Several of our investor friends have been debating on a question back and forth for several weeks.  Opinions have varied widely as always, and as is typical have been vehemently expressed.

The question that has arisen is this – when on tenant screening you come across a tenant with a recent foreclosure, how are you handling them?  Historically in the time window pre-2007, most management companies we’ve interviewed and retained have used a recent foreclosure as grounds to exclude a tenant from occupancy. 

As with many other aspects of the business times are a changing though, as more and more former renters who were enticed by no money down home buyer programs have lost their homes and are returning to the renter pool. 

The Spring 2008 issue of Multifamily Executive has a fairly well balanced and reasoned article on the issue, and it would be worth your time to look over.

The team here at Redfish Emerging Markets agrees with most of the principles in the article, particularly with the admonition that property managers should be thoughtful and consistent in their approach to vetting prospective tenants with a foreclosure.   While there very likely is some aspect of increased risk with these tenants, it’s most likely possible to reasonably mitigate that increased risk with some thoughtful action.

Here’s a set of concepts that we think make sense in looking at the issue.  First of all, it’s important to understand there indeed will be a larger pool than ever of former recent home owners returning to the rental pool, and some will have a foreclosure on their record.  We’d consider marketing to that group in high foreclosure markets, with a careful screen of the remainder of the applicant’s credit history – if the remainder of their credit is intact (and other screens are “go”), we’d likely pursue that tenant. 

The group of investors we’d recently been corresponding with had agreed (as do the authors of the article mentioned above) that requiring an increased deposit, staggering lease terms, and extra diligent screening make great sense here. 

There’s no question however than many experts, managers, and owners feel that the additional risk is simply not worth the opportunity. 

Think about the issue and your approach now – if you have tenants the issue will come up this year if it hasn’t already……

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