Rental fraud is becoming a growing problem for property owners and managers in the real estate industry. This fraudulent practice involves applicants using fake documents to misrepresent their financial situation. It affects all types of multifamily housing, from affordable housing to luxury apartments. The financial impact is significant, with eviction costs averaging between $20,000 and $25,000 per unit. Despite these high costs, only 17% of multifamily property owners have implemented comprehensive fraud prevention systems, highlighting the urgent need for improved measures.

The development of rental fraud

As Mendowa Martin, senior vice president at JLL, explains in a podcast, rental fraud has evolved dramatically over the years. Originally, fraudulent activities were more low-tech, involving simple forgeries such as fake employment records. However, as technology has advanced, fraudsters now have access to sophisticated tools that make it easier to create convincing fake pay stubs and bank statements. Notably, there are even online communities dedicated to teaching individuals how to circumvent income requirements for apartment rentals.

Kent Simpson of Yardi Systems, also a speaker on the podcast, points out that the sophistication of rental fraud increased significantly during the COVID-19 pandemic. When leasing offices closed and processes moved online, fraudsters operated anonymously, making it easier to deceive property managers. Simpson highlights the dual challenge of creating a seamless application process for legitimate applicants while deterring fraudulent applicants.

Types of rental fraud and strategies for prevention

Rental fraud involves a variety of tactics, including document forgery, misrepresentation of income and identity fraud. Martin stresses that verifying an applicant’s identity is a crucial first step in fraud prevention, using technology to authenticate identities before addressing other aspects such as income verification.

Simpson stresses that there should be no more reliance on easily forged documents. Instead, he suggests using automated asset verification systems that require applicants to sign up with their bank or payroll provider to reduce the likelihood of fraud. This approach not only increases security, but also improves the user experience by requiring fewer documents to be uploaded.

Financial impact and industry response

The financial impact of rental fraud is significant. The costs of legal fees, lost rent and re-letting add up quickly. Martin points out that while most applicants are honest, it is the small percentage of fraudulent applicants who cause the greatest financial damage. Therefore, it is important to approach the screening process with a balanced mix of skepticism and positive intent to ensure that honest applicants are not unfairly disadvantaged.

The industry is beginning to recognise the need for robust fraud prevention measures. Martin mentions that while only a small percentage of operators currently have comprehensive plans in place, there is a growing trend to include fraud prevention as a line item in budgets. This shift is crucial as it allows operators to invest in technology and processes that can effectively mitigate fraud risks.

The human factor in fraud detection

While technology plays a major role in preventing rental fraud, the human factor remains just as important. Property managers must be vigilant and trained to spot warning signs, such as applicants claiming to be victims of identity theft or who insist on submitting paper documents due to alleged technical issues. Martin shares an anecdote of a manager who was touched by an applicant’s story of identity theft, but then found discrepancies in the documents provided.

Ultimately, it is critical for property owners and managers to have a plan in place to effectively combat rental fraud. Martin sums it up: “Companies that don’t have a plan or lack a plan become targets.” The industry must continue to adapt and evolve, leveraging both technological advances and human intuition to stay one step ahead of fraudsters. As Simpson aptly notes, “We will never be able to eliminate all risk, but we can mitigate more and more of it over time.”