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With fears mounting over COVID-19 and a looming recession, it has never been more crucial for property managers to secure reliable sources of rental income. Problem tenants can disrupt rent collection, or worse, require an eviction. Compounding the issue, many municipalities are temporarily halting evictions due to the crisis, leaving the property manager responsible for lost rent revenue for an extended period.
At Snappt, we know that fraudulent applications are a leading indicator of future evictions. According to a Transunion Study, 50% of evictions could have been prevented with the proper fraud detection protocol. At a cost of $7,000-plus per eviction, that’s a significant source of revenue leakage. If that weren’t enough, we can expect the coming recession to increase rental fraud.
Why Recessions Increase Rental Fraud
Historical Evidence
To understand why recessions increase rental fraud, we first look to recent history. According to a 2011 study published by Harvard University, the Great Recession significantly increased the cost burden on tenants. The rate of severely cost-burdened renters, defined as paying more than 50% of income for housing, rose to 29.4%. As tenants spend more of their monthly income on rent, they are less able to overcome unexpected occurrences, which puts them at risk for non-payment and future evictions.
Lost Income
One such unexpected occurrence is losing employment. During the Great Recession, nearly 8.8 million people lost their jobs — and the current crisis is estimated to lead to even greater job losses. If these losses rise in the coming months as expected, so too will fraudulent income figures.
Forced Relocation
Other situations dictate a quick change with short notice, leading to desperation. In March 2020, nearly 600,000 college students needed to find new housing after their dorms evacuated them with less than a week’s notice. In such a situation, desperation can often lead to submitting a fraudulent application.
Clearly, fraud detection is important. However, some of the most common fraud detection techniques property managers currently employ might not work in this changing landscape.
Standard Fraud Detection Is Insufficient
Two of the most common fraud detection techniques property managers utilize are in-person screening and reference verification. Both techniques are uniquely at risk in the quarantined environment.
In-Person Screening
First, with social distancing currently at the forefront of the American lifestyle, many organizations are shutting down their in-person leasing operations. Beyond simply restricting the ability to vet an applicant in person, this moves applications to a digital format that our firm has found is much more likely to contain fraud. Thus, organizations can no longer rely solely on the in-person screening process to detect fraud.
Reference Verification
Many applicants provide a phone number for their current employer. However, as it is self-supplied, property managers have no way of knowing whether the “employer” is a friend of the applicant’s who could be in on the fraud. That’s why it is common practice for property managers to locate and call the office line directly and ask about the applicant. With many employers moving to the work-from-home model, calling the office is no longer an option.
So, if in-person screening and reference verification techniques are not feasible, what can property managers do to detect fraud?
Recommended Fraud Detection Techniques For The New Era
Visual Detection
As most major sources for bank statements and pay stubs have the same formatting for all documents from that source, one Bank of America statement should look visually like another Bank of America statement. Thus, a property manager can check the formatting and file quality of a submitted statement to gauge its authenticity. The following are key questions that a reviewer should evaluate:
• Does the file look scanned, or does it look like the original digital document?
• Do the transactional details align or are they shifting between documents?
• Does each document of the same type match the expected formatting?
Check The Math
Property managers can also check the math of submitted statements. If an applicant gets a direct deposit from their workplace to their bank, the amount they earn should be reflected in equal measures on both statements. Reviewers can also ensure that the ending balance of one month matches the beginning balance of the next month. Similarly, a reviewer can run the math on the applicant’s pay stubs to ensure that the year-to-date earnings reflect the proper income from statement to statement.
Performing Due Diligence
As savvy fraudsters can defeat both visual and math checks, a committed property manager should research the company and the applicant via sources such as LinkedIn, OpenCorporates and SBA.gov. A thorough investigation can reveal a thin working history or a company that exists on paper only, indicating a fraudulent applicant.
Data-Driven Fraud Detection
While effective, the above checks are time-consuming and not core to the property manager’s job. Data-driven solutions, including our firm’s, can save property managers time and reduce hassle by scanning digital documents to analyze and detect manipulation.
Taking Crucial Action, Today
With a recession looming and the rental landscape altered, the time to take action to protect your rental revenue is now. We have found that a 10,000-unit portfolio could expect $1.5 million in lost revenue due to preventable fraudulent applications — and this is projected to get worse as we enter a recession. The real question facing property managers is not, “Should we implement fraud detection?” but rather “Can we afford not to implement fraud detection?”