There are many questions to ask yourself long before allowing tenants to occupy your rental property. Will you allow pets? Are you wanting to rent to a group or would you prefer a family? What price will you be charging as a rental fee?
While these are all very important questions which you will need to answer before you can begin the renting process, there is one exceptionally important question which can sometimes get overlooked—should you charge an application fee for your rental?
Application fees are important. As a landlord, you want to be sure you’re getting the best tenant for your property and charging an application fee can help you do that. Of course, as with anything real estate related, there is an upside and a downside. It is important to weigh the pros and cons in order to decide whether or not an application fee would benefit your process.
An application fee for applicants can be a great tool in finding the right tenant, if used correctly. Application fees help to wean out the window shoppers or the time-wasters. If you are upfront about charging an application fee, preferably before even showing the property, it can help to rule out people who know the property is out of their budget or who aren’t really serious about wanting to move just yet. If you’re honest about the application fee upon first contact, you’re less likely to waste your time showing the property to people who won’t be following through. Not to mention, those with evictions, criminal charges, and other such factors will know these will show on their screening and are less likely to pay a fee only to be disqualified.
Application fees are great to cover the cost of the background screening services, giving you the ability to thoroughly screen each tenant without putting a major dent in your wallet. This means you’ll have a clearer picture of the tenant and their background, allowing you to make an informed decision on whether or not they will be a great fit for you and your property.
Essentially, think of a rental application fee as an additional prescreening tool, helping you to narrow your pool down to those who are a better fit.
Application fees can, in some states, be a tricky business. Several states have strict application fee rules in place to prohibit landlords from taking advantage of those in search of a home. Some states have regulations regarding the amount a landlord can charge while others allow the landlord to base the fee off of market rates, charging a higher fee for homes in areas of higher demand. It is important to know your state’s regulations before deciding whether or not to charge an application fee.
Regardless of the state, most areas have strict rules in place that prevent a landlord from using application fees as a profit generator. This is in response to cases where landlords have charged massive fees for applicants in areas of property shortages, when the tenant screening costs only approximately $25.
Now, this is not to say you can’t charge a small processing fee. Just be careful with how much you decide to charge and ensure that you are compliant with all local and state regulations.
If you charge a rental application fee and do not run the appropriate checks, some states consider that a case of fraud. In cases of having multiple applicants, it is most suggested to process the applications in the order received, one at a time. Accept the first qualified candidate and refund the money to the remaining applicants to avoid any possible fraud charges. Only retain the money on applicants which you actually screened. Of course, to many busy landlords, this can be a hassle to keep on top of.
To keep in line with all tenant application laws, it is important to be using a legal, up to date, rental application. Ensure you explain to the applicant what the fee is, what it will be used for, and whether or not the fee is refundable. Having the tenant sign this protects both you and the applicant, however, many landlords feel that this is an additional headache added to the already-hectic process of filling a vacancy.
When considering the advantages and disadvantages of charging an application fee for your rental property, you should always think long-term. Sure, keeping up with the laws and filling out all the appropriate paperwork can be a hassle, but isn’t finding the right tenant more important? When you consider the damage that a bad tenant can do to your rental business, a few extra steps shouldn’t be a disqualifier for application fees. In the long run, using a rental application fee can save you a lot of wasted time, extra vacancies, and even from having to undergo the eviction process in many cases.