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Short circuit

Detecting fraudulent applications prevents costly eviction

By <i>Journal of Property Management</i> staff
Woman Reading Rental Agreement On Tablet.

In the modern film classic “Field of Dreams,” Kevin Costner’s character receives some otherworldly wisdom: “If you build it, he will come.” This works very well for fictional farmers who want to turn a parcel of farmland into a baseball field—especially one that has no admission fees.

But in the real world of property management, owners have built rental accommodations with an eye to getting a fair return for their investment. They and, by extension their property managers, expect to have rents dutifully paid according to the terms of the lease. The lease is a contract, a good-faith agreement that the renter and landlord enter into based on certain assumptions, the main one being that the renter can pay the stated rent. The property/leasing manager relies on the rental application for income information, as well as the person’s identity, creditworthiness, rental history and more to determine if the person can, in fact, pay.

If information on that application is deliberately falsified, it can lead to a costly chain of events for property managers, beginning with skipped rent and possibly ending in eviction.

Chad Vasquez manages Circa LA, a premier Greystar Management Services, AMO, property in downtown Los Angeles. He has been in the industry for more than a decade and admits that bogus applications have become a bigger problem than ever before. “In some markets it is very prevalent,” he asserts. He notes that a property’s market factors into the degree of risk. He managed properties in Hollywood before moving downtown and shared that he had to deal with a fair number of bad-paying residents in the area, which attracted a lot of newcomers.

The attraction factor hasn’t gone away, though, now that he is responsible for a 648-unit pair of luxury towers across from L.A.’s Staples Center. He still sees fraudsters lining up to try to get in. “Developers think that when you build something really grand and sophisticated, they’re going to get really good-paying renters. But we get a lot of people who know the law [around evictions] and are trying to live rent-free, even if it’s just temporarily.”

The scope of the problem

A 2018 survey of property management companies confirms that application fraud is an ongoing and growing problem. The survey “Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry,” was prepared by Forrester Consulting on behalf of the credit reporting agency TransUnion. The respondents, who managed anywhere from two to more than 10,000 units, reported that 97% of them had experienced fraud in the properties they managed over the previous two years. A significant portion—73%—said they discovered the fraud after move-in.

Many factors play into this phenomenon. Some are extrinsic, coming from the network of bad payers and fraudsters. These rent cheats are becoming more and more adept at their methods, and they are making those methods available to others via online sites dedicated to scamming the application process.

“We get a lot of people who know the law [around evictions] and are trying to live rent-free, even if it’s just temporarily.”

—Chad Vasquez, Greystar, AMO

Another factor resides with property managers’ own push to use technology—technology that can be thwarted. Property managers and sales leads are responding to resident desires to have as many services as possible accessible online or through mobile apps, including self-guided property tours, rent payments and amenities sign-ups. The application process has also gone digital; respondents to the Forrester survey report that roughly 59% of applications are now made online. In some cases, managers eager to give a quick, positive response to a prospect may not take the time that is really needed to vet the applicant.

That’s how they get you

There are two main categories of fraud that are being perpetrated. The first type revolves around identity documents. Applicants use fake driver’s licenses or stolen or fake social security numbers. Scott Ellerbrock, president of AmRent, a national renter screening service, says that ID fraud is one of the biggest problems in the industry. “Eighty-five percent of all fraud is synthetic identity fraud,” he says. “With today’s technology, someone committing fraud can present what appear to be valid documents and history—including credit history—which makes it very difficult to stay ahead of fraudsters and identify them before they move in.”

Trying to detect fraudulent IDs or stolen credit cards and social security numbers manually is a difficult and time-consuming process. Some fraudsters cobble together pieces of valid information from several sources, effectively cloaking themselves in realistic data. “In the last five years, I’ve seen all sorts of ways people try to fool you,” Vasquez says. “But as seasoned as I am, I was not able to find out everything about [certain bad payers]. I can only imagine that people who are new to the business or who’ve moved to a new region are probably missing twice what I’m getting.”

Many managers have relied on in-house tools to screen applicants, but that is changing. To combat the groundswell of fraudulent applications, property managers are starting to use third-party providers who offer services that can quickly run checks on everything from rental history to identity theft to criminal history. For example, AmRent ”recently rolled out a new product called REV (Rapid Employment Verification) that uses an applicant’s direct deposit history to help our customers electronically verify income and employment, as well as identify pay stub fraud,” Ellerbrock reports.

By the numbers
Estimated rate of evictions due to fraud: 15%–30%
Estimated percentage of fraudulent applications: 8% in-person applications; 15% online
Typical number of months of lost income per unit: 6 to 8
Estimated cost of single resident eviction: $7,000–$7,500
Eviction filings per year (U.S. 2016–all causes): 2.3 million (1 in 20 rentals)

Sources: “Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry.” Forrester Consulting for TransUnion
“First-Ever Evictions Database.” NPR Snappt survey, conducted by ReRez Research

Looking good on (electronic) paper

The second main type of fraud is financial in nature. In these cases, prospective renters are who they claim to be, but they doctor their financial documents—bank statements, pay stubs or other asset reports—to appear more desirable as prospects.

Fortunately, technological solutions are available that can help managers with this as well. Daniel Berlind, CEO and co-founder of Snappt, describes how his company’s software can verify the authenticity of documents submitted electronically. “There are companies that help with fake driver’s licenses or social security numbers. We saw an opportunity to work with financial fraud,” Berlind, who has a background in property management, explains. “People are either taking authentic documents and altering them or going online to get templates that look exactly like legitimate bank statements or pay stubs that they can fill in with numbers that make them look good.”

The Snappt software scans the submitted PDF documents and evaluates them for any alterations. They are compared to legitimate documents for things like logo color and layout, and even examined structurally to see if information has been added or taken away. “We have a deep understanding of how a PDF is made,” Berlind says. In addition, Snappt’s machine-learning algorithm examines historical data for the account to expose anomalous transactions or balances.

“There are companies that help with fake driver’s licenses or social security numbers. We saw an opportunity to work with financial fraud.”

—Daniel Berlind, Snappt Group

The entire check can be accomplished within 24 hours. If suspect data or document alteration is found, Snappt informs the property manager, who can then tell the applicant why their application is being rejected. The information is fairly specific, so if the person wants to challenge or correct the record, they can. When asked about the chance of “false positives,” Berlind says that “the last thing we want to do is falsely accuse someone. The system is designed to find a ‘smoking gun.’ Someone putting a black bar over something innocuous—like covering their account number—isn’t really what we’re looking for. Adding a zero to their monthly income is.”

Vasquez has been using Snappt and is a fan. “The software can help with human error,” he says. “It helps us with due diligence and saves me the time of Googling past addresses and so forth. If the report says ‘edited,’ I [can turn the person down and] don’t have to worry about it. I send them over to Snappt if they want to dispute it, and if they are cleared, then I can approve them. It saves me time and headaches.”

All this being said, be sure to evaluate the claims of anyone who approaches you with an innovative technology-based solution. Dr. Aleksandar M. Velkoski, director of data science, IT at the National Association of REALTORS®, advises maintaining a healthy skepticism. “I’d encourage you to challenge companies to demonstrate that offerings have been developed by a team with sufficient expertise in the technology that is being sold and work as expected. If solutions incorporate artificial intelligence to detect and eliminate fraud, make certain those solutions include strategies for mitigating bias. If you’re still not sure about what to do with an offering, consult a trusted independent advisor or someone knowledgeable on the technology.”

Best practices
Make sure everything matches up. Deposits—especially automatic payroll deposits—should match amounts on the bank statement.
Call sources like employers and previous landlords yourself instead of relying on a supplied phone number that might belong to a friend or accomplice.
Conduct an interview. The applicant should be prepared to present a photo ID, as well as hard copies of utility or phone bills from the address on the application.

Journal of Property Management

Written by <i>Journal of Property Management</i> staff

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