IT IS A SCENE THAT IS OCCURRING with greater frequency in apartment communities across the nation: A prospective resident fills out an application and just minutes later finds out if the apartment is his. A process that traditionally has taken several days can now be completed almost instantaneously.
The reason? The development of advanced, computerized screening services, typically Web-based, that function much like the systems that quickly issue or deny someone a credit card, simultaneously assessing a vast array of factors to recommend that an apartment manager accept or decline a certain applicant.
Apartment managers are using these systems, built upon complex risk-assessment models, because they believe the systems save money by securing more reliable tenants who are more likely to meet the conditions of their lease. The instant-leasing programs also are a major convenience for today's prospective renters, who are looking to secure a unit quickly, according to apartment industry members.
Most apartment leases are still executed through traditional screening procedures, which typically include obtaining credit reports and making phone calls to verify employment history. However, “if you look at our list of the 50 largest apartment owners and managers, there is not a firm on there that has not utilized these products to some degree,” says David Cardwell, vice president of finance and technology at the Washington, D.C.-based National Multi Housing Council (NMHC). “They have all at least tested the waters.”
Companies offering the instant screening include Denver-based SafeRent Inc.; Rockville, Md.-based First American Registry Inc.; Englewood, Colo.-based RentPort Inc.; Dallas-based Resident Data Inc.; and Waltham, Mass.-based RentGrow Inc.
Southern Takes The Plunge
More than a year and a half ago, Vienna, Va.-based Southern Management, which manages 24,000 apartment units, began using First American Registry's instant credit-scoring system, called RegistrySCOREX. The company has been a client of First American, which offers a variety of screening programs, for years.
The scoring system, which clients can access via the Web or software, works as follows: Once a leasing agent has a completed application in hand, he enters information about the applicant into the program, which collects a person's credit and eviction information from a database that includes more than 33 million landlord-tenant court records. Once the information has been run through a scoring model, the agent receives a score that tells him whether the applicant should be accepted, rejected or accepted with a conditional lease.
Geoff Ogden, who is the director of resident financial services at Southern Management, says the program has been a success. He points to a case study of the SCOREX system that shows Southern filed 2,038 fewer actions in landlord/tenant courts in the first eight months of 2001 compared with the same period in 2000, when the company was not using SCOREX, resulting in a savings of $122,280. Also, the number of delinquent leases declined nearly 30%, and the amount of rent that was delinquent decreased by $469,000. And the use of the scoring system saved nearly $55,500 in credit-screening costs.
According to Nevel DeHart, executive vice president of First American Registry, the SCOREX system is used to screen residents for approximately 1.5 million apartment units. First American charges between $10.50 and $12.95 per screening. Companies using the SCOREX system include Denver-based AIMCO, which uses the program in portions of its portfolio; Newport Beach, Calif.-based Irvine Apartment Communities; and Foster City, Calif.-based Legacy Partners.
Instant Checks Through SafeRent
Less than four years ago, SafeRent was an Internet start-up operating out of the home basement of Linda Bush, the company's president and CEO. Today, the company provides its tenant-screening system to more than 250 companies that manage approximately 850,000 units nationwide. Funded by approximately $29 million in venture capital, the company's clients include Denver-based Archstone-Smith, which has invested in the firm, AIMCO, Charlotte, N.C.-based Summit Properties and Atlanta-based Gables Residential Trust.
Designed by two Harvard University economics professors, the SafeRent scoring program is accessed via the company's Web site and works similarly to First American's system. Depending on the size of the client's portfolio, SafeRent charges between about $10 and $14.95 per screening.
Bush says the real value of her company's scoring system is that it helps landlords manage risk. She compares it to the credit-card business. “You're always trying to find the best customer,” she says. “For each consumer, you're trying to figure out whether to offer a card at all, with what credit limit, at what interest rate,” she says.
The system appears to produce results. During its first 18 months of using SafeRent, Archstone (then Archstone Communities Trust) experienced an 18% decline in bad debt. In a study conducted by SafeRent of 21 properties that switched to the company's system, residents vetted by SafeRent owed, on average, about $50 less upon vacating an apartment than those screened by traditional methods. SafeRent officials claim this is because their risk assessment system produces more reliable tenants than the usual screening methods.
Todd Bruun, co-founder and vice president of finance and risk management of SafeRent, notes that the $50 is an important statistic because once a tenant leaves owing money, there is no guarantee that the landlord will be able to recover those funds.
A similar study by SafeRent, this one of nearly 10,000 move-outs at 80 properties, reveals 18% fewer lease skips and 56% fewer evictions among SafeRent-screened renters.
Jim Thomas, president of the multifamily property management division at Irvine, Calif.-based SARES•REGIS Group, which manages about 11,000 units in California, Arizona and Colorado, says his company began using SafeRent two years ago and has been very pleased.
The program is popular among apartment shoppers because of its speed. “People today have less time,” Thomas says. “They want to spend less time filling out forms and waiting for somebody to determine where they are going to live next.”
Thomas also says his company's use of SafeRent allows on-site staffs more time to follow up with people who have visited a property but not filled out an application.
A Reduction Of Fair Housing Risk
Another benefit to using credit-scoring systems such as those offered by First American Registry and SafeRent is that they can offer apartment owners and managers protection from Fair Housing Act violations. “What SafeRent does is make the whole process objective,” Bush says. “It doesn't let in any kind of judgment on behalf of the person that's sitting across from the applicant.”
If a credit-scoring system does not account for a characteristic such as race, religion, gender or marital status, it is in compliance with the law, according to a white paper that Bush and Bruun of SafeRent authored for the NMHC.
Potential Drawbacks
Industry members point out that instant credit-scoring systems do present some challenges for the apartment industry. Bush and Bruun's white paper warns that a leasing associate may view the arrival of an advanced screening system as an encroachment on his turf. “Moving to automated credit scoring significantly changes the on-site employees' jobs and possibly the culture of the organization,” Bush and Bruun write.
Also, there's the matter of cost. Large apartment companies typically pay the credit bureaus, such as Equifax, Experian and Trans Union, $2 to $7 per report, according to a 2001 study on instant credit-scoring systems written by Lee Schalop, REIT analyst with New York-based Banc of America Securities.
Compare those prices with the $9 to $11 per report that SafeRent charges such companies. “There is some skepticism at these apartment companies that the extra price is worth it,” Schalop writes. “Of course, SafeRent argues that the savings from its service more than outweighs the incremental price.”
Senior Associate Editor Stephen Ursery covers the multifamily sector for NREI.