During my time as a rental housing owner and manager, I have heard many arguments against the acceptance of lease guarantors. Most of the arguments were voiced by persons who rejected the option because they were put off by the complexity of the processing, qualifying and documenting a guarantor, rather than for sound business reasons.
At my company, Lightner Property Group, we have always provided applicants a guarantor option as an alternative to our standard application qualification package. We see it as a way to approve otherwise economically or credit-wise unqualified prospects, who will be very acceptable residents if given the chance. This increases our potential pool of renters, and with good screening still makes sure our future residents are responsible residents and good neighbors.
But the allowance of guarantors and guarantees does add real complexity to your rental application procedure; and it does open doors for potential fraud. Early in my career, I experienced one of these fraud scams. It went something like this:
A student who was to be supported by his parents wanted to rent an apartment. The story was that when the student was younger, the student had made some mistakes in the handling of his finances, as so many young people do today. So, he didn’t have any income because he was a student and he had bad credit. His situation was perfect for a guarantor. So when the option was requested, we were happy to provide it.
Because the guarantor-dad was located in Southern California, we were happy to fax our guarantor application and paperwork to the father’s place of work, as requested. The guarantor application was completed and returned to us by fax. The identity of the business was confirmed by the header of the fax. The business name and telephone number matched the publicly published business fax number which was the number we had faxed the guarantor information to. It was all the way it was suppose to be; nothing suspicious or out of the ordinary.
The application was processed and approved. The signed guarantee form was received by our office, from the guarantor-dad’s business fax, the lease was executed by the prospective resident, deposits were paid on time, and the resident moved in.
During the subsequent years, we experienced a series of occasional late payments, all of which resulted in our office receiving a catch up payment from the guarantors office, after we had alerted guarantor-dad of the non-payment.
Fast forward 5 plus years. The resident has stopped paying rent, and we are not receiving the now expected catch up payment from our guarantor-dad.
A 3-Day notice is served. An unlawful detainer action is filed against the resident and the guarantor-dad. Neither the resident nor guarantor-dad respond to the Summons and Complaint. A default judgement is secured against both of them. The resident is evicted by the sheriff. When we are allowed to take possession of the apartment, it has been trashed.
The collection file sits on my desk as the months go by. The judgement is earning interest the legal rate, so I feel little sense of urgency to take immediate action. Other matters get in the way. It seems time is on our side in this instance. The guarantor-dad makes a very significant 6-figure income.
Finally I write a polite letter to guarantor-dad, suggesting that a simple payment in full will result in this unpleasant situation going away - as opposed to us garnishing wages or executing on the liens we placed on guarantor-dad’s real property. I assume that good business sense will prevail. I fully expect to see a check or to see an offer of 50 cents on the dollar to settle the matter. What I didn’t expect was what happened next.
In a letter from the family attorney, I am told that the signature on the guarantee is not that of our assumed guarantor-dad. According to “Dad’s” attorney, our guarantor-dad has no idea who’s signature it is - but it is not his signature. Through legal counsel, guarantor-dad indicates he never agreed to act as his son’s guarantor and he had not signed the application or the guarantee. He had not seen or been served the Unlawful Detainer or Complaint for Money Damages.
Furthermore, guarantor-dad had no intention of paying the judgement or any portion of it. And, on top of all of this, the guarantor-dad claims that he is no longer employed in his successful high powered well-paid position in the financial services industry. That relationship has been terminated. In addition, it is claimed guarantor-dad is seriously ill. Finally, the claim is made that the family is now experiencing significant money troubles. So much for sitting on a judgement collecting phantom interest. What an unbelievable change of circumstances!
Needless to say, with a story this wild, I didn’t believe the claims. I wrote a saber rattling letter to the attorney . Round two of the battle began when the default judgement was challenged by the guarantor-dad on appeal; where we lost. We then end up fighting at a new trial (Round Three); where we lost, again. Then in Appeals Court again (Round Four); we lost.
Finally each side hires handwriting experts and it is determined that dad was not guarantor-day. “Dad” did not sign the guarantee or the application. We learn a business associate of the dad had intercepted the guarantor application and documents sent by our company to the guarantor-dad, completed them with the help of the son, signed them and faxed them back using the company fax machine. This was ostensibly done without the knowledge or approval of the dad. The bottom line: We have lost and we have spent tens of thousands of dollars losing.
But that is not where the import of this story lies. The import of this story lies in the common mistakes we made with the lease guarantor application. What didn’t we do correctly?
- We didn’t document when and where the potential lease guarantor had been spoken to, at what telephone number and who called who;
- We didn’t review and keep a record of the lease guarantors government issued photo ID such as a driver’s license (after the application had been accepted) and compare the photo ID (driver’s license) signature against the signatures on the guarantor application and the residential lease guarantee; and
- We didn’t call the lease guarantor at a personal telephone number at an unannounced time, making it impossible for someone else to intercept a call.
Had we done these things we might still have experienced the rental scam, but the chances would have been lessened. Now we do all of these things.
I am pleased to report this event is still the only time a lease guarantee has gone sour for us. We encourage lease guarantor applications, just as we do any other rental application type. But we now approach them more methodically and are sure to dot our “I’s” and cross the “T’s” and to take that extra look if something is out of sorts or does not add up as it should.
Don’t allow your fear of a lease guarantor application to steer you away from otherwise qualified rental applications. But don’t let your desire to fill your rental vacancies keep you from taking the time necessary to verify that those who represent themselves over the telephone are who they purport to be. Taking that extra five to ten minutes can save you thousands on the other end. Believe me, as I speak from the best teacher available - experience!
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Merrie Turner Lightner is a full time property owner and manager with 25 years of experience in the rental housing industry. She serves as vice president and CFO of Lightner Property Group. Ms. Lightner is an attorney and routinely provides expert witness and consulting services in areas such as standard of care, wrongful death, sever personal injury, mold, lead paint and habitability in residential landlord-tenant cases.
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Most responsible property owners and managers use the three-tier approach of income, credit and background check to implement a fair and non discriminatory application protocol. Such application guidelines are well accepted and generally considered “best practice” guides for the housing industry. Individual and company guidelines will vary with risk tolerance levels, such as how many late payments are acceptable or what income ratio is appropriate. However some sort of combination of income, credit and background evaluation is the norm when evaluating a rental application.
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