Lease Fraud Continues to Rise
Owners, managers, and underwriters have been watching Lease fraud steadily rise across the multifamily industry for many years. Forbes estimates multifamily businesses are losing as much as $1000 per unit to fraud each year.
What is causing the rise in Lease Fraud?
Lease Fraud is a complicated issue with many causes, but the most obvious cause is financial. Prospects who don’t meet the financial requirements of a property will use fraud to help themselves through the gates.
Since Covid, housing prices have soared, especially in the last couple years. Some areas have seen rent increases as high as 30%. Couple this with high mortgage rates, which drives would-be home buyers to rent, and you have an environment where many are struggling to find housing they can afford. For properties requiring 3x the monthly rent to qualify, potential renters who have not seen a salary increase inline with rental price increases are stuck in a difficult position.
The Leasing Fraud Environment
The multifamily industry has started to develop a fear of fraud due to the rising prevalence. There are some alarming figures surrounding the extent of fraud in the industry:
- Forrester reported that 97% of all multifamily management companies experience fraud.
- 70 Million Americans have poor or bad credit, according to Experian.
- Access to information about ways to commit fraud for the purpose of renting apartments is increasingly simple online.
- Fraud rings in the United States make document and background fraud easier to commit than ever.
How is Lease Fraud Committed?
Fraudulent documents are the #1 reported type of fraud by leasing offices. Ease of document fraud has increased dramatically online, and the large majority of fraudulent pay stubs, bank documents, etc come from online sources. The results of this are hugely impactful to the bottom line of a property, as it allows higher delinquency rates, higher eviction costs, higher turnover, and all the complicated collections issues that go along with it.
Identity Fraud, while less common, is a serious risk to multifamily operators. This type of fraud is the fabrication of identities, or the use of both real and fictitious personal data to create a credit profile used for applications. This type of fraud has doubled in the last 10 years and accounts for hundreds of millions in unpaid rent across the US.
What Are Easy Solutions to Reduce Fraud?
Fraudulent applications can be challenging to identify. But there are a few procedural steps and tools that multifamily offices can use to spot potential issues.
Through necessity, many onsite teams have learned how to spot potential issues with someone’s ID - but because of this, new tactics in producing fake ID’s have become more common. Partnering with a 3rd party service to spot identity fraud can be extremely useful and highly effective at mitigating potential risk.
First and foremost is putting forward a Proactive Fraud Management Strategy. This is a set of protocols followed by staff to be mindful of fraudulent behavior, and have a guideline to help them identify it. Leasing Offices can enhance their screening procedures by (for example):
- Asking for printed original copies of Financial Statements (pay stubs, bank statements, etc).
- Using tenant screening software to verify identification
- Running credit checks and thoroughly reviewing credit history
- Using document detection tools
- Call and verify references and all sources of data
- Running criminal history checks.
- Check for prior evictions
- Link payment methods to reduce payment issues
Analysts find that Rental History is critically important, to avoid residents who hop from one property to the next while leaving unpaid rent behind. And calling to verify the history provided is incredibly important and often overlooked.
- Always verify, verify, verify. Never rely on statements from applicants.
- Ask for check-cashing receipts and/or bank documents that can be compared to provided documents for accuracy.
- Verify employment and wage documentation with the employeer.
- Check with local counties for eviction history.
But what do you do when you spot an inconsistency or issue? If it’s a small inconsistency, ask the applicant for an explanation. Ask them why 2 documents may not have matching numbers. Ask them for a second ID. Always be polite and curious and simple state there was an issue found and it needs to be clarified prior to approval.
What are Harder Solutions to Minimize Fraud?
In some markets fraud is more common place. Depending on the level of fraud your organization is facing, but may become prudent to have someone in-house who focuses on fraud prevention.
Fraudulent document detection tools are available which can analyze PDF’s and other supplied documents to verify their source and integrity. In depth employment verification can sometimes be necessary. Particularly if the area has a lot of seasonal work. Many times applicants will claim full-time year-round employment, but in reality are only working for part of the year.
Leasing Fraud - Consistency and Fair Housing
Some notes about Fair Housing in relation to fraud. It is very important to have protocols and procedures that are followed the same for each and every applicant. Always ask the same questions, require the same documents, and scrutinize them in the same ways.
Never decline someone base purely on:
- Social media profiles or activity
- Viewpoints or points of view they have expressed
- Intuition and gut feelings
Be consistent in what is asked of applicants. Follow fair housing guidelines. Ask the same series of questions based on the type of applicant: Those currently employed, unemployed, self-employed, or retired.
- Document findings for every applicant using the same format
- Look for pets, illegal behavior, hints for employers/type of employment
- Don’t decline someone based on social media.
- Don’t decline someone because you disagree with a point of view they’ve expressed.
- Don’t decline someone because of your “gut” feeling.
How does Leasing Chat help?
We are not a fraud-prevention service, but we do as much as we can to help our clients identify and reduce fraud. Because we are first-touch and early-journey focused, we are often the first interaction a prospect has with a property, and as such we can help identify surface level problems and red flags.
We collect important pre-qualification data from leads and enter it into the CRM/PMS system of the property. This data includes basic information like full name and phone number, but also often includes their employer, the current residence, details about their rental history, their current salary and our assessment of their qualifications. All this data allows leasing agents to know right away if a prospect is going to be pre-qualified for a unit.
Any anomalies we identify, or questions we have about a potential resident will be outlined in the customer notes. Our team is trained to recognize red flags, as well as more subtle hints and questionable details.
We also support our clients with integrations for fraud prevention, identification verification, and background checks. And some of our add-on services like Lease Auditing can be one more safe-guard to spot inconsistencies.
Multifamily Lease Fraud isn’t going anywhere soon. Sadly, it is here to stay, and will likely continue to get worse as the market tightens and interest rates remain high. It’s important to sit with office staff and go over company policies and protocols around fraud, and train leasing agents to identify it. Companies that are proactive in fraud prevention are much more likely to identify it when it happens, and not end up hanging with unpaid rent and vacant units.