Landlords and property managers should conduct comprehensive credit checks on every tenant before signing an agreement. The cost associated with not doing such a simple task is expensive and sometimes irreparable. This is especially true in 2019 with many insurance companies making tenant checks a compulsory precaution for home cover.
To truly understand the cost of not doing comprehensive credit checks on tenants, we look at:
- Insurance obligations and what their new terms on tenant checks mean for landlords and property managers who do not do them.
- A recent case where not obtaining a credit check ended in a major financial loss for an owner.
- As well as describing the difference between a comprehensive credit check versus a limited credit check and how this can affect the information you are provided with.
Understanding all of these aspects is vital to understanding the importance of doing comprehensive credit checks during the tenant selection process. It will also ensure you take the correct precautions to better avoid issues with your tenant in the future, such as:
- Rent arrears and unpaid rent at the end of a tenancy.
- Damage to your property.
- As well as not being entitled to the financial security of insurance cover.
What are my insurance obligations as a landlord in terms of credit checks?
February 2019 saw New Zealand’s leading insurance provider IAG update their home policy cover. These changes included setting new landlord obligations, outlining tenant checks as a now compulsory requirement for every prospective adult tenant.
Recognising credit checks as a small action that could greatly help in reducing tenant selection risks, many other insurance companies followed suit. This includes Vero and Initio who both mention carrying out and keeping a record of credit checks as “landlord obligations.”
- Vero’s Residential Home Policy (Landlord obligations, p. 19)
- Initio’s Home Policy (Landlord obligations, p. 20)
What happens if I don’t meet these obligations?
It is important to meet your insurance obligations as a landlord with the consequences of not doing so being “invalid claims.”
In order to have a claim that your insurance company sees as valid and as something they will cover you for, you need to meet all of your responsibilities. This is because:
- You agreed to this when signing your policy.
- You prove to your insurance that you have completed all personal risk assessments before letting these tenants live in your home. Therefore, you should be entitled to any and all of the security insurance can provide.
Not completing your landlord obligations can leave you in the lurch when things go wrong. Whether your tenant contaminates your home with methamphetamine or refuses to pay rent, all of these scenarios leave the landlord with big bills to pay on their own if insurance refuses to get involved.
New Zealand landlord’s failure to credit check a tenant ends badly
Methamphetamine contamination, one-thousand dollars in rent arrears, and over 48,000 dollars of damage was the result of a nightmare tenant and property manager Yvonne Parker not completing a comprehensive credit check on them during due diligence.
While Parker thought she took correct steps in making sure Alysha Howe would be the perfect tenant, this is questionable. This is because the tenant has previous cases with the tribunal which show she owed $5000 to one Whangarei landlord.
All of this is information that a comprehensive credit check would have revealed as it would search Howe’s name against:
- the Tenancy Tribunal database
- the Ministry of Justice fines database
- and all of New Zealand’s credit agency databases (if it were comprehensive).
Although in an NZ Herald article Parker says she now takes to looking at tenant Facebook profiles during the selection process, this would still not avoid such a situation. Why? Because Facebook does not store credit and fines information and tenants are able to choose what they present on Facebook. This is not the same as with credit reports.
To see photos of what the Tenancy Tribunal thought was one of the worst cases of intentional damage, see here.
Comprehensive vs. limited credit checks
What is the difference between a comprehensive credit check vs. a limited credit check?
A comprehensive credit check searches your tenant’s name against every credit agency in New Zealand, unlike limited credit checks which only search one or two.
A comprehensive credit check also completes a thorough background check on tenants. This is different from looking at their credit and instead, it pulls information about the tenant from:
- the Ministry of Justice fines database
- Tenancy Tribunal database
- social media
- the national media
- as well as other tenant scoring systems like TINZ or illion Tenancy which includes the list of criminals being searched for by the international policing agency, and other relevant information.
The reason we refer to a credit check that does not search all of these things as limited is that the information they provide is lacking – especially when it comes to the information on credit.
What risks do you take when only conducting a limited credit check?
Because some companies only report to one credit agency, you are taking a risk when you only conduct a limited credit check. Why? Because the information that one credit agency has on a tenant is not necessarily the same as other credit databases. This leaves you with gaps in your credit report if you use a limited-service that doesn’t check all three.
An example of this is a recount by tenantcheck.co.nz which showed different results from all credit companies.
The first from Centrix showed no credit defaults and gave the tenant a great score.
The second Equifax report showed 2 credit defaults including a repossessed vehicle worth over 6000 dollars and an unpaid life insurance policy.
The third illion report showed 3 credit defaults. These were the same as the Equifax report as well as an unpaid Genesis Energy bill of over $300.
Although these results don’t necessarily mean this tenant is a bad candidate, it is information that a prospective landlord would want to know. This example also shows that although not every credit checking service searches against all credit databases, you should choose one that does. The reason being is that you risk missing information that could be vital to your final decision.