The Rise in Fraud and What Multifamily Can Do About It

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Fraud is on the rise in the multifamily space, with a recent occupational fraud report showing that real estate is the No. 1 targeted industry in the world. Renters are increasingly using fraudulent pay stubs, credit scores, Social Security numbers, and bank account statements to qualify, while fraudulent background checks, references, and rental activity are used to conceal criminal activity or other disqualifying information.

The problem was exacerbated by the pandemic when a spike in unemployment led desperate renters to resort to fraudulent means to secure an apartment amid economic uncertainties. This led to property managers seeing a doubling of fraudulent applications, from 15% in February 2020 to 29% six months later. The percentage of landlords impacted by rental fraud rose from 66% to 85% within a year.

Despite this substantial rise in fraud, property managers are finding it increasingly difficult to detect fraudulent applications, due in part to the more sophisticated techniques perpetrators are employing, with detection rates dropping from 90% before the pandemic to 75% today.

In addition to the increase in fraud, the deterioration of renters’ credit is on the rise. Credit scores are down and debt-to-income ratios are increasing, resulting in fewer qualified tenants in the market. There is also a surge in defaults, which a RealPage study shows are most likely to occur within the first six months after a resident moves in.

The impacts of this trend have been multifaceted, extending beyond mere financial losses to encompass broader disruptions in tenant screening processes and rent collection dynamics. As fraud increases, credit scores decline, and debt-to-income ratios soar, property managers face heightened risks and operational complexities.

In light of this concerning trend plaguing the real estate industry, particularly in the multifamily sector, it’s evident that robust measures must be put in place to safeguard against such threats. Thankfully, there are more proactive solutions than ever that owners and property managers can use to protect the rent rolls of their real estate holdings, including:

1. Be diligent in accepting cashier’s checks as payment for the application fee, first month’s rent, or security deposit. This payment method, which was previously regarded as safe, has become more prone to fraud, so steps like calling a bank to verify should be taken.
2. Pick up the phone and call employers upfront to make sure the applicant is working where they say they are. A simple check can quickly reveal fraudulent employment history.
3. Raise the bar for applicants by asking for two or more months of pay stubs or bank statements, along with an application. One month’s worth of fake documents is easier for fraudsters to supply than two or more.
4. Tie future bonuses to a rental property’s on-time rent payment score, not just new leases. This incentivizes your team to prioritize legitimate applications and be more discerning in evaluating potential residents.
5. Incorporate rent guarantee programs, which can assess risks and provide rent guarantees through an independent agreement with the prospect. These programs reduce the risk of nonpayment.
6. Empower on-site management to identify fraudulent activity and reward them when they implement best practices. The on-site team is one of the most important components of fraud prevention, and they should be trained and incentivized accordingly.
7. Be an early adopter of fraud prevention programs and continue to refine your operations to stay in front of the market. Fraudsters are becoming more sophisticated as the industry improves its screening practices, making it crucial to explore new prevention technologies early and often.
8. Perform a regular analysis of resident payment trends. The sooner you identify a negative trend, the quicker you can pivot your strategy and reduce future payment issues.
9. Implement strong operating procedures with a focus on separation of duties. Always have more than one employee involved in the application and application approval process to ensure multiple steps of review and eliminate the possibility of employee participation in any fraudulent practices.

A proactive approach to fraud prevention, including early adoption of technology-driven safeguards and empowerment of on-site management teams, gives owners and property managers a competitive advantage. By instituting stringent operating procedures, conducting regular trend analyses, and embracing rent guarantee programs, the multifamily industry can remain agile in navigating and preventing future fraud.

Source: Multifamily Executive