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January 4, 2024

The Hidden Costs of Tenant Fraud: Protecting Property Managers and Their Business

Daniel Berlind
CEO

Tenant fraud can be a landlord’s worst nightmare, wreaking havoc on their property, finances, and overall business. Unfortunately, it’s a growing concern that poses significant risks for property managers.

In this article, we will delve into the various costs associated with tenant fraud, how it affects property managers and their businesses, and practical measures that can be taken to prevent it. Buckle up as we explore this crucial topic and equip you with the knowledge to safeguard your properties against tenant fraud.

What is Tenant Fraud?

Tenant fraud, also called rental application fraud, is when a tenant lies on their application to your property. They may use false names and make up details about their income, employment history, or even criminal background. The most common occurrence is falsifying bank statements and pay stubs to meet a property’s income requirements.

The top side effects of tenant fraud include:

  • Evictions and related costs
  • Physical property damage
  • Missing out on good tenants
  • Criminal activity at the property
  • Loss of reputation

Why are people driven to commit fraud, you ask? These are some common reasons:

  • More people are self-employed, resulting in an unreliable income source
  • An increase in online rental applications
  • Better technology = better tools that make it easier to alter documents
  • Compliance rules are making it more challenging to run comprehensive background checks

Tenant fraud is an unfortunate reality that can have severe consequences for property owners and managers. Not only does it lead to unreliable tenants who are more likely to default on rent payments or cause damage to your property, but it can also cost you in other ways.

By the Numbers

Snappy surveyed 100 property managers from across the country to find out what they were experiencing in terms of fraud and evictions.

  • The standard annual eviction rate is 12%
  • The average cost for eviction is around $7,685
  • 41% said that fraudulent applications are “somewhat to extremely common”
  • ⅔ have fallen victim to fraudulent rental applications
  • 59% say fraudulent rental applications are staying the same or are growing
  • 58% say that detecting fraud is “somewhat to extremely challenging.”
  • 50% say it takes too long to do manually

Financial Losses and Property Damage

One of the most immediate and visible costs of tenant fraud is its financial impact on property managers. Fraudulent tenants may engage in non-payment of rent, leaving property managers struggling to cover mortgage payments, maintenance costs, and other expenses.

Moreover, these tenants may cause significant property damage, leading to costly repairs and renovations. The financial impact of dealing with these fraudulent tenants can be devastating – from struggling to make mortgage payments to shelling out for pricey repairs and renovations. It’s like a one-two punch to your wallet that can throw your whole business off balance.

Legal Expenses and Eviction Proceedings

Tenant fraud can sometimes lead to lease violations, subletting without permission, or unauthorized occupants. Addressing these issues can lead to legal expenses, including attorney fees, court costs, and eviction proceedings.

Navigating the legal system to evict fraudulent tenants can be time-consuming, emotionally draining, and result in lost rental income during the process. Property managers may also face reputational damage if disputes become public, potentially deterring future tenants and impacting their business.

Reputational Damage and Tenant Retention

That’s right, rampant tenant fraud doesn’t just cost you money. It can tarnish the reputation of property managers and their properties. Word travels quickly in the rental market, and negative experiences with tenants can lead to a loss of trust among prospective renters. Why would someone choose your property if it’s toting a 1-star average on Yelp?

As a result, you may suffer from extended vacancy periods, decreased tenant retention, and difficulties attracting quality tenants in the future. Maintaining your positive reputation is vital for a property management business’s long-term success and growth.

Increased Operational and Administrative Burden

Your team isn’t going to be thrilled if their workload increases either. Dealing with fraud creates additional administrative work and operational costs for them, souring their disposition and adding to their stress levels.

Property managers will be forced to invest more time and resources in investigating fraudulent activities, pursuing legal actions, and finding new tenants to replace those they lost. These added burdens can strain resources, divert attention from core responsibilities, and hinder the smooth operation of a property management business.

Preventing Tenant Fraud

While there may be hefty costs associated with tenant fraud (general fraud is also costly), you can take several steps to help prevent it and avoid unnecessary risk.

Robust Tenant Screening

By implementing a rigorous tenant screening process, you’re taking a proactive step towards protecting your property management business from scammers and fraudsters. Comprehensive background and credit checks? Check. Employment verification? Check. Rental history verification? Double check. These tools help you identify any potential red flags before you hand over the keys to your property.

Regular Inspections

Grab that magnifying glass and get to work! Conducting regular property inspections helps you discover any unauthorized occupants, lease violations, or signs of fraudulent activity. Proactive monitoring can help address issues promptly and deter fraudulent behavior.

Clear Lease Agreement

Set the record straight from the get-go. Creating a thorough and precise lease agreement that outlines expectations, restrictions, and consequences for fraudulent activities can serve as a deterrent and provide a solid foundation for legal action if necessary.

Enhanced Security Measures

Not only is advanced security a selling point for many renters, but implementing additional security measures can help prevent unauthorized occupants and subletting fraud. Incorporate surveillance systems, key access control, and background checks to help keep your property safe.

Education and Training

Education and training are powerful tools in your efforts to prevent tenant fraud. Empowering property managers and staff increases their ability to identify warning signs and take appropriate action against fraudulent behavior. It’s like giving them superpowers but for property management!

To Sum Up…

Tenant fraud may be a scary prospect, but with the right tools and strategies, property managers can prevent it. By conducting thorough background checks, verifying income and documentation, and using tools like Snappt to detect fraud, you can protect your investment and ensure a positive rental experience for you and your tenants.