Avoiding Fair Housing Complaints and Lawsuits

Federal and state antidiscrimination laws limit what you can say and do in the tenant selection process. Because the topic of discrimination is so important we devote a whole chapter to it later in the book (Chapter 5), including legal reasons for refusing to rent to a tenant and how to avoid discrimination in your tenant selection process. You should read Chapter 5 before you run an ad or interview prospective tenants. For now, keep in mind four important points:

1. You are legally free to choose among prospective tenants as long as your decisions are based on legitimate business criteria. You are entitled to reject applicants with bad credit histories, income that you reasonably regard as insufficient to pay the rent, or past behavior— such as property damage or consistent late rent payments—that makes someone a bad risk. A valid occupancy limit that is clearly tied to health and safety or legitimate business needs can also be a legal basis for refusing tenants. It goes without saying that you may legally refuse to rent to someone who can’t come up with the security deposit or meet some other condition of the tenancy.
2. Fair housing laws specify clearly illegal reasons to refuse to rent to a tenant. Federal law prohibits discrimination on the basis of race, religion, national origin, gender, age, familial status, or physical or mental disability (including recovering alcoholics and people with a past drug addiction). Many states and cities also prohibit discrimination based on marital status or sexual orientation.
3. Anybody who deals with prospective tenants must follow fair housing laws. This includes owners, landlords, managers, and real estate agents, and all of their employees. As the property owner, you may be held legally responsible for your employees’ discriminatory statements or conduct, including sexual harassment. ("Your Liability for a Manager’s Acts," in Chapter 6, explains how to protect yourself from your employee’s illegal acts.)
4. Consistency is crucial when dealing with prospective tenants. If you don’t treat all tenants more or less equally—for example, if you arbitrarily set tougher standards for renting to a member of a racial minority—you are violating federal laws and opening yourself up to lawsuits.

How to Advertise Rental Property

You can advertise rental property in many ways:

• putting an "Apartment for Rent" sign in front of the building or in one of the windows
• taking out newspaper ads
• posting flyers on neighborhood bulletin boards, such as the local laundromat or coffee shop
• listing with a local homefinders’ or apartmentfinding service that provides a centralized listing of rental units for a particular geographic area
• posting a notice on Craigslist (see “Craigslist and Online Apartment Listing Services,” below, for details)
• listing with a local real estate broker that handles rentals
• hiring a property management company that will advertise your rentals as part of the management fee
• posting a notice with a university, alumni, or corporate housing office, or
• buying ads in apartment rental guides or magazines.

The kind of advertising that will work best depends on a number of factors, including the characteristics of the particular property (such as rent, size, amenities), its location, your budget, and whether you are in a hurry to rent. Many smaller landlords find that instead of advertising widely and having to screen many potential tenants in an effort to sort the good from the bad, it makes better sense to market their rentals through word of mouth— telling friends, colleagues, neighbors, and current tenants.

To stay out of legal hot water when you advertise, just follow these simple rules.

Describe the rental unit accurately. As a practical matter, you should avoid abbreviations and real estate jargon in your ad. Include basic details, such as:

• rent and deposit
• size—particularly number of bedrooms and baths
• location—either the general neighborhood or street address
• move-in date and term—lease or month-tomonth rental agreement
• special features—such as fenced-in yard, view, washer/dryer, fireplace, remodeled kitchen, furnished, garage parking, doorman, hardwood floors, or wall-to-wall carpeting
• pets (whether you allow or not and any restrictions)
• phone number or email for more details (unless you’re going to show the unit only at an open house and don’t want to take calls), and
• date and time of any open house.

If you have any important rules (legal and nondiscriminatory), such as no pets, put them in your ad. Letting prospective tenants know about your important policies can save you or your manager from talking to a lot of unsuitable people. For example, your ad might say you require credit checks in order to discourage applicants who have a history of paying rent late.

Be sure your ad can’t be construed as discriminatory. The best way to do this is to focus only on the rental property—not on any particular type of tenant. Specifically, ads should never mention sex, race, religion, disability, or age (unless yours is really legally recognized senior citizens housing). And ads should never imply through words, photographs, or illustrations that you prefer to rent to people because of their age, sex, or race. For example, an ad in an environmental or church newsletter that contains a drawing of a recognizably white (or black or Asian) couple with no children might open you to an accusation of discrimination based on race, age, and familial status (prohibiting children).

Quote an honest price in your ad. If a tenant who is otherwise acceptable (has a good credit history and impeccable references and meets all the criteria explained below) shows up promptly and agrees to all the terms set out in your ad, you may violate false advertising laws if you arbitrarily raise the price. This doesn’t mean you are always legally required to rent at your advertised price, however. If a tenant asks for more services or different lease terms that you feel require more rent, it’s fine to bargain and raise your price, as long as your proposed increase doesn’t violate local rent control laws.

Don’t advertise something you don’t have.Some large landlords, management companies, and rental services have advertised units that weren’t really available in order to produce a large number of prospective tenants who could then be directed to higher-priced or inferior units. Such bait-andswitch advertising is clearly illegal under consumer fraud laws, and many property owners have been prosecuted for such practices. So if you advertise a sunny two-bedroom apartment next to a rose garden for $500 a month, make sure that the second bedroom isn’t a closet, the rose garden isn’t a beetleinfested bush, and the $500 isn’t the first week’s rent.

Keep in mind that even if you aren’t prosecuted for breaking fraud laws, your advertising promises can still come back to haunt you. A tenant who is robbed or attacked in what you advertised as a "high-security building" may sue you for medical bills, lost earnings, and pain and suffering.

Renting Property That's Still Occupied

Often, you can wait until the old tenant moves out to show a rental unit to prospective tenants. This gives you the chance to refurbish the unit and avoids problems such as promising the place to a new tenant, only to have the existing tenant not move out on time or leave the place a mess.

To eliminate any gap in rent, however, you may want to show a rental unit while its current tenants are still there. This can create a conflict; in most states, you have a right to show the still-occupied property to prospective tenants, but your current tenants are still entitled to their privacy.

To minimize disturbing your current tenant, follow these guidelines:

• Before implementing your plans to find a new tenant, discuss them with outgoing tenants, so you can be as accommodating as possible.
• Give current tenants as much notice as possible before entering and showing a rental unit to prospective tenants. State law usually requires at least one or two days. (See Chapter 13 for details.)
• Try to limit the number of times you show the unit in a given week, and make sure your current tenants agree to any evening and weekend visits.
• Consider reducing the rent slightly for the existing tenant if showing the unit really will be an imposition.
• If possible, avoid putting a sign on the rental property itself, since this almost guarantees that your existing tenants will be bothered by strangers. Or, if you can’t avoid putting up a sign, make sure any sign clearly warns against disturbing the occupant and includes a telephone number for information. Something on the order of "For Rent: Shown by Appointment Only. Call 555-1700. DO NOT DISTURB OCCUPANTS" should work fine.

If, despite your best efforts to protect their privacy, the current tenants are uncooperative or hostile, wait until they leave before showing the unit. Also, if the current tenant is a complete slob or has damaged the place, you’ll be far better off to apply paint and elbow grease before trying to rerent it.

Dealing With Prospective Tenants and Accepting Rental Applications

It’s good business, as well as a sound way to protect yourself from future legal problems, to carefully screen prospective tenants.

Tell Prospective Tenants Your Basic Requirements and Rules

Whether prospective tenants call about the rental, or just show up at an open house, it’s best to describe all your general requirements—rent, deposits, pet policy, move-in date, maximum number of occupants, and the like—and any special rules and regulations up front. This helps you avoid wasting time showing the unit to someone who simply can’t qualify—for example, someone who can’t come up with the security deposit. Describing your general requirements and rules up front can also help avoid charges of discrimination, which can occur when a member of a racial minority or a single parent is told key facts so late in the process that she jumps to the conclusion that you’ve made up new requirements just to keep her out.

Also be sure to tell prospective tenants about the kind of personal information they’ll be expected to supply on an application, including phone numbers of previous landlords and credit and employment references.

CAUTION: Show the property to and accept applications from everyone who’s interested. Even if, after talking to someone on the phone, you doubt that a particular tenant can qualify, it’s best to politely take all applications. Refusing to take an application may unnecessarily anger a prospective tenant, and may make the applicant more likely to look into the possibility of filing a discrimination complaint. And discriminating against someone simply because you don’t like the sound of their voice on the phone (called linguistic profiling) is also illegal and may result in a discrimination claim. Accept applications from anyone who’s interested and make decisions about who will rent the property later. Be sure to keep copies of all applications. (See discussion of record keeping below.)

Ask Interested Tenants to Complete a Rental Application

To avoid legal problems and choose the best tenant, ask all prospective tenants to fill out a written rental application that includes information on the applicant’s employment, income, and credit; Social Security and driver’s license numbers or other identifying information; past evictions or bankruptcies; and references.

A sample Rental Application is shown below, and a copy is included on the Landlord Forms Library CD.

Before giving prospective tenants a Rental Application, complete the box at the top, filling in the property address, rental term, first month’s rent, and any deposit or credit check fee tenants must pay before moving in. Here are some basic rules for accepting rental applications:

Give an application to all adult applicants. Each prospective tenant—everyone age 18 or older who wants to live in your rental property— should completely fill out a written application. This is true whether you’re renting to a married couple or to unrelated roommates, a complete stranger, or the cousin of your current tenant.

Insist on a completed application. Always make sure that prospective tenants complete the entire Rental Application, including Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN), explained below, driver’s license number, or other identifying information (such as a passport number); current employment; and emergency contacts. You may need this information later to track down a tenant who skips town leaving unpaid rent or abandoned property. Also, you may need the Social Security number or other identifying information, such as a passport, to request an applicant’s credit report.

You may encounter an applicant who does not have an SSN (only citizens or immigrants authorized to work in the United States can obtain one). For example, someone with a student visa will not normally have an SSN. If you categorically refuse to rent to applicants without SSNs, and these applicants happen to be foreign students, you’re courting a fair housing complaint.

Fortunately, nonimmigrant aliens (such as people lawfully in the U.S. who don’t intend to stay here permanently, and even those who are here illegally) can obtain an alternate piece of identification that will suit your needs as well as an SSN. It’s called an Individual Taxpayer Identification Number (ITIN), and is issued by the IRS to people who expect to pay taxes. Most people who are here long enough to apply for an apartment will also be earning income while in the U.S. and will therefore have an ITIN. Consumer reporting agencies and tenant screening companies can use an ITIN to find the information they need to effectively screen an applicant. On the Rental Application, use the line "Other Identifying Information" for an applicant’s ITIN.

CAUTION: Do not consider an ITIN number as proof of legal status in the U.S. The IRS does not research the taxpayer’s immigration status before handing out the number.

Check for a signature and consider getting a separate credit check authorization. Be sure all potential tenants sign the Rental Application, authorizing you to verify the information and references and to run a credit report. (Some employers and others require written authorization before they will talk to you.) You may also want to prepare a separate authorization, signed and dated by the applicant, so that you don’t need to copy the entire application and send it off every time a bank or employer wants proof that the tenant authorized you to verify the information. See the sample Consent to Contact References and Perform Credit Check, below. A copy is included on the Landlord Forms Library CD.

When you talk to prospective tenants, stick to questions on the application. Avoid asking questions omitted from Sample Chapter – Rental Application that may discriminate, specifically any inquiries as to the person’s birthplace, age, religion, marital status or children, physical or mental condition, or arrests that did not result in conviction. (See Chapter 5 for details on antidiscrimination laws.)

[Sample Rental Application] omitted for online sample chapter

Request Proof of Identity and Immigration Status

In these security-sensitive times, many landlords ask prospective tenants to show their driver’s license or other photo identification as a way to verify that the applicant is using his real name.</<br>

Except in California (Civ. Code § 1940.3), and New York City (N.Y.C. Admin. Code § 8-107(5)(a)), you may also ask applicants for proof of identity and eligibility to work under U.S. immigration laws, such as a passport or naturalization certificate, using Form I-9 ( Employment Eligibility Verification) of the U.S. Citizenship and Immigration Services, or USCIS (a bureau of the U.S. Department of Homeland Security). This form (and instructions for completing it) are available from the USCIS website at http:// uscis.gov, or by phone at 800-375-5283. Remember that an Individual Taxpayer Identification Number (ITIN) is not proof of legal status in the U.S.—it is merely a way for the IRS to identify a taxpayer.

Some people who have the right to be in the United States, such as some students and other temporary visa holders, may not have the right to work, which is the focus of the I-9 form. To confirm their right to be in the U.S., ask for a USCIS "receipt" or other document describing their status.

Under federal fair housing laws, you may not selectively ask for such immigration information— that is, you must ask all prospective tenants, not just those you suspect may be in the country illegally. It is illegal to discriminate on the basis of national origin, although you may reject someone on the basis of immigration status, as discussed in Chapter 5.

Cross -Reference For a related discussion on security issues regarding suspected terrorists, see "Landlords and the Fight Against Terrorism" in Chapter 12.

CAUTION: Take your time to evaluate applications. Landlords are often faced with anxious, sometimes desperate people who need a place to live immediately. On a weekend or holiday, especially when it’s impossible to check references, a prospective tenant may tell you a terrific hard-luck story as to why normal credit- and referencechecking rules should be ignored in their case and why they should be allowed to move right in. Don’t believe it. People who have planned so poorly that they will literally have to sleep in the street if they don’t rent your place that day are likely to come up with similar emergencies when it comes time to pay the rent. Taking the time to screen out bad tenants will save you lots of problems later on.

Never, never let anyone stay in your property on a temporary basis. Even if you haven’t signed a rental agreement or accepted rent, you give someone the legally protected status of a tenant by giving that person a key or allowing him or her to move in as much as a toothbrush. Then, if the person won’t leave voluntarily, you will have to file an eviction lawsuit. (Chapter 8 discusses the legal rights of occupants you haven’t approved.)

Checking References, Credit History, and More

If an application looks good, your next step is to follow up thoroughly. The time and money you spend are some of the most cost-effective expenditures you’ll ever make.

CAUTION: Be consistent in your screening. You risk a charge of illegal discrimination if you screen certain categories of applicants more stringently than others. Make it your policy, for example, to always require credit reports; don’t just get a credit report for a single parent or older applicants.

Here are six steps of a very thorough screening process. You should always go through at least the first three to check out the applicant’s previous landlords, income, and employment, and run a credit check.

Check With Previous Landlords and Other References

Always call current and previous landlords or managers for references—even if you have a written letter of reference from a previous landlord. (A prior landlord may be a better source of information than a current one, since a past landlord has no motive to give a falsely glowing report on a troublemaker.) It’s worth the cost of a long-distance phone call to weed out a tenant who may cause problems down the road. Also call previous employers and personal references listed on the application.

To organize the information you gather from these calls, use the Tenant References form, which lists key questions to ask previous landlords, managers, and other references. A sample is shown below, and a copy is included on the Landlord Forms Library CD.

Tip: Check out pets, too. If the prospective tenant has a dog or cat, be sure to ask previous landlords if the pet caused any damage or problems for other tenants or neighbors. It’s also a good idea to meet the dog or cat, so you can make sure that it’s well-groomed and well-behaved, before you make a final decision. You must, however, accommodate a mentally or physically disabled applicant whose pet serves as a support animal—no matter how mangy-looking the pet might be. For more information on renting to tenants with pets, see Chapter 2, Clause 14.

Be sure to take notes of all your conversations and keep them on file. You may note your reasons for refusing an individual on the Tenant References form—for example, negative credit information, insufficient income, or your inability to verify information. You’ll want to record this information so that you can survive a fair housing challenge if a disappointed applicant files a discrimination complaint against you.

Occasionally, you may encounter a former landlord who is unwilling to provide key information. This reluctance may have nothing to do with the prospective tenant, but instead reflects an exaggerated fear of lawsuits. And as landlords learn that their negative remarks about former tenants can be disclosed to rejected applicants if they request it, (see "Choosing—And Rejecting—an Applicant," below), one can expect that they will become even more circumspect. But if a former landlord seems hesitant to talk, an approach that often works is to try to keep the person on the line long enough to verify the dates of the applicant’s tenancy. If you get minimal cooperation, you might say something like this: "I assume your reluctance to talk about Julie has to do with one or more negative things that occurred while she was your tenant." If the former landlord doesn’t say anything, you have all the answer you need. If she says instead,"No, I don’t talk about any former tenants—actually, Julie was fairly decent," you have broken the ice and can probably follow up with a few general questions.

Verify Income and Employment

Obviously, you want to make sure that all tenants have the income to pay the rent each month. Call the prospective tenant’s employer to verify income and length of employment. Make notes on the Tenant References form, discussed above.

Before providing this information, some employers require written authorization from the employee. You will need to mail or fax them a signed copy of the release included at the bottom of the Rental Application form or the separate Consent to Contact References and Perform Credit Check form shown above. If for any reason you question the income information you get by telephone—for example, you suspect a buddy of the applicant is exaggerating on his behalf—you may also ask applicants for copies of recent paycheck stubs.

It’s also reasonable to require documentation of other sources of income, such as Social Security, disability, workers’ compensation, public assistance, child support, or alimony. To evaluate the financial resources of a self-employed person or someone who’s not employed, ask for copies of recent tax returns or bank statements.

How much income is enough? Think twice before renting to someone if the rent will take more than one-third of their income, especially if they have a lot of debts.

Obtain a Credit Report

Private credit reporting agencies collect and sell credit files and other information about consumers. Many landlords find it essential to check a prospective tenant’s credit history with at least one credit reporting agency to see how responsible the person is managing money. Jot your findings down on the Tenant References form.

TIP: Get the tenant’s consent to run a credit report. Because many people think that you must have their written consent before pulling a credit report to evaluate a prospective tenant, we have included it in our consent forms (at the end of the Rental Application and in the separate Consent to Contact References and Perform Credit Check form). But there’s another reason for doing this: A written consent will help you if, later, when the applicant is a tenant (or an ex-tenant), you decide that you need an updated credit report. For example, you may want to consult a current report in order to help you decide whether to sue a tenant who has skipped out and owes rent. Without a broadly written consent, your use of a credit report at that time might be illegal. (FTC “Long” Opinion Letter, July 7, 2000.)

How to Get a Credit Report

A credit report contains a gold mine of information for a prospective landlord. You can find out, for example, if a particular person has ever filed for bankruptcy or has been:

• late or delinquent in paying rent or bills, including student or car loans
• convicted of a crime, or, in many states, even arrested
• evicted (your legal right to get information on evictions, however, may vary among states)
• involved in another type of lawsuit such as a personal injury claim, or
• financially active enough to establish a credit history.

Depending on the type of report you order (the offerings vary according to the agency you deal with), you may also get an applicant’s credit, or “FICO” score. This number, ranging from 320 to 820, purports to indicate the risk that an individual will default on payments. High credit scores indicate less risk. Generally, any score above 650 is considered a medium risk or less. Don’t put too much value in a high credit score, since this number does not reflect the many other good-tenant characteristics (such as ability to get along with neighbors and take good care of your property) that are very important.

Information covers the past seven to ten years. To run a credit check, you’ll need a prospective tenant’s name, address, and Social Security number or ITIN (Individual Taxpayer Identification Number.) Three credit bureaus have cornered the market on credit reports:

• Equifax (www.equifax.com)
• TransUnion (www.tuc.com), and
• Experian (www.experian.com).

You cannot order a credit report directly from the big three bureaus. Instead, you’ll need to work through a credit reporting agency or tenant screening service (type “tenant screening” into your browser’s search box). Look for a company that operates in your area, has been in business for a while, and provides you with a sample report that’s clear and informative. You can also find tenant-screening companies in the Yellow Pages under “Credit Reporting Agencies.” Your state or local apartment association may also offer credit reporting services. With credit reporting agencies, you can often obtain a credit report the same day it’s requested. Fees depend on how many reports you order each month.

[Sample Tenant References Form] omitted for online sample chapter

[Sample California Application Screening Fee Receipt] omitted for online sample chapter

If you do not rent to someone because of negative information in a credit report, or you charge someone a higher rent because of such information, you must give the prospective tenant the name and address of the agency that reported the negative information. This is a requirement of the federal Fair Credit Reporting Act. (15 U.S. Code §§ 1681 and following.) You must also tell the person that he has a right to obtain a copy of the file from the agency that reported the negative information, by requesting it within 60 days of being told that your rejection was based on the individual’s credit report.

Tenants who are applying for more than one rental are understandably dismayed at the prospect of paying each landlord to pull the same credit report. They may obtain their own report, make copies, and ask you to accept their copy. Federal law does not require you to accept an applicant’s copy—that is, you may require applicants to pay a credit check fee for you to run a new report. Wisconsin is an exception: State law in Wisconsin forbids landlords from charging for a credit report if, before the landlord asks for a report, the applicant offers one from a consumer reporting agency and the report is less than 30 days old. (Wis. Adm. Code ATCP 134.05(4)(b) (2004.))

Credit Check Fees

It’s legal in most states to charge prospective tenants a fee for the cost of the credit report itself and your time and trouble. Any credit check fee should be reasonably related to the cost of the credit check —$30 to $50 is common. California sets a maximum screening fee and requires landlords to provide an itemized receipt when accepting a credit check fee. See “California Law on Application Screening Fees and Credit Reports,” above, for details.

Some landlords don’t charge credit check fees, preferring to absorb the cost as they would any other cost of business. For low-end units, charging an extra fee can be a barrier to getting tenants in the first place, and a tenant who pays such a fee but is later rejected is likely to be annoyed and possibly more apt to try to concoct a discriminatory reason for the denial.

The Rental Application form in this book informs prospective tenants of your credit check fee. Be sure prospective tenants know the purpose of a credit check fee and understand that this fee is not a holding deposit and does not guarantee the rental unit. (We discuss holding deposits below.)

Also, if you expect a large number of applicants, you’d be wise not to accept fees from everyone. Instead, read over the applications first and do a credit check only on those who are genuine contenders (for example, exclude and reject those whose income doesn’t reach your minimum rent-toincome ratio). That way, you won’t waste your time (and prospective tenants’ money) collecting fees from unqualified applicants.

CAUTION: It is illegal to charge a credit check fee if you do not use it for the stated purpose and pocket it instead. Return any credit check fees you don’t use for that purpose.

Investigative or Background Reports

Some credit reporting companies and "tenant screening companies" also gather and sell background reports about a person’s character, general reputation, personal characteristics, or mode of living. If you order a background check on a prospective tenant, it will be considered an "investigative consumer report" under federal law (the Fair Credit Reporting Act, 15 U.S. Code §§ 1681 and following, as amended by the Fair and Accurate Credit Transactions Act of 2003) and you must tell the applicant, within three days of requesting the report, that the report may be made and that it will concern his character, reputation, personal characteristics, and criminal history. You must also tell the applicant that more information about the nature and scope of the report will be provided upon request; and, if asked, you must provide this information within five days.

If you turn down the applicant based wholly or in part on information in the report, you must tell the applicant that the application was denied based on information in the report, and give the applicant the credit or tenant screening agency’s name and address.

What You’re Looking For

In general, be leery of applicants with lots of debts —so that their monthly payments plus the rent obligation exceed 40% of their income. Also, look at the person’s bill-paying habits, and, of course, pay attention to lawsuits and evictions.

Sometimes, your only choice is to rent to someone with poor or fair credit. If that’s your situation, you might have the following requirements:

• good references from previous landlords and employers
• a creditworthy cosigner to cosign the lease (Chapter 2 includes a cosigner agreement)
• a good-sized deposit, as much as you can collect under state law (see Chapter 4), and
• proof of steps taken to improve credit—for example, enrollment in a debt counseling group.

If the person has no credit history—for example, a student or recent graduate—you may reject them or consider requiring a cosigner before agreeing to rent to them.

CAUTION: Handle credit reports carefully. Federal law requires you to keep only needed information, and to discard the rest. See "How to Handle Credit Reports," in Chapter 7 for precise information

Verify Bank Account Information

If an individual’s credit history raises questions about financial stability, you may want to double-check the bank accounts listed on the rental application. If so, you’ll probably need an authorization form such as the one included at the bottom of the Rental Application, or the separate Consent to Contact References and Perform Credit Check (discussed above). Banks differ as to the type of information they will provide over the phone. Generally, banks will at most only confirm that an individual has an account there and that it is in good standing.

CAUTION: Be wary of an applicant who has no checking or savings account. Tenants who offer to pay cash or with a money order should be viewed with extreme caution. Perhaps the individual bounced so many checks that the bank dropped the account or the income comes from an illegitimate source—such as drug dealing.

Review Court Records

If your prospective tenant has lived in the area, you may want to review local court records to see if collection or eviction lawsuits have ever been filed against them. Checking court records may seem like overkill, since some of this information may be available on credit reports, but it’s an invaluable tool and is not a violation of antidiscrimination laws as long as you check the records of every applicant who reaches this stage of your screening process. Because court records are kept for many years, this kind of information can supplement references from recent landlords. Call the local court that handles eviction cases for details, including the cost of checking court records. In most places, it runs about $50.

Use Megan’s Law to Check State Databases of Sexual Offenders

Not surprisingly, most landlords do not want tenants with criminal records, particularly convictions for violent crimes or crimes against children. Checking a prospective tenant’s credit report, as we recommend above, is one way to find out about a person’s criminal history. Self-reporting is another: Rental applications, such as the one in this book, typically ask whether the prospective tenant has ever been convicted of a crime, and, if so, to provide details.

"Megan’s Law" may be able to assist you in confirming that some of the information provided in the rental application and revealed in the credit report is complete and correct (but see "Restricting Your Use of Megan’s Law," below). Named after a young girl who was killed by a convicted child molester who lived in her neighborhood, this 1996 federal crime prevention law charged the FBI with keeping a nationwide database of persons convicted of sexual offenses against minors and violent sexual offenses against anyone. (42 U.S. Code §§ 14701 and following.) Every state has its own version of Megan’s Law. These laws typically require certain convicted sexual offenders to register with local law enforcement officials, who keep a database on their whereabouts.

How Megan’s Law Works

Unfortunately, the states are not consistent when it comes to using and distributing the database information. Notification procedures and the public’s access rights vary widely:

• Widespread notification/easy access. A few states, such as Arizona and Texas, are "wide open"—they permit local law enforcement to automatically notify neighbors of the presence of sexual offenders on the database, by way of either letters, flyers, or notices published in local newspapers. Alternately, some states, such as California and Colorado, make the information available to anyone who chooses to access the database.
• Selected notification/limited access. Other states, including Connecticut and Florida, take a more restrictive approach, allowing law enforcement to release the information only if they deem it necessary. Or, states such as Vermont permit public access only to persons who demonstrate a legitimate need to know the names of convicted sexual offenders.
• Restricted notification/narrow access. Finally, many states, such as Michigan, Minnesota, and Ohio, are quite restrictive, permitting notification only to certain individuals or officials, and allowing access only to them.

For information on your state’s Megan’s Law and restrictions on your use of information derived from a Megan’s Law database, contact your local law enforcement agency. To find out how to access your state’s sex offender registry, you can also contact the Parents for Megan’s Law (PFML) hotline at 888-ASKPFML or check www.parentsformeganslaw.com.

The Limitations of Megan’s Law Searching

The early promise of Megan’s Law databases was ambitious. Landlords expected that they could quickly find accurate information on any person, and freely use it to reject an applicant with an unsavory past. Several years’ experience with the databases, and legal challenges to their use, have resulted in landlords’ taking a much more cautious approach to running a Megan’s Law search. Here are the issues:

• Accuracy. Megan’s Law databases are notoriously inaccurate, the result of incomplete or old data or entries that mistake one person for another. You can’t assume your search will be worth much.
• Relevance. The criminal offense you discover on the database may not be relevant to whether this applicant is likely to be a threat to you, your tenants, or your property. For example, in some states consensual intercourse between minors (statutory rape) is an offense for which a person must register.
• Misleading negatives. Many convictions result from plea bargains. For example, someone charged with a registerable offense may end up with an assault conviction—perhaps because the prosecutor couldn’t prove the charge, or because a chief witness disappeared. You’ll never know whether the assault conviction was originally charged as such, or began as a far more serious charge and ended up less so because the defendant lucked out. In other words, a relatively harmless-looking conviction that would not bother you may in fact mask a more serious incident.
• Expectations you create in other tenants. If you do a database check, you should let tenants know that you’re doing so (this will allow applicants to opt out of the application process, and may spare you a charge of invading their privacy). Residents will assume that you have not rented to anyone on a Megan’s Law list. They may relax their guard— for example, a family may assume it’s okay for their children to be home alone after school. Suppose you’ve rented to someone who should have been on the list but mistakenly wasn’t, and he assaults one of the children. The family could argue in court that they relied on your implied promise that the building was safe, and that you bear some of the responsibility since you rented to someone who posed a risk of harm.
• Loss of other tenants. Ironically, if you decide that a past offense was not relevant, and rent to this applicant, you may have to disclose his past (to save you from the fate described just above). Other tenants won’t share your complacency, and will leave. Before you know it, your only tenant will be the one you least want.
• Lawsuit waiting to happen. Finally, you may be the unlucky landlord who’s targeted by a lawyer armed with many legal theories of why the Megan’s Law registration and search structure is unconstitutional. These arguments (due process, equal protection, privacy, and the like) are not far-fetched. They’ve been made already, and at some point, a judge is going to agree with one of these legal theories.
• Illegal in some states. Finally, in some states and cities you simply cannot use information derived from a Megan’s Law database to discriminate. These laws provide for stiff penalties if you do. (See "Restricting Your Use of Megan’s Law," below.)

Choosing And Rejecting An Applicant

After you’ve collected applications and done some screening, you can start sifting through the applicants. Start by eliminating the worst risks: people with negative references from previous landlords, a history of nonpayment of rent, or poor credit or recent and numerous evictions. Chapter 5 discusses legal reasons for refusing to rent to a tenant, including convictions for criminal offenses. You’ll want to arrange and preserve your information for two reasons: so that you can survive a fair housing challenge, if a disappointed applicant files a complaint; and so that you can comply with your legal duties to divulge your reasons for rejecting an applicant.

What Information Should You Keep on Rejected Applicants?

Be sure to note your reasons for rejection—such as poor credit history, pets (if you don’t accept pets), or a negative reference from a previous landlord—on the Tenant References form or other paper so that you have a paper trail if an applicant accuses you of illegal discrimination. You want to be able to back up your reason for rejecting the person. Keep organized files of applications, credit reports, and other materials and notes on prospective tenants for at least three years after you rent a particular unit. Keep in mind that if a rejected applicant files a complaint with a fair housing agency or files a lawsuit, your file will be made available to the applicant’s lawyers. Knowing that, choose your words carefully, avoiding the obvious (slurs and exaggerations) and being scrupulously truthful.

How to Reject an Applicant

The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, requires you to give certain information to applicants whom you reject as the result of a report from a credit reporting agency (credit bureau) or from a tenant screening or reference service. (15 U.S. Code §§ 1681 and following.) These notices are known as "adverse action reports." The federal requirements do not apply if your decision is based on information that the applicant furnished or that you or an employee learned on your own.

If you do not rent to someone because of negative information contained in the credit report (even if other factors also played a part in your decision) or due to an insufficient credit report, you must give the applicant the name and address of the agency that provided the credit report. Tell applicants they have a right to obtain a copy of the file from the agency that reported the negative information, by requesting it within the next 60 days or by asking within one year of having asked for their last free report. You must also tell rejected applicants that the credit reporting agency did not make the decision to reject them and cannot explain the reason for the rejection. Finally, tell applicants that they can dispute the accuracy of their credit report and add their own consumer statement to their report.

Use the Notice of Denial Based on Credit Report or Other Information form for this purpose. A sample is shown below and a copy is included on the Landlord Forms Library CD.

Assuming you choose the best-qualified candidate (based on income, credit history, and references), you have no legal problem. But what if you have a number of more or less equally qualified applicants? The best response is to use an objective tie-breaker: Give the nod to the person who applied first. If you cannot determine who applied first, strive to find some aspect of one applicant’s credit history or references that objectively establishes that person as the best applicant. Be extra careful not to always select a person of the same age, sex, or ethnicity. For example, if you are a larger landlord who is frequently faced with tough choices and who always avoids an equally qualified minority or disabled applicant, you are exposing yourself to charges of discrimination.

[Notice of Denial Based on Credit Report or Other Information] omitted for online sample chapter

Conditional Acceptances

You may want to make an offer to an applicant but condition that offer on the applicant paying more rent or a higher security deposit (one that’s within any legal limits, of course, as explained in Chapter 4), supplying a cosigner, or agreeing to a different rental term than you originally advertised. If your decision to impose the condition resulted from information you gained from a credit report or a report from a tenant screening service, you have to accompany the offer with an adverse action letter (described above). Use the Notice of Conditional Acceptance Based on Credit Report or Other Information, shown below. A copy is included on the Landlord Forms Library CD.

Finder's Fees and Holding Deposits

Almost every landlord requires tenants to give a substantial security deposit. The laws concerning how much can be charged and when deposits must be returned are discussed in Chapters 4 and 15. Here we discuss some other fees and deposits.

Finder’s Fees

You may legitimately charge a prospective tenant for the cost of performing a credit check. Less legitimate, however, is the practice of some landlords, especially in cities with a tight rental market, of collecting a nonrefundable "finder’s fee" or "move-in fee" just for renting the place to a tenant. Whether it’s a flat fee or a percentage of the rent, we recommend against finder’s fees. First, a finder’s fee may be illegal in some cities and states (particularly those with rent control). Second, it’s just a way of squeezing a little more money out of the tenant—and tenants will resent it. If you think the unit is worth more, raise the price.

Holding Deposits

If you make a deal with a tenant but don’t actually sign a lease or rental agreement, you may want a cash deposit to hold the rental unit while you do a credit check or call the tenant’s references. Or, if the tenant needs to borrow money (or wait for a paycheck) to cover the rent and security deposit, you might want a few hundred dollars cash to hold the place. And some tenants may want to reserve a unit while continuing to look for a better one.

Is this a wise course? Accepting a deposit to hold a rental unit open for someone is legal in some states but almost always unwise. Holding deposits do you little or no good from a business point of view, and all too often result in misunderstandings or even legal fights.

EXAMPLE: A landlord, Jim, takes a deposit of several hundred dollars from a prospective tenant, Michael. What exactly is Jim promising Michael in return? To rent him the apartment? To rent Michael the apartment only if his credit checks out to Jim’s satisfaction? To rent to Michael only if he comes up with the rest of the money before Jim rents to someone who offers the first month’s rent and deposit? If Jim and Michael disagree about the answers to any of these questions, it can lead to needless anger and bitterness and result in a small claims court lawsuit alleging breach of contract.

[Notice of Conditional Acceptance Based On Credit Report or Other Information] omitted for online sample chapter

Another prime reason to avoid holding deposits is that the laws of most states are unclear as to what portion of a holding deposit you can keep if a would-be tenant decides not to rent or doesn’t come up with the remaining rent and deposit money, or if the tenant’s credit doesn’t check out to your satisfaction.

In California, for example, the basic rule is that a landlord can keep an amount that bears a "reasonable" relation to the landlord’s costs—for example, for more advertising and for prorated rent during the time the property was held vacant. A landlord who keeps a larger amount may be sued for breach of contract. A few states, including Washington, require landlords to provide a receipt for any holding deposit and a written statement of the conditions under which it is refundable.

If, contrary to our advice, you decide to take a holding deposit, it is essential that both you and your prospective tenant have a clear understanding in writing, including:

• the amount of the holding deposit
• your name and that of the applicant
• the address of the rental property
• the dates you will hold the rental property vacant
• the term of the rental agreement or lease
• conditions for renting the applicant the available unit—for example, satisfactory references and credit history and full payment of first month’s rent and security deposit
• what happens to the holding deposit if the applicant signs the rental agreement or lease— usually, it will be applied to the first month’s rent, and
• amount of the holding deposit you will keep if the applicant doesn’t sign a rental agreement or lease—for example, an amount equal to the prorated daily rent for each day the rental unit was off the market plus a small charge to cover your inconvenience.

A sample Receipt and Holding Deposit Agreement which covers each of these items is shown below, and a copy is included on the Landlord Forms Library CD. You can adapt this form to your own situation.

[Receipt and Holding Deposit Agreement] omitted for online sample chapter

Introduction

Choosing tenants is the most important decision any landlord makes, and to do it well you need a reliable system. Follow the steps in this chapter to maximize your chances of selecting tenants who will pay their rent on time, keep their units in good condition, and not cause you any legal or practical problems later.

Cross-Reference: Before you advertise your property for rent, make a number of basic decisions—including how much rent to charge, whether to offer a fixed-term lease or a month-to-month tenancy, how many tenants can occupy each rental unit, how big a security deposit to require, and whether you’ll allow pets. Making these important decisions should dovetail with writing your lease or rental agreement. (See Chapter 2.)