The escalating trend of renter fraud
Recent data unveils a worrying trend: multifamily risk experts TheGuarantors has seen a startling 164% surge in denials stemming from fraud in the past 18 months. In addition, according to Snappt, a fraud detection company, as many as 1 in 8 rental applications contain some type of fraud. Understanding and mitigating this threat is paramount for multifamily housing professionals to protect their NOI and communities.
Understanding the drivers of fraud
Digital evolution of multifamily: The industry has brought previously in-person elements of the leasing process online. With virtual tours and online applications becoming mainstream, it's easier for fraudsters to exploit the system.
COVID: The pandemic catalyzed a surge in virtual renting, creating vulnerabilities that scammers are quick to capitalize on.
Proliferation of fraud tools: A quick Google search returns established businesses that sell fake documents, including bank statements and pay stubs.
Economic desperation: With higher rent and stagnant income, renter desperation can further fuel fraudulent practices.
Eviction moratoriums: Covid-era eviction moratoriums have inadvertently created opportunities for fraudulent renters to exploit the system.
The evolving threat landscape
Fraud in multifamily housing isn't a monolithic issue. Types of renter fraud include:
Identification and financial fabrication: This encompasses false identification, income and employment fraud, credit score manipulation, CPN fraud, and SSN fraud.
Unauthorized usage: This involves activities like subletting without permission or rent skimming.
False rental history: Fabricated rental history or employing "straw renters" fall under this category.
Additionally, the ease of falsifying documents is alarming. The image below shows examples of forgery.
The financial implications on NOI
As fraud escalates, the financial repercussions for the multifamily sector have the potential to be severe. Antoinette Willliams, VP of Operations at Luna, mentions that financial instability makes P&L planning arduous. In addition, there is a tangible impact on bad debt as fraudulent renters fail to pay their rent, and an increase in expenses as operators adopt screening software and other prophylactic measures.
Finally, this results in the most serious concern for a multifamily executive–can the mortgage be paid consistently amidst squeezed margins?
Operational ramifications in multifamily housing
The fraud epidemic doesn't just hit the wallet; it significantly impacts daily operations of site teams:
Detective duties: Leasing teams are now burdened with the added responsibility of identifying fraud during the application process.
Extended leasing process: Higher rates of fraud affect leasing conversions as more applications are required to fill a single unit with a legitimate resident.
Community threat: Fraudulent residents pose a broader risk to the safety and integrity of the entire community, with some operators reporting even incidents of gang activity.
Vendor integration: Incorporating anti-fraud vendors into a leasing process that requires quick turnaround can slow approvals.
These operational challenges create a more serious obstacle for executives: onsite staff and resident retention.
Navigating the vendor landscape
With a slew of fraud screening companies emerging, it's vital to evaluate a variety of factor during an RFP, including:
Cost: Is it variable or fixed?
Application approval time
Vendors should be evaluated holistically, and pilots should run in multiple properties in different locations. Establishing buying committees, scheduling weekly vendor performance reviews, and planning for expansive integration after successful pilot testing is crucial.
The reliability of screening tools and TheGuarantors safety net
While screening tools are valuable, one cannot assume they'll catch every fraudster. Snappt highlights that a rental applicant with a fake document is 7 times more likely to end in eviction or incur bad debt.
Fortunately, TheGuarantors works with operators in 49 states to provide a financial safety net for fraud, ensuring recovery from losses due to rent defaults, lease breaks, unpaid utilities, vacancies, and damages. If the resident doesn’t pay, the operator is able to recover the balance of what’s owed.
A strategic approach to combat fraud
To effectively combat fraud, multifamily housing professionals must:
Recognize portfolio risks: Understand the specific threats to your assets.
Deploy effective screening: Leverage tools that filter out potential fraudsters.
Prepare for slip-ups: Even with the best tools, some fraudsters may slip through. Be ready with recovery strategies.
Summary: bracing for a more complex risk landscape
Looking forward, the challenge of renter fraud in multifamily housing is set to grow not only in scale but also in complexity. As property managers navigate these uncertain waters, it's crucial to acknowledge a vital truth: most operators aren't specialists in detecting and preventing fraud. This reality underscores the importance of harnessing the right tools and forming alliances with partners adept in the realm of fraud prevention.
Embracing the support of these specialized tools and experts is more than a strategy; it's a necessity to withstand the onslaught of rental fraudsters. In doing so, operators can secure not only their financial stability but also safeguard the integrity and safety of their communities. As the fraud landscape evolves, so too must the approaches to combat it, ensuring a secure and profitable future in multifamily housing.