AIPIS 244 - Lease Guarantees, Property Management Practices & Tenant Screening with American Apartment Owners Association Rent Recovery Service Jeff Cronrod

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It's my pleasure to welcome Jeff Kronrod to the show. He's a returning guest. He's founder of the American Apartment Owners association, also founder of Rent Recovery Service. We're going to talk about a new program, fairly new program they're involved with called lease Guarantee and just some other issues that affect single family homeowners and small cap apartment owners. Jeff, welcome. How are you?

I'm good. Thanks for having me back, Jason.

Yeah, it's good to have you on the show. So let's dive in and talk about lease guarantee first. I mean, every landlord wants their lease or their rent to be guaranteed. Who wouldn't want that? There have been other players in this world with, I guess I'll say similar promises. They've been done sometimes as an insurance policy. Yours is not an insurance policy, it's a contract, I guess. Forgive me for maybe diving in too deep too quickly. Give us the macro picture of what is lease guarantee and then let's drill down on it.

Well, in a macro sense, it essentially is there to cover both tenant and landlord in providing a safety net really for both sides to cover any losses that might be adjudicated in terms of anything from a breach of the rental agreement or the lease. So from a landlord standpoint or property management company standpoint, lease guarantee is going to help them rent a unit, help them secure the unit to a strong tenant. And I think from an applicant or tenant standpoint, it would avoid the problems of either being required of a cosigner or if they have poor credit or even no credit, a lot of young people renting that may not have credit then additionally it can also be used in lieu of or in addition to a security deposit. So there's lots of help there for both sides.

So is it for any landlord with any type of property or any tenant or only the certain market that you mentioned?

It's available to any landlord. It can be someone with just a single family home or condo to someone with thousands of units certainly can use it. It's available on a tenant by tenant basis. And it is part of the tenant screening process. So when the landlord or property manager runs a screening report, they're advised whether or not the applicant qualifies for a lease guarantee contract. And if they do, then it's their option and either the landlord can pay for it or in most cases the tenant pays for it. Although we've had some landlords pay for it and then amortize the expense over the course of the year. It's been interesting to watch different ways in which they've been doing it, but it's really designed for the tenant to pay for it. And it's been used a lot to soften the move in money because frequently an owner will waive or reduce the security deposit, which could be sizable given today's rents, rather than coming up with two or three months worth of rent up front, which is hard sometimes for a tenant, they can do a lease guarantee and reduce that move in money. So again, it really works both sides.

Yeah, so give us an example of say you've got a single family home and just for a nice round number sake, it rents for $1,000 per month. And you want your tenant to get this lease guarantee, not insurance, but this lease guarantee contract. How much does it cost them and what does it provide for the landlord and the tenant?

The minimum contract amount is $2,500. And the cost for a $2,500 contract starts at about $299.

Does that contract mean that's the value of the lease? That would only be a couple hundred bucks a month for a year, if it's a year lease. But what do you mean a contract? Or is that the amount that they'll pay out? The maxim paid out or what is that number?

That would be the max amount paid out in the event there's a breach of the tenancy agreement. Whatever is adjudicated by a court, if there's a problem, we all hope there isn't. But if there's a problem and the tenant either leaves, breaks the lease, leaves without paying rent, or does property damage, or there's legal costs, it covers all of it, whatever is adjudicated by a court up to the contract amount. And you can purchase contracts up to $10,000. But just keeping it simple, a $2,500 contract is going to cost about $299 or more, depending upon some of the underwriting algorithms that we use. But just keeping it that it's an annual payment, it's renewable, and it is part of the Tenant screening process. So when a screening report is run, we're able to gather up enough information to in real time offer the contract to both the landlord and the tenant, let them decide if it makes sense in their transaction.

Basically, the cost is a little bit more than 10% of the amount of the. I keep wanting to say insurance.

It's definitely not insurance.

What do you call it? The amount of the contract?

Okay, yeah, it's a guarantee contract.

Okay. Right. In order to get this money, say the tenant just leaves and breaks the lease early or they damage the property. I mean, what's covered? Is it damages to the property above and beyond the security deposit or is it breaking the lease, or is it both? Or tell us that it's.

Anything that a court will grant would include legal fees, it would include property damage and lost rent.

This is what I find to be really discouraging. And since you've been in the collection business, you know, most landlords just don't pursue it. They don't litigate, you know, that breach, they just let it go. And they say things like, well, I had a bad experience. You can't get blood out of a turn up. You know, I've heard it so many times. It just sickens me that these landlords just don't hold tenants to their contracts. But, but that's just the reality of it. I mean, is that a way for you guys to not have to pay too many contracts? Sorry if I'm being a little confrontive, but I want to be healthy skepticism here.

Yeah, no, I understand, but it's actually just the opposite. It helps them because they're going to have to sue to get possession. They're going to have to go to court to evict. And I agree with you, most of them don't want to pursue collection. They get a judgment, they get the tenant out and they let the judgment go. We had that issue, that issue when we were. When I had Rent Recovery Service convincing landlords that in fact you can collect it. But we're not asking to collect anything. We're basically putting ourselves out there and saying we'll give you the money immediately following your successful eviction judgment. So get an eviction judgment is what you need. And you need to do that anyway to get them out, right?

Not always, but a lot of times.

Yeah, well, yeah, I mean, you know, you're right. They do have to mitigate their damages in order to collect on the contract. In fact, that was a significant problem with one of our predecessors that didn't make it in this business because they didn't subrogate and they didn't force the claimant, the landlord, to get judgment. There were a lot of fraud claims because people were just, they were just claiming that there was a loss when there wasn't. There was no proof of claim. So we do need a judgment. And in theory, pretty much every landlord is going to have to evict.

Okay, so let's, let's make sure all the listeners understand this. If you have a bad apple, which happens occasionally, but it really doesn't happen as much as people say it does. They like to talk about it. These people that don't invest in real estate like to talk about it like it happens all the time. It really is pretty rare. In fact, it took me couple of decades after my very first property, my first property I had to evict. I was 20 years old. That was a bad experience. But after that I went many, many years, like about two decades, I think, without an eviction. It was a pretty amazing, really. Well, you know, I didn't own zillions of units either. So, you know, but you know, I had a, I don't know in there. I probably had several hundred tenants maybe over the years. You know, in that time there's two stages. Just let's make sure everybody understands this. When a tenant doesn't pay rent, the first thing you do is you give them the three day notice to pay or quit, right? You can have a process server do that. You can do that from anywhere in the world. You don't need to be local, blah, blah, blah, that's easy. Or your property manager does this. If they don't move or they don't pay, you have to basically sue for eviction, which means you're suing for the right to retake possession of the property literally by force. The sheriff will come or the marshal will come and they'll kick him out. They'll put their stuff on the curb and they'll be kicked out. This hardly ever happens because they usually move before then, obviously, but that's what you're doing. You're literally filing a lawsuit for possession of the property. Okay, but after that. And this is the part that most and most times the tenants will just move and you won't have to go through with it, you know, but after that, then comes the money. You've got the possession of the property, but then comes the money. Are there damages to the property above the security deposit? Right. Is there back rent owed? Is there forward rent owed? Meaning did they break the lease and you know, you're sitting with a property that's vacant for an extra month or two because you didn't release it right away, they're potentially liable for all of that stuff. Do you want to add to that?

No. I mean, your description is right on. And the only thing I might want to add in terms of the. The frequency is it depends upon the economy and the geography. But just to sort of fine tune how frequently we do it. And the eviction courts are backed up. There are a lot of evictions, and they run anywhere from about 6 to as high as 9% in different areas currently. And when the economy falters, that number goes up. So there's a reasonable amount of landlords that do have to follow through an evict.

Sure, sure.

Sounds like you had a lucky 20 years.

Yeah, yeah, well, certainly I did. But I'll tell you something. The way to not have evictions is to do better tenant screening up front, you know, so maybe you want to address that after this. But let's get through the. Where this contract comes in. I explained the two parts of the lawsuit. One is for possession, the other parts for the money. Usually I find landlords just throw up their hands and they don't bother chasing the money. You know, I just think this is crazy. This has to end. You get the judgment for the money and you hand it to a collection agency, that judgment's gonna last for 10 years. I believe everywhere now it's 10 years. I could be wrong. I'm not a lawyer. And you can renew them. At some point, that tenant, especially if that judgment gets on their credit report, is going to want to buy a house or a car. And that creditor may well say, look, before we can give you a loan or a lease for a car or a lease for another property, you got to satisfy this prior creditor. I mean, do you want to speak.

To that a little bit?

I mean, you're in that business. You know a lot more about it than I do.

And your description is right on. Except. Except, of course, that not everyone wants to wait 10 or 20 years for the length of a judgment. Plus renewal time. And lease guarantee allows you to get your money right away.

I know you're promoting the lease guarantee. I got it. I'm fine with. No, no, I'm fine. I'm fine with that. But all I'm saying is to get the lease guarantee, what judgment do you need to get? Only eviction or money judgment, at least in California.

Generally, they're one of the same. Now, it's not identical. They don't mirror each other, but they can. They can be done concurrently. Since you're paying the attorney to show up in court and get an unlawful detainer action.

Right.

Which is a judgment for possession, you also concurrently get one for restitution, which means money. And so you get a money judgment concurrent with your eviction judgment. It doesn't cost. I think it costs pennies more. At least it used to be just 20 or $30 to get that additional judgment.

Right.

And I think it's similar throughout the country. Yep. So it's almost foolish. With or without a lease guarantee. As you said, you're always better off with the money judgment. If you're willing to wait out the time.

That's.

The judgment's good for 10 years, renewable.

That's exactly the point.

Spends the effort to get an eviction. It doesn't make sense not to get a money Judge.

I. It blows my mind the way landlords just don't bother. They just let them go. You got to stop doing this. Landlords don't let them go like that. You know, you got to look at.

I mean, as you know, I've been in this business for 30 years and been a landlord for 40, and I've been preaching exactly what you're saying all that time. It doesn't make sense to let them get away with it. It's like stealing your goods off the shelf.

If you were a shopkeeper. Yeah, yeah, they're shoplifting. If for no other reason than philosophically. Look at. Society collapses when people don't uphold their contracts. That's why we have courts. So you don't have to go be violent. You don't have to stick a gun in their face. You take them to court and through the civil process, you force their hand to uphold their contract. And that's what you gotta do. So when you get that money judgment, if that money judgment says $2,000 and you bought the $2,500 contract or the tenant bought it for you, then you just instantly pay that out, Right?

Correct.

Okay. Okay. What else do you want people to know?

It works and it makes sense. It really is there to help both sides. I mean, I think that's, for me, is the key for an owner who has a vacancy, he's losing money. And, you know, even circling back to getting a judgment for a minute. And what we were just talking about, it's more than just getting even. These landlords are not all rich people, and they have a mortgage to pay and taxes to pay. And so on and losing a month or two of income sometimes puts these landlords in foreclosure. So it's really less about getting even and chasing the bad guy and more about saving your own skin. Because they're in business to make money.

Absolutely. Let's just talk about some general best practices. I mean, you've been doing this a long, long time. You've got a wealth of experience, you've seen everything. Tell us a little bit about some best practices in the property management world, whether they be single family homeowners or small apartment owners. What would you say is some of the keys?

Touched on it briefly a few seconds ago. And I said, for me, and I've lectured on this for years, again, it's really about doing tenant screening and doing it properly. It frustrates me when I see property managers, rental agents and owners rush not use common sense. And we have seen it all. And so the bottom line is you have to be somewhat intuitive and somewhat skeptical and you have to view every applicant thoroughly and review them thoroughly. We have sometimes a manager might be on commission and he's told if you don't get this unit rented by a certain date or if you get it rented by a certain date, you get a bonus or that. And so they look the other way. Or owners who are just desperate because the unit's been empty a long time, they need the cash. These are huge mistakes. You've got to do really good tenants. If you do good tenant screening, you have no problems going down the road. You have good tenants.

That's definitely true. I couldn't agree with you more. This is how you reduce your number of eviction problems or tenant problems. Tell us about the specifics of how you do good tenant screening or how you make sure your manager has done good tenant screening. You know, we teach people how to self manage from a distance. Never thought you could possibly do that, but it actually is very possible, especially nowadays with technology. But most of our clients have property managers, so you know, there are goods and bads of both ways. If you have a good property manager, they're worth the weight in gold. If you have a bad one, I say give self management a try. You can always change your mind five minutes later if you don't like it. You know, there's no shortage of managers that will be happy to take your account. What are some of the ways you can do good tenant screening or make sure your manager does that?

I think there's some basic things you have to do. And again, running a credit report, running a criminal Background report, running an eviction report, run a fraud report. All these reports, which are available online both from my company as well as others, are helpful tools. But that's not the end all, and that's part of the problem. People are running these reports and they get a thumbs up or a thumb down or a red light or a green light and they don't go any further. So some of the things they ought to do is we always advise, don't, don't call the prior landlord. Although some do, because I hate to say it, but landlords lie.

In other words, they may want to get rid of that tenant. Exactly.

And they'll say, oh, he's a great tenant. He doesn't cause any wrong ruckus. He doesn't abuse the place. He pays his rent on time because he wants that guy out. But if you ask the applicant for copies of canceled checks and, or receipts for the last few months and let's see if they are on time, that would be. I think you need the documentation to verify that it's real. You don't take an applicant's word for a job. Ask to see the paycheck steps or a tax return if they're willing to give it to you. Always get a copy of a driver's license. Make sure the picture matches. I can't tell you how many times we've had people literally ask for a driver's license and the picture is somebody 40 years older than the person applying. It's stolen identities. It's a junior senior situation. Might have a young person who's messed up his credit. He's a Joe Smith Jr. And he uses his dad's Social Security number. And they pull a report and it shows the guy is 70, but the guy in front of me is only 25. And they rent to them. They still rent to them. And so a lot of that is just they're not thinking or they're, they're highly motivated. Just put anybody in that they can. A lot of these things are red flags.

This is like being in business, right? Avoid the. And we've all done it. Every entrepreneur has done this. Avoid the desperate hire, you know, fix up your property and market your property well enough so you have choices so you don't have to go with the first lousy tenant that walks in the door. You know, out of choice comes power and you can do proper screening and you're not desperate and all of that.

So, yeah, desperation is a big problem. And we've had so many red flags. We could talk for hours when somebody pulls up with all their furniture in the back of the truck and they offer you cash, that's a red flag.

Yeah, yeah. It's even worse when some of their furniture is laboratory equipment for the meth lab that they've got going and then they're saying they're not going to give you percentage rent on the meth sales. That doesn't that suck? I'm joking, of course. Yeah.

So talk to us more about the different reports that are available since you've been in that business or are in that business. Drill down deeper onto these reports. Everybody knows there's a credit report, a criminal background check, unlawful detainer, which means have they been evicted before? You can check for those things. But I think you mentioned a couple others.

There are eviction, landlord, tenant or eviction reports that will show if someone been evicted, which is I think more important probably than criminal.

Yeah, unlawful detainer.

Right, right. We always encourage people to get an eviction, criminal and credit at least. We also have a bank sift report which shows you their bank records as well as a telecheck report. Also gives you their history in dealing with banks or if banks have closed accounts because too many bounce checks. Those sorts of things are important. Obviously what you really want to focus on is their character. A lot of people check social network sites to see what kind of person this applicant is and then the way they deal with their finances and how many late accounts they have and if banks have shut them out, if they bounce checks and so on. The other thing to really watch out for, I would always recommend is a Social Security search and or a fraud check. Essentially they're kind of one of the same. You want to be sure that you're dealing with the right person. There's lots of fraud out there. There are also sex offender checks. This terrorist search is available. Those are a little more out there, but we certainly would recommend those as well.

How do you do all these checks, like the sift check? I've never even heard of the sift check. I mean you can check on the watch list. I mean, do you just have to subscribe to a background checking service if you want to do them yourself? If you're self managing or does your service do all this and how much does it all cost for all these reports?

Both Tenant Alert and aaoa, American Apartment Owner association, both of them offer all of these and the costs vary depending upon the volume. We do volume discounting on both sites, but compared to the losses that you might have in having a bad tenant it's pennies. You're never going to spend more than $40 or $50 tops. And that would include manual verifications of employment. And we do employment checks, employment verification for HR departments. We'll do blood tests and drug screenings for them as well. So we're pretty far reaching.

Right.

So again, if you're hiring a resident manager, that's a job, not a resident. And you might want to do drug testing on someone like that. Yeah, we do that as well.

Yeah. I don't think you can do that on your tenants, though.

No, no, but on a resident manager.

Yeah, I do, I do. Right. If you got a resident manager in a small apartment or something. I do want to say one thing, folks. Be a little careful with some of this stuff. You know, you got to always be mindful of the fair housing laws and make sure that none of your screening becomes discriminatory. Okay? So be careful of that. But I'm looking at your site now, and for example, the most popular blue package that's $39 is credit report, credit score, previous address, tenant history, telecheck verification, eviction depend, you know, on a specific state, state by state basis, nationwide. Criminal, sex offender, terrorist. It says federal search. I don't know what that means. Is that a Social Security.

No, it's a different database of federal crimes.

Okay. Oh, white collar cyber crimes, crimes against children, murder. Okay. Yeah. Okay, well, yeah, we don't want any of this uglier stuff. Yeah. And then the lease guarantee analyzer is also included in that. And that's going to, you know, give you the opportunity or give your tenant the opportunity if you want to do the contract that we talked about as well, the lease guarantee thing. And then the gold package, which is 10 bucks more, includes Social Security number, fraud. That's what it adds to that list. So, yeah, interesting. Okay, good, good. What else do you want people to know in terms of best practices? And let's wrap it up. Maybe one more thing.

You touched on the word discrimination, which is a hot button that everyone has to be super cautious of. And I'd like to believe that everyone can just use common sense and know that we don't discriminate. But both of our sites and a lot of our competitors also offer algorithm that essentially is a colorblind religion blind, gender blind, and analyzes all this information for you and will give you a. We use a red light or green light. That way you're not accused of discriminating against someone. You're saying, well, look, the computer told me not to rent to you, of course, the issue with that is that you still have to go deeper. You still have to do some of the things we just talked about. But discrimination is a big problem. We see it a lot.

Yeah, good stuff. We've talked about all the pitfalls today, but I think we should mention something in closing to cheer everybody up. Income property is the most historically proven asset class in the entire world. There is simply no better investment than income property. Of course, you've owned a lot of it over the years. Do you want to speak to that for a moment?

I'm a believer. I mean, I've had over 4,000 rental units over the years and it may be the last vestige where a small owner can compete next to a big one. You know, you can't, you can't open up a local stationary store anymore because those are all big boxes and stuff. And this is, it's an incredible business. It's a great way to make money. It's a great way to get appreciation long term and get good cash flow if you, if you manage it right. I think that the one caveat is it's not a passive investment, right?

Yeah, no, there is. And I would.

It's a business.

I would argue that there is no such thing as a passive investment. And I've discussed that in depth on many prior shows, so I won't do it here. But you got to pay attention to it like anything in life, you know, if you want to be good at stock investing and you know, I mean, Wall Street's the modern version of organized crime, but you better be learning. You better be constantly researching and learning and following all the news and reading all the newsletters and you're still going to get, you know, burned probably. But yeah, income property is great. Some multidimensional asset classes. It's awesome. So, Jeff, thank you for joining us. Give out your website.

They can visit American Apartment owners association@aaoa.com or for tenant screening, then go to Tenant alert, all1word tenantalert.com and by the.

Way, on the tenant screening thing, to be able to do these checks oneself, do you need to have someone like visit your house and make sure you have a locking file cabinet and take a picture of your desk and all that kind of stuff, or is that this is really outsourced screening, I believe, right or no?

We offer both. We can certainly underwrite larger clients generally, which you've just described. We call underwriting and we do underwrite them. We do have someone visit either their house, their office, make sure they have a shredder and a locked file cabinet, so on, but it is not a requirement. We do have products where the tenant gets invited to pull their own report, and that's faster, it's easier, it's a little more expensive, but usually the tenant will pay for it. So we encourage both ways. It really depends how many units you have and how frequently you.

Yeah, my. My mom has her own, and she told me about how they came over and, you know, took a picture of her paper shredder and her locking file cabinet and, you know, that kind of stuff. So she runs the reports. She can do it right from her iPhone and she just loves it. She just says it's incredibly convenient. So. Good stuff. Well, Jeff, thank you so much for joining us.

I appreciate it. And give your mom our website. We'd love her business.

I certainly. Well, she may already be a customer. I'm not sure where she. But, hey, happy investing to you.

Thanks a lot. Thank you.

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