Qualifying Prospects

Once a prospect has filled out an application, is time to assess their feasibility as an occupant at the site. This process is called qualifying. Qualifying a residential prospect involves examining household income, references, and credit history. Qualifying a commercial prospect consists of evaluating the business in a number of areas, such as financial strength and stability, reputation, business operations.

Residential
To qualify as a potential resident, a prospect must show ability to pay rent and demonstrate acceptable prior performance as a renter. The property manager’s responsibility to the owner is to maximize net operating income. Failure to ensure that prospective residents will adhere to the lease terms will defeat the owner’s objectives. It is crucial to the success of the apartment property that you establish minimum standards in a resident selection process, the resident selection criteria. Selection criteria should be in writing and applied consistently to all applicants, and should include:

• Minimum rent-to-household income ratio
• Minimum period of employment with current employer
• Satisfactory references from one or more prior landlords
• Satisfactory references regarding credit
• An appropriate ratio of occupants to apartment size
• Minimum age requirement

To assure an applicant’s ability to pay rent, the yearly income should be around three or four times the amount of the rent. A reasonable period of employment is a measure of stability and financial security. Often the requirement is that each applicant must have been employed by the same employer for at least twelve months during the preceding two years. An applicant who has been working with a current employer for less than six months is likely to have worked at least a year for a prior employer. An exception to this might be a prospect whose primary employment is seasonal (e.g., construction) or a young adult who is new to the work force.

Typically, residents are required to have satisfactory references from two previous landlords. Verifying on-time payments and responsible behavior from the applicant’s previous landlord and the one before that should be adequate.

It is also important to check credit references to determine how much debt the prospect is handling. Many individuals are paying off loans or carrying balances on credit cards. Credit bureaus may limit the information due to state and local laws; it is more important to determine the person’s creditworthiness. Most apartment managers use the traditional screening procedures that consist of obtaining credit reports and making phone calls to verify employment history. However, more of the larger apartment owners and managers are using advanced, computerized screening services, typically web-based, that are able to determine whether the applicant should be accepted or declined within a matter of minutes.

Many property managers set limits on the number of occupants in an apartment, usually based on the number of bedrooms. This criterion is aimed at minimizing wear and tear on the apartment and assuring a quality lifestyle for the residents. Before establishing specific limits, it is a good idea to check with local jurisdictions since they may have set maximum occupancy levels. In addition, residents must have attained the age of majority—depending on state law, this may be 18, 19, or 21—before, they can sign a lease.

Commercial
A prospective commercial tenant’s financial strength and stability is assessed by examining financial statements, business history, and credit rating. To start, prospects should be asked to submit a financial statement outlining the income and expenses, gross sales, taxes, and net profit of the business during the most recent year of operation. Loan obligation and other outstanding debt should also be included. Such information should always be considered confidential, and the prospective tenant should be assured of this confidentiality up front. The prospect should also be asked to submit pro forma operating statements, statements of cash flow, and budgets.

An important factor in determining stability is how long the prospect has been in business, both at the present location and at any previous locations. Typically, the longer a business has been in operation, the stronger a tenant it will make. However, newcomers should not be ruled out. Financial success is more important than number of years in business—if a business has generated enormous profits within two years by capturing a new share of the market, it is certainly healthier financially than a business established in the same market for fifteen years, but operating at a steady loss.

Each prospect's creditworthiness has to be verified. In dealing with a small business or a first‑time tenant, the leasing agent should ask for at least two credit references in addition to references from a former landlord. Calls to suppliers or utility companies will reveal how tenants pay their bills and whether they do so on time. Dun & Bradstreet (http://www.dnb.com/) provides comprehensive reports investigating a selected company’s background, financial stability, and business activity. These reports can identify companies that have slow payment experience or are undergoing financial stress, compare the company to others in the same industry, look into the business background of the company's owners, determine how many times a company has moved and where, and review public records to see if any suits have been brought against a the company. Many of these reports and tools are now web-enabled and can be accessed and purchased via the internet.

Key components of the tenant’s business operations should also be evaluated to determine suitability at the site. Such components include personnel, store hours, housekeeping, and for retail tenants: promotion and merchandise presentation, and customer service policies.