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Credit Quality a Mixed Bag: 3 Tips for Securing Rental Tenants

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RISMEDIA, March 3, 2011—Everyone knows that The Great Recession has taken its toll on the housing market. Foreclosures have been at historical highs and we have all heard the personal and devastating stories of displaced homeowners. But there is a corollary in the rental market that gets less attention: Job loss and financial devastation don’t discriminate and renters have been severely impacted by the economic downturn, too. This has led to shifts in renter behavior as well as the delicate supply-demand balance in the rental market.

Rent.com, an eBay company that gives renters a free tool to search tens of thousands of rental listings nationwide, analyzed data from over 450 million searches in 2007 and 2008 to get a before-and-after look at renter behavior relative to the economic downturn (remember the recession officially began in December 2007). Before the recession started, the average number of bedrooms that renters searched for was trending downward steadily over the course of the year, but after the start of the economic meltdown renter search behavior showed a clear reversal of that trend. We hypothesized that renters were either doubling-up or trading up.

To vet out our theories, we looked at trends in the keywords renters use to search for apartments using data from Google and our own internal data. We also conducted interviews with some of our largest customers—the companies that manage rental properties. All evidence pointed to a doubling up trend and, in hindsight, it makes perfect sense. Renters were searching more on terms like, “cheap apartments” and “bad credit apartments” and property managers were telling us that they were seeing increases in vacancy rates due to renters losing their jobs, doubling up with roommates, or moving home with family to weather the storm.

All of this household consolidation took its toll on apartment owners and managers. National vacancy rates soared throughout 2009 and much of 2010, and apartment owners responded by offering greater concessions, decreasing rents and taking on more credit risk. In fact, in Rent.com’s 2009 Annual Property Management Survey, 73% of owners and managers revealed that their vacancy rates were being impacted by the declining creditworthiness of renters. When asked how they were responding to this phenomenon, 43% said that they were actually lowering their credit standards in order to fill vacancies.

In our 2010 Annual Property Management Survey, conducted this past summer, we identified that credit is still a major issue in the rental market. Over half (53%) of property owners and managers shared that the declining credit worthiness of renters was impacting their occupancy. To contend with this issue, 44% of property owners and managers told us that they were reducing security deposits to fill their vacancies, an increase from the 35% of owners and managers in 2009 who were using this tactic.

Today, vacancy rates are stabilizing and improving, but renter credit quality is a mixed bag. According to industry experts, properties are screening about 3% more rental prospects than a year ago and declining fewer renter applications due to credit quality. But while the credit scores of applicants at Class A and B properties (newer properties in nicer neighborhoods with better amenities) are showing improvements, credit scores of applicants at Class C properties (older properties in less desirable areas) are continuing a multi-year decline.

Interestingly, Class C properties are experiencing the largest increase in volume of applicants, as well as the largest effective rent growth. Our guess is that renters who would have previously applied to more expensive Class B properties are likely being financially conservative either because they are insecure about their employment or are newly re-employed and want to shore up their finances after some period of unemployment.

If you are managing rental property and having a hard time finding tenants, here are a few tips that may help you participate more effectively in the rental market recovery:

Collect a larger security deposit. The reality of the market may be that in order to lift occupancy rates, property owners and managers will need to accept renters with lower credit scores than before the economic downturn. To mitigate risk, managers should require larger security deposits because, on average, default rates decline with larger deposits.

Consider renting to people with foreclosures on their record. Those who have a mortgage in foreclosure or who have mortgage payments that are 90 or more days past-due make up 9.2% of apartment applicants, up from 7% just two years ago. At the same, they tend to make good renters who pay their rent on time, and over 70% of them typically “pass” their credit screening.

Reduce the security deposit, but make it non-refundable. Some property owners and managers may feel that in order to remain competitive, they still need to ask for lower security deposits than they would in fatter times. One way to mitigate losses is to make the deposit non-refundable. By doing so, they may actually increase their effective deposits while still remaining competitive and filling vacancies.

Rent.com is the nation’s #1 Internet listing site (ILS) in the rental housing industry, enabling renters to find a residential rental property online using a free robust search tool.

GOT A HOUSE OR CONDO FOR RENT? Fill your vacancy faster on Rent.com. For a flat fee of $49 we guarantee you’ll receive 15 leads in 30 days or we’ll give you another month free! Learn more.

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