The Rise of Fraud in the Rental Industry

The process to apply for a rental unit looks much different than in years past. Rather than meeting with a landlord in person, applicants can send an application online without ever meeting face-to-face. While this convenience can provide landlords with a larger pool of applicants, it can come with a few drawbacks—most notably, fraud.

Fraud has been commonplace in the rental housing industry for years, but today’s digital landscape has accelerated housing scams, and the industry is finding it hard to keep up. As a landlord or property management company, reducing cases of rental fraud should be a top priority, not only to protect your property but to protect yourself and your small rental business.

To mitigate risk, it’s important that landlords understand what these risks are in the first place. TransUnion commissioned Forrester Consulting titled: Misunderstand And Inconsistency: The State Of Fraud In The Rental Housing Industry. It explores fraud in the rental housing industry to help landlords stay protected. It’s important for landlords to use robust technology solutions that identify and prevent fraud to maintain a successful rental business. You can view the full report here.

TransUnion also conducted its own in-depth industry study in 2020 titled Fraud in the Multi family Industry. Together these two studies highlight some of the big challenges landlords face when it comes to addressing fraud in the rental housing industry.

Throughout this post, you’ll find eye-opening rental industry fraud statistics, types of fraud that landlords face, recommendations for the future, and more. Our infographic sheds light on some of the weaknesses landlords face when fighting fraud and how landlords can protect themselves. Read through for an in-depth look at fraud in the rental housing industry, or use the links below to navigate the post.

The Rise of Fraud in the Rental Industry

Digital interactions are becoming increasingly popular between landlords and tenants, especially in urban centers where virtual communication is often preferred. While the digital age offers many benefits, such as larger applicant pools and easier communication, it has opened the door to more fraudulent applications.

Today, many landlords and property management companies in urban corridors have transitioned from in-person interactions with rental applicants to digital interactions to cater to customer preferences. However, this has made it more difficult to verify application validity and find tenants with good qualities.

In fact, between 2016 and 2018, 97% of property management companies have experienced fraud in some capacity, with 80% experiencing it up to 20 times, according to the Forrester study. Overall, about 59% of rental applications are submitted online versus in-person, and this digitization of the rental application process has opened new avenues for fraud.

In addition to the switch from in-person applications to digital applications, the COVID-19 pandemic was another contributing factor to the rise of fraud in the rental housing industry. TransUnion’s 2020 study explored how multifamily property managers were managing fraud in the changing environment.

They found that

• 41% of respondents discovered fraud after move-in
• 67% are concerned about the future of fraud growth

Over the course of the coronavirus pandemic, fraud has steadily increased, and 22% of applicants failed authentication or were identified as high risk. During the pandemic, fraud reached a high of 15% compared to 10.3% over the same period in 2019.

It’s important for landlords to understand the risk factors of fraud, as it can result in several negative consequences. Some lasting impacts of fraud, as identified by Forrester, include:

• Increased repetitional damage: 59%
• Increased evictions: 51%
• Internal time spent comparing applications to find discrepancies: 46%
• Increased financial loss: 35%
• Lighter vacancies: 32%
• Increased bad debt: 22%

These are just some of the lasting impacts of fraud that landlords can experience, which is why having the right systems and practices in place are essential to mitigating risk.

Types of Fraud Landlords Face

With increased digitization comes more types of fraud. Data breaches are becoming more commonplace, and Forrester estimates that one recent breach alone caused an increase of 5% to 10% in identity theft-related fraud in the U.S. With fraudsters becoming smarter, companies are having difficulties staying ahead of their advanced tactics. Some types of fraud landlords should be aware of include:

• Rental application fraud: This the practice of lying on a rental application, whether it be providing false income or uploading an altered photo.
• Synthetic fraud: This is one of the fastest-growing types of fraud. It’s where an applicant creates a fake identity using real and false information. For example, a fraudster may create a fake Social Security number and pair it with a real address to create a fake identity to gain access to a rental property.
• First-party fraud: This type of fraud is performed by the individual, which is typically the tenant, where they use fake or altered information, such as pay stubs and previous addresses, to qualify for a rental property.
• Third-party fraud: This is when an individual uses another person’s identity or information to qualify for a rental property, such as misrepresenting who they are with someone else’s Social Security number, name, and date of birth.

These are some of the most common types of fraud that landlords can face. It’s important to be aware of them and take steps prevent them from occurring in the first place.

Weaknesses Property Management Companies Face When Fighting Fraud

The rapid increase of fraud in the rental housing industry is proving to be a challenge for many landlords and property management companies. One of the most significant weaknesses is that most landlords are confusing applicant screening with fraud mitigation. While tenant screening is an important step that all landlords should take when vetting applicants, it isn’t a fool-proof measure to prevent fraud. Adopting fraud mitigation measures will help landlords be more effective in getting quality renters and become more cost-efficient by reducing involuntary turnover costs.