]

FYI, since the OP is owner occupying this duplex, they are exempt from Federal Fair Housing Laws but could be held to same or other standards by state laws.

[bacchi]

FYI, since the OP is owner occupying this duplex, they are exempt from Federal Fair Housing Laws but could be held to same or other standards by state laws.

Aka the "Mrs. Murphy" exemption in the FHA.

[powskier]

They haven't signed a lease so just say you decided not to rent to them, sorry, have a nice day.

[Seadog]

The general rule in rentals is if you are attracting the wrong sort of tenants, your asking rent is too high.  Bad tenants expect to pay higher rents for rentals that are not as well maintained.  They don't care, because they won't maintain the property either.  At some point they just aren't going to pay you anyway.  As long as your location does not attract only low quality renters, either make improvements that attract better quality tenants, or lower the rent.

When you deny an applicant, inform them of the legally permissible reason for rejecting the application.  That should stop any planned discrimination lawsuit.

I require a 700+ credit score and 3.5x rent for all except full time students with co-signers.  My rentals are all A/B houses in A/A- locations with rent is slightly below market.  Knock on wood but so far the houses have been easy to fill with model tenants.

These two posts are a key that a lot of people don't seem to grasp. Simply stated, the higher quality tenant, the lower the rent they'll expect to pay, and fewer hoops they'll expect to jump through, simply because by virtue of their quality, they have options.

You can bleat on all day about equality and that, but that's life and perhaps *the* oldest rule of finance (reward is directly proportional to risk). You want to lend out money only to Triple-A countries? Be happy with your 2%. Not good enough? Then open a payday loan shop, deal with dregs who eventually wont pay, and spin the wheel at your chance to collect 60%.