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The Importance of the Tenant Selection Process

Written by Peter L. Mosca on Wednesday, 29 October 2008 7:00 pm
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[Note: To follow is an excerpt of an interview with Don Conrad, investor and author of "How to Find That Quality Tenant." To listen to, or download the show archive MP3, go to www.IncomePropertyInvestmentTalk.com/101508.]

Mosca: What is the main focus of your book, "How to Find That Quality Tenant?"

Conrad: As a real estate investor, I'm always looking for things to improve my skills and I love to read. There was a vacuum on books on the tenant selection process. I started writing the book hoping to fill the niche. The goal of the book is to give people a basic roadmap of the tenant selection process, a separate skill from just managing or investing. Most people don't respect it. While you might be able to buy a property in a couple of days or a couple of weeks or a couple of months, you have to deal with that property for years. By selecting the right person upfront everything that happens is so much easier to handle. The tenant selection process is the most important skill, bar none, a real estate investor will need for the next five or 10 years.

Mosca: Why do most landlords have trouble finding quality tenants?

Conrad: First, most people don't respect it as a separate skill. Investors spend months preparing to buy the right property, get their financing and confidence to go in and buy something and they spend absolutely no time learning the tenant selection process. Second, most problems with tenants actually begin before landlords hand over the keys because they handle the showing incorrectly. There is a system I call, "eliminate then investigate." Do not leave home to show a property until sure you would rent to the person calling provided they have not lied, omitted or falsified any information over the phone. When people call about the property I don't run out to show it because somebody wants to see it. To me that makes no sense. Usually within a minute I try to eliminate them. If I can't eliminate them then I investigate them. If they turn out to be what is good for my business and if my property's going to be what's good for them, then I work on getting them to a showing.

Mosca: All of that work upfront, does it pay off?

Conrad: Yes. When people run to a show there are four results. Out of those four, three are instantly negative, which means you have a 25 percent chance for a winner -- and even then you could fall flat on its face. Spend a few minutes with the important ones on the phone and you will save hundreds of hours. What I do is when I get somebody on the phone, I ask them an important question from a business point of view based on income, credit, pets, evictions, and convictions. If their answer is wrong or a deal breaker then I politely get off the phone and move to the next caller.

Mosca: In your book "How to Find That Quality Tenant" you mention a five step process, each step begins with the letter "P." The first P is prepare. What do you mean by prepare?

Conrad: Prepare yourself, mentally and prepare qualifications to eliminate or investigate people based on what you need for that property. Prepare also for the tenant mentality because the tenant mentality is different than a landlord. When you get to the place in your life when you are a landlord, or an investor that buys and holds, you have probably taken two or three steps to get there. Tenants have not been there yet. They do not know how you think or expect things. It's like a big game of chess and you have to know both sides of the board even though you are playing and representing yours.

Mosca: What about step two, to pre-qualify?

Conrad: The most important step. Most landlords begin at step three, the paperwork. They get to the building, get an application, and go home and start to think through it to see if it might fit their needs. In step two, when I pre-qualify, I am finding everything out ahead of that. Before I ever meet people I know so much about them. I know probably more about my potential tenant before they fill out an application than most landlords know after they rent to them.

Mosca: The third step was the paperwork. The fourth step is process. Can you talk about process?

Conrad: There are two steps to leasing -- pre-lease and post-lease. Before a lease is signed, the ball is in your court. As soon as the ink hits the lease, it is harder to make amends and solve problems compared to pre-lease time. The process, therefore, is your last final ditch effort to uncover problems or seeds to problems during the rental period. Talk to every reference you can, every landlord, past landlord, employer, past employer, and emergency contact and personal references. If I have a husband and wife team, talk to his personal references about her and vice a versa. You look at the credit reports, the background checks, the cash flow form, and anything else that you have that you accumulated in the paperwork process to put a nice puzzle together and see what kind of picture you can develop on these people. The conversations you have with these people are going to open up stories. I recommend three or four days to do your due diligence.

Mosca: Step five in the tenant selection process is the 'icing on the cake' or the payoff. Can you talk to us about the payoff?

Conrad: The first four steps were pre-leasing. The fifth is post, when we sign the lease and actually start making money with our property and hopefully sleeping better at night. If you do your job right on the first four steps, if you dial that in, your post lease should be pretty minimal as far as headaches and stress go. Not only do you get your lease and all important paperwork signed, you have to teach your new tenants what you need and what you expect from them.

Mosca: What is your golden nugget?

Conrad: Persevere, use resources, get education and tenant selection is going to be a big part of it for the next few years. Treat it as a skill.

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