Three Pentacles, PLLC has been dealing with and detecting tenant fraud for years. However, fraudsters are getting bolder in their attempts to take advantage of unsuspecting landlords. If you are a rental property owner, you need to be aware of red flags and be able to detect rental fraud.

What is the cost of bad tenants?

The goal of rental scammers is to take advantage of landlords and milk them for thousands of dollars in lost rental income.  Their actions are premeditated and ruthlessly executed to ensnare unsuspecting landlords. Once rental scammers get into your property, it is very difficult to get them out. They hide behind landlord-tenant laws and often pose as victims. In addition to lost rental income, legal fees and court costs for eviction, landlords often incur thousands of dollars in property damage and repairs.

How can you protect yourself from rental scams?

The only line of defense is to identify rental scams before you become a victim. By using a comprehensive rental application, requiring copies of supporting documents, checking credit, performing background checks, and verifying all information, you can reduce your risk. At Three Pentacles, PLLC, we have created a tenant screening matrix that allows us to eliminate rental fraud. Creating and posting minimum tenant requirements is the beginning of a tenant screening process that allows you to treat all applicants equally.

Just checking credit history is not enough

At Three Pentacles, PLLC we have taken a page from the consumer landing risk manual and set our minimum FICO score at 661+. It turns out that borrowers with FICO credit scores below 661 are ten times more likely to default on their loans than those above 661.  One of the red flags is when applicants provide you with a ready-made credit history report and insist that you not run their credit history because they don’t want multiple credit inquiries to show up on their credit.

Detecting Fraudulent Documents

Most applicants are honest prospective tenants looking for a place to live. But because of a few bad apples, you need to keep your guard up at all times. In addition to fake credit reports, scammers will provide photo-shopped pay stubs and assume false identities. For example, last year we were hired to take over a property after the landlord himself rented it for $5,000/month to someone who claimed to be a qualified tenant and provided the landlord with a credit report, personal financial statement, and copies of bank statements. Unfortunately, all of the documents were forged.

After I point out the flaws in the documents, it is easy to see that they have been falsified. However, to the untrained eye of the real estate investor who had just spent a few hundred thousand dollars to rehab the subject property, who was in the middle of high-stakes lease negotiations, and who received these documents in person from a con artist who behaved convincingly and drove a nice car; the “deal” looked good. At the time of our engagement, the landlord did not know that the documents he received were fraudulent. But he was able to file an eviction case after his $5,000/month rent payments stopped. The problem was that the tenant had not been served and the eviction process was going nowhere. After taking possession, the tenant installed surveillance cameras outside the property and a security system inside. I have seen this happen before in a receivership where I was the Court Appointed Receiver for a property that was being used for criminal activity.

Resolution

After Three Pentacles, PLLC was hired; we reviewed the documents, we traced the phone numbers used by the tenant to be owned by other people, and we conducted background checks and discovered that the tenant had been released from prison for murder, just prior to renting the subject property.

We learned from the local police department that the police were unable or uninterested in doing anything about falsified financials and bank statements, but they were willing to investigate identity theft.  We contacted the tenant and asked for possession by agreement in exchange for dropping the eviction action and not pressing identity theft charges with the police. The tenant surrendered the property within a few days. There was no damage to the property other than some minor issues and normal wear and tear. Three Pentacles, PLLC was able to resolve all issues and lease the property to a paying tenant. Considering the alternatives, we consider this a good outcome, even though the investor lost all rental income for months before we stepped in. The alternative for the investor was to spend many more months in eviction court, lose far more rental income, deal with a criminal element, and potentially get back his freshly rehabbed property in pieces.

Conclusion

This is not an isolated case. There are other situations I could write about; perhaps I will do so in another article. The lesson here is that rental fraud happens to some landlord somewhere every day. Ordinary landlords “don’t know what they don’t know”. They are sitting ducks and can be easily exploited by scammers if they do not actively protect their rental properties.