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When most people hear “rental scam,” they tend to think of an unassuming customer being tricked by a devious landlord. Many people overlook the opposite situation: a landlord or property manager gets fooled by an untrustworthy tenant. Tenant fraud often goes unreported because the losses to landlords are smaller and seemingly insignificant. However, these scams are becoming more rampant as more and more rental agreements are taking place online; at this point, it could happen to almost anybody.
According to a study conducted by TransUnion, over 80% of property managers have fallen victim to tenant fraud—and that does not include other types of fraud, such as scams within the company.
In order to help you avoid rental fraud both outside and inside of your company, we researched the three most common types of scams in the rental industry and how to prevent them:
Tenant application fraud comes in a number of various forms, made all the more doable by the transition to online applications. Sometimes people commit tenant application fraud because their applications will not be accepted otherwise, but other times it is all part of a scheme for them to make money; either way, it is important to know how to spot a scammer.
People resort to doctoring their documentation, stealing the identities of others, and even creating entirely fictional identities.
All of these methods are damaging. When a fraudster fakes his identification, credit cards, and other important information, and it all remains unverified, he can get away with a fake rental application and take advantage of your business. When he commits identity theft, he uses bits of information to assume somebody else’s identity and pin everything on them; when rent collection rolls around, the true identity of the tenant is unknown. Finally, a person who creates an entirely fake identity to obtain a rental property uses that address to build up credit before defaulting on rent—and it’s pretty much impossible to collect rent from somebody who doesn’t exist.
Most of the time, landlords discover the fraud after the tenant moves in and misses a rent payment. This type of fraud can cost you thousands of dollars, so it is essential that you take the right precautions.
While you obviously (and unfortunately) cannot force people to stop committing rental application fraud, there are steps you can take to ensure that you are not its next prey.
The most important thing you can do to prevent rent application scams is completing thorough screenings for any potential tenants. Check for photo identification before you provide applicants with a tour of the property; require that tenants sign and verify their rental applications under the penalty of perjury; contact third-party sources that can verify application information, such as previous landlords or employers; run tenant credit reports, as the report cannot be falsified.
Keep an eye out for any noticeable discrepancies between documentation and applications, like information on a previous utility bill that does not match up to information on the application, or the applicant driving a car that they had not mentioned.
While such thorough background checks and verification might sometimes feel like overkill, it will protect you and your company from fraud in the long-run.
Like tenant application scams, rent scams manifest in several different ways, but each way is costly.
Some tenants move in with no intention of paying their rent on time, if at all. To be fair, sometimes people encounter a bump in the road, such as unemployment or unexpected medical expenses, that makes it difficult to make their payments on time. If your tenant consistently fails to make timely payments, look into the reasons behind it. Sometimes people do not pay rent under the impression that it will take you a few months to catch on, and at that point, they’ve received a few months of free housing before they get evicted.
Another form of a rent scam involves money wiring. Many times landlords receive rental applications from international renters; the renters send a check that pays more than the necessary amount and then request that you wire the overpayment back. Typically the check they send is fraudulent and takes a few weeks to bounce, and by the time it does, you’ve already wired the money and the renter has vanished.
The third type of rent scam is especially nasty because it affects not only property managers but also unsuspecting third parties. Somebody will rent your property and pay for the first few months, and then suddenly you stop receiving payments. You decide to stop by the apartment to ask about the issue, and there you find somebody who is not your tenant living there. That person has paid a hefty chunk of money for a short-term illegal sublet, and the original tenant is nowhere to be found.
Because there is such a variety of rent scams, it might seem impossible to minimize the risk of it all. However, there are several measures you can take to ensure that this does not happen to you.
Again, always, always, always screen your tenants thoroughly. A simple credit check will not do; run background checks and reach out to references. Property managers who only complete quick credit checks or background checks are undoubtedly more susceptible to fraudsters.
On top of that, avoid money wiring at all costs. Don’t deal with overpayments. If something like this happens and doesn’t seem to make sense, trust your gut. To ensure that you securely receive payments, try cutting down on physical checks and instead having your renters pay through an online portal.
Implementing such practices into your company significantly minimizes the risk of tenant fraud. It is better to be too careful than not careful enough.
While both of the aforementioned rental scams have dealt with tenants, accounts receivable fraud actually takes place within your company.
Why you should be especially concerned about this kind of fraud is because it has the potential to ruin your company from the inside. Not only does theft obviously hurt your financial health, but it can destroy the esteem of employees and the overall reputation of the company.
There are several different ways to commit accounts receivable fraud: lapping, which involves stealing checks from one customer and continuously using the next customer’s payment to balance it; skimming, which involves intercepting checks before the payment has been recorded; write-offs, which involves covering up theft by applying fraudulent discounts to customer accounts—and so many more.
The gist of accounts receivable fraud is that employees who handle your company’s accounts receivable use various methods to steal money and conceal any suspicious activity.
Accounts receivable fraud seems unfortunate because you want to be able to trust your employees while also protecting the interests of the business as a whole—and luckily, you can.
When it comes to your company’s accounts receivable, you should make sure that multiple people are part of the process. When only one person has the authority over a financial process, you are much more vulnerable to fraud; however, when several people handle the process, the likelihood of any sort of fraud decreases drastically.
You can also implement accounting and bookkeeping software into your company if you have not already done so. Receiving payments through online software helps ensure financial security since the computer handles the accounts receivable process and there are no physical checks that an employee could easily pocket.
Finally, and perhaps most importantly, educate yourself and your staff on the signs of fraud. The most common fraud detection method is through employee tips, so it is important that anyone who witnesses suspicious activity reports it.
As much as we would like to believe that everybody has good intentions, that is not the case. The thought of rental fraud might be off-putting and even scary, but when you take the appropriate measures to prevent scams, your business will be a lot less vulnerable and a lot more prepared.
