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PODCAST: Rent fraud is rising. What are multifamily landlords doing about it?

Multifamily owners and developers are being proactive to protect their investments

augustus 02, 2024

Fraudulent rent applications are an increasingly big problem owners and developers of large residential buildings.

Around 71% of professionals in the multifamily industry have seen an increase in rent fraud over the past year, according to a survey from the National Multifamily Housing Council (NMHC) in January.

Part of the rise comes from a rising volume of rental applications. After a surge in house prices in the last few years, renting is increasingly seen as the better – and sometime only – option.

Fraud has been especially prevalent at the higher end of the market. To get their hands on upscale rentals, people lie about their income or employment.

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As fraudsters are becoming more sophisticated, more financial losses are on the horizon.

In the U.S., eviction costs per apartment due to fraud can reach up to $25,000, says Mendowa Martin, Senior Vice President of JLL Multifamily Property Management. Speaking on a recent Trends & Insights podcast episode, she says these rising costs underscore the need for proactive measures to prevent and tackle rent fraud.

However, only 17% of owners and developers in the multifamily housing sector have implemented a system to prevent it throughout their portfolios, according to the NMHC.

That number may be closer to 30% in many markets, according to Kent Simpson, Industry Principal for Screening and Fraud Solutions at Yardi Systems. Many of those who currently lack a solution are starting to explore options.

"People are realizing they're falling behind if they don't address this issue," Simpson said. "A lot of those who haven't implemented a system yet are currently in discussions with providers. By the end of this year, they'll likely have a solution in place."

To learn more about challenges and solutions regarding rent fraud, listen to Mendowa and Kent discuss this topic on Trends & Insights: The Future of Commercial Real Estate.

James Cook: Apartment rent fraud is on the rise. This is where an applicant to rent an apartment uses fake documents to show assets they don't have, income they don't have, in order to trick the owner into leasing the apartment to them. Now, rent fraud is happening in all multifamily properties from affordable all the way to Class A luxury apartments, and for the owner of the property, it is not cheap. 

Mendowa Martin: I wanted to know what the average eviction costs a landlord. Probably in the last year, it's upwards of $20,000 to $25,000 per apartment that fraud costs. It costs about $25,000 to evict somebody. 

James Cook: That is Mendowa Martin. She heads operations for JLL's multifamily platform. Apparently only 17% of owners of multi-family properties have a fraud prevention system across their entire portfolio. So clearly there's a big need here. How can owners and developers put a plan in place? Today, we are finding out. We're speaking with Mendowa Martin with JLL plus Kent Simpson of Yardi Systems. This is Trends and Insights: The Future of Commercial Real Estate. My name is James Cook, and I am a researcher for JLL. 

Mendowa Martin: I'm Mendowa Martin. I am the senior vice president. I head up operations nationally for JLL's multifamily, property management platform.

James Cook: So you've been in the business a while. What was your first experience with rental fraud? 

Mendowa Martin: In the very beginning, people would just really falsify documents. That was pretty easy. They would, say they didn't have things they would say I'm employed by so and so, and you would call and it would be their mom or whatever. It was just so low tech, and the technology has gotten great for people to be able to now generate paycheck stubs and falsify bank statements.

James Cook: There are websites dedicated to helping you generate a paycheck stub that is getting increasingly more difficult to identify. Thank goodness, technology keeps. evolving as well. 

Mendowa Martin: And they're keeping up with pace. But, there are reddit groups. There are tick tocks dedicated to people that want to move into an apartment that otherwise would not qualify. So how to get around income requirements, how to make these bank statements.

Kent Simpson: I'm Kent Simpson. I'm from a company called Yardi Systems. We are a property management software for real estate. And I am our industry principal for screening and fraud solutions. 

Just to piggyback on that, there was fraud before covid But certainly Mendowa to your point, Everything really ratcheted way up when everybody came out of that world of all prospects were anonymous. 

There was no leasing offices that were open. And so that was the time where everything just skyrocketed on to your point, the sophistication. So the sophistication meant they were going to be more successful at getting by operators. And not most people aren't trying to defraud operators the 80 percenters are great you want them to have smooth workflows and those types of things? So you're always trying to have this tug of war dual purpose of let's create the cleanest possible Workflow for folks through the application process while giving the fraudsters the opportunity to Be deterred or get caught continuum. 

I'm not as breathtaken as I was three and a half four years ago by the brazenness Of where this has become but screening that traditional screening of credit and criminal that's really now the assumption the byline fraud prevention has really become the headline. 

James Cook: I imagine there are different types of rental fraud.

Kent Simpson: three and a half years ago when Folks on the vendor side began to try to solve For more of the fraud things that were going on. Yes, it's documents. Yes, it's pay stubs, but there's a whole lot more going on In being able to better vet people through payroll providers through banking institutions verifying identity I've been in here 20 years and this fraud stuff has come up in the last five years. We think about whatever driver's licenses that me or our buddies tried to have a long time ago. 

It's nothing. Compared to what happens now and the way that the states have gotten more sophisticated at building theirs out But verifying identity can be at the top of the funnel and it is for a lot of operators today Just trying to say before we even get down to the other types of fraud around income is this person even them? 

Can we give them kind of a scarecrow security sign effect and give them the opportunity to stop kicking the tires here or not? even try so ID verification is certainly a big component and then on the income or the document side, that's the combination of the things that operators are weaving into their vetting process to figure out is somebody them and are they whole on the financial front. 

 I would say, as far as what we're seeing now, as we look at the middle of 2024,can we move away from documents? Can we solve with documents? Is that where our problem is? Yes. But no matter how sophisticated the solutions get to combat that, fakes are gonna get through. 

It'll be edge cases, but man, there's some, as y'all mentioned, digital stuff, The kits you can buy, So can we get to more automated sources, asset verification? So those are, things that, operators I think really want to do and just cut down on, the number of people who will use a document and possibly get by, but cut down on friction and the user experience for the prospects to not have to upload stuff. 

Just log into your bank, just go to your payroll provider and make it real simple. 

James Cook: do we have a sense of how much of an impact all of this fraud has on apartment owners?

Mendowa Martin: it's funny. I did look this up. By the time you factor in attorney costs and lost rent, and then having to rerent, it's upwards of 25, 000. So it's real money. When we start talking about why we are so stringent the screening, and we don't always want to be right. one of the things that happens in this business is we can become very jaded. 

We think everybody is out to commit fraud when that's not the case. And so we really. Have to be skeptical. But one of the things we really want to do is approach it with positive intent. The last thing I want to do is have that time when yes, the person's computer is not working or they, give me every document I don't want. 

 all the red flags are there, but they're just. a person trying to rent an apartment and not trying to commit fraud. So really positive intent is important, but with a healthy dose of skepticism 

James Cook: did we talk about that it's growing? 

Kent Simpson: Yeah, it's certainly growing. there was a study that came out at the beginning of the year and the types of fraud that clients between the 60 to 85 percent clip we're seeing, whether it's around documents or identity or falsifying and then subletting with the whole, whole other world that we could get into today. 

What happens there? operators are just, It's unbeknownst to them, right? those are the unintended consequences that you don't want on that third and fourth level of fraud. But it certainly is at a growing pace to the point where I would say when we began to go to clients 3, 4 years ago and say, Hey, We have some ways to help you solve they weren't budgeting for this as a line item yet They were panicking and beginning to try to figure out what else can we do? 

But when they had done those Budgets they spending, you know the pennies to save the dollars on the fraud prevention wasn't there But I would say going in the last couple of years clients operators small and large are budgeting for this on their annuals to solve for it because to Mendowa's point Even if we only catch 3 to 5%, but you deter 8 to 10%. 

And I'm just making up some broad numbers. those turn out to be large numbers when you annualize that on maybe a, depending on the size of the portfolio, what that number would really look like, even on the most conservative 7, 500 eviction, total, which I know is silly Mendowa, but, it's more than that, but yeah, so it's at a growing pace. 

And I think I saw something leading into this that, it looked like only 17 percent of operators in the multifamily world had a portfolio wide solve. I don't know if that number is still that low, but it's still probably less than 30 because operators are still figuring this out. 

This isn't a one size fits all. There are a bunch of different technologies and what's the best way to really accomplish what you want to do. Four things at once. Cost, turnaround time. How long does it take to do something like this? 

Friction for your prospects, and then, completion rate. Because the options are there for the different things that can be done, but you've just got to find the best way to do it that meets the company policy and need. 

Mendowa Martin: to piggyback on what Kent just said. 17 percent of operators really have a solid plan in place. I thought that was a little bit low, but not surprising, because this is such a gray area. 

Legislation is changing, right? Our world is changing. We're asking for different things than we did 25 years ago. We're taking a lot more exceptions. We can't be as hard and fast, legally as been able to in the past, so it's an uncomfortable position to be in, to be talking about credit and criminal and identity and all of these things. 

It feels very personal when we dig into your bank records and we want to know Rental history. And so it's, I get it. It's a lot to dig through, which is why you've got to have a partner that is willing to not only keep you up to date on what is happening, nationally in your state in your city or even, our County levels. 

 That's really one of the reasons that chose to go with Yardi because we knew you. That not only would they keep us up to date, but they'd also answer our questions because when you think you've got it figured out, Experian comes back and they give you yet another alert and you're like, okay, I don't even know what this means. 

 sometimes, you have to have a PhD in this stuff to really figure it out. But I can understand why there are so few operators that really have it. It's an uncomfortable. Area to operate in 

James Cook: it sounds like there's no easy fix. talk me through, what can be done? 

Mendowa Martin: the 1st thing you've got to have a plan. 70 to 83 percent of operators. don't have 1. that's mind boggling to me. and so that's the 1st thing is have a plan, but it can't just stop there. 

Somebody has to be responsible for continually updating this plan and educating the on site teams not only what to look for, if they're presented with documentation or identification, but even methods of payment and how, potential fraud can happen when somebody goes to submit the payment. 

 companies like ours try to figure out the best way to support operators. and their prospects and residents. to the point of most people aren't trying to defraud you. We focus so much on those that are because that small percentage causes the vast majority of the financial pain, obviously, but , you do want to keep things smooth and easy and intuitive. 

Kent Simpson: And in a lot of these cases, only introduce friction when absolutely necessary. Some of these things can be accomplished with no friction. You can have a provider look for data around And so unbeknownst to the prospect, this gets accomplished and they get moved on through and they're fine, right? Their employer is involved in that. And just a couple of quick examples without going too deep. If we look at just two of these things, verifying identity. First, when we first got into this and some of our competitors, it's been documents, images of those, and then a selfie of myself, like we're beginning to do at airports when I log into my, to do mobile banking and things like that. 

But what if we can use things like this? Passive authentication now our industry and multifamily is wonderful, but oftentimes we're late adopters of technology Which is good and bad the bad is that we're missing out on something for a period of time The good side is we're getting it when it's vetted and tried and true when the banking and auto industries have done all this So the next thing is going to be is Can we get more people identified without having to have them take images and us do the vetting there and let's just make sure their IP address or their phone number or their email addresses are all legit. and not even have them do that unless something looks fishy there. So that's an example of how these things continue to move forward on the income side. there were things we didn't know a few years ago when people were saying, a lot of our people are under banked or everybody's allergic to this idea of open banking. There were the things that we just didn't know. What we've learned is that people are not underbanked, whether they're in an A class or an F class or whatever community type it is. and if they want to live somewhere badly enough, they will give up banking information. And I'm even one of those people that's a little creeped out by giving up my financials out of my bank. 

But, If we're talking about stories in the past year, there was a high dollar reservation I wanted to make and a high dollar purchase that I wanted to make, and in both of those cases, remotely, I was asked to do what? Give up my bank stuff. What did I do? I did it. I didn't want to. So take that little example and move that forward to somebody, Finding a place where they're going to live, a much more extreme example. 

What we've noticed is we can get things done with no friction, a little friction, and only in those rare cases have people upload anything and more of these things are going to continue to come. Asset verification will be next, probably some form of, and we'll see, but figuring out people's cashflow and deterring fraud all at the same time with their income, their, assets and their expenses. 

And figuring it that out that way. So these things will continue to move and ebb and flow as things tighten with how to prevent it because look the reality has been it will continue to be That whether the vendor or the operator we're always living in our 10 foot building together And the fraudsters will always have the 11 foot ladder, so we'll never eliminate All risk, but we can continue to mitigate more of it as time goes on and we all will.

James Cook: So I imagine you're probably paying close attention to all of these online forums, seeing what people are doing. So you can figure out, Hey, behind the scenes, how can we stop that? 

Mendowa Martin: You're absolutely right. I want to hire Leonardo DiCaprio from catch me if you can. I want to find that person that has done this for, 20 years and evolved and pick their brain on, cause most of us are not criminals. We don't think that way. you were asking about Why do we think there's growth in fraud and certainly, the COVID effect, the other thing too is just how expensive it is to try to purchase. 

Kent Simpson: If you're renting with the aspiration of becoming a homeowner and building equity, the size of the down payment that you have to make along with the interest rates that are out there now, it's making it much, much more difficult for people to move in that direction. 

So people are going to try more things that they might not have ordinarily tried in the past, to get the kind of place they want to live in. And it's in these A class type properties that they don't necessarily want to live in something else. 

James Cook: Are there any other things, Kent that we haven't talked about with third party, fraud prevention

Kent Simpson: it is June of 2024. The solutions are what they are. And look back from Yardi perspective at the testimonials that clients were writing three years ago, coming out of COVID as far as where things have come from and where they are now when we had this one payroll solution that 13 percent of the time we were helping them find out how much somebody made and where they worked. 

So not to just talk about our product, but now we moved. Forward three years as far as the sophistication and how products are growing and what else is available now There's much more going on with banks. The completion rates are now not 13 15 percent They're more like 80 85 percent and you're getting more of these prospects through the process all these legitimate ones With little to no friction and you're still catching it aturing the fraudsters at a growing rate with more sophistication to respond to their sophistication Than we had before but I just was in a meeting with a couple of folks earlier this week, around what's next and what do we need to be thinking about to position to our operators? 

So it's a moving target. You want to get ahead and like the catch me if you can scenario. You almost have to wait for it to get broken before you know what to fix, of what's going on, whether it's around documents or IDs banking information, whatever may be. 

So there'll be more. We can have this conversation six months from now, certainly a year from now, and things will have advanced. Operators will be more successfully solving, more of 'em will be solving. I'd liken this a little to renter's insurance 15 years ago when everybody was afraid to require it. 

'cause they were worried about losing leases. A few of the biggies jumped off that cliff first never happened and occupancies weren't affected. And now everybody requires rent's insurance. I think that clients certainly now, if. even if that number is still in the 20 to 30% range of those that are portfolio wide solving, you won't go to a conference or a round table and have anybody go we maybe we don't need to do anything about that. 

Everybody is now very aware that they're behind if they're not solving for it and if they're not, a lot of those 60, 70 percenters that don't have a portfolio wide solution yet, they're certainly talking to, a provider around how they are going to solve for that. Probably by the end of this calendar year. 

Mendowa Martin: I think it's interesting coming from the operations and being on site many times in my career, actually being on the front line of this. And we talk about the technology piece, which is critical, but there's the human piece also that is equally as important and there are. some of the characteristics of, the high pressure and, yeah, I need to move tomorrow. 

I need you to do this or I'm going to do this. There's that negative connotation. There's also the 1 that, we have people that come in that are trying to commit fraud that really play on your heartstrings This was about 2 weeks ago but I had a manager, send me an email just saying This gentleman was a victim of identity fraud. 

and his credit is going to be tough and they have a new baby and he is just starting a new job. Just, they laid it all out. And my manager was like, I just really think we need to approve them. And one of the things to know is the onsite team can see only two things, whether somebody is approved or denied. 

So if you come in, they can't see your social security number. They can't see your driver's license number. They don't have any information. there are only a few people, in the organization that can dig a little bit deeper. And I said, okay, this is then if this. who had filed, by the way, a police report filed with the credit agencies that he had been a victim of identity fraud. 

And at the end of the day I have never known a criminal that stole somebody's identity and continued to pay on the debt for four years. And only in the last six months when the debt wasn't paid for now, I like, I'm okay. I've never seen a criminal pay the debt. Steal it and then pay it back. 

So that was interesting. and then my favorite one, they said, the technology is not working for me, right? We get a lot of that. No, it won't work on my computer. I can't do it this way. I need to submit paper documents again, another red flag. But my favorite was they then did submit the paycheck stubs. 

and the, pay schedule was weekly. The pay period went from May 19th to May 27th. So I don't know about your math. I'm not great at math, but I know that is longer than a week. There were just all kinds of red flags, but I thought that was an interesting one. 

this gentleman had a nine day work week. 

James Cook: Oh my gosh. So is it fair to say you, can't ignore rental fraud as an apartment owner or manager? There's just no way to avoid it. You've got to have a plan. 

Kent Simpson: that is a great understatement. We absolutely have to have a plan. And the firms that don't have a plan or the firms that lack in a plan, it's like the secret doesn't stay a secret. Then they become a target. It's an interesting comment you make, and you know it certainly better, Mendowa, on the operator's side than we do on the vendor's side, but the word on the street effect Of just this property takes this seriously and that property doesn't that amoeba effect of your fraud rings is very nimble They will be happy to go Okay, we're going to stop targeting this property and go over here until they find one where there's a kink in the armor that where things haven't advanced 

Mendowa Martin: And they'll consistently look for properties managed by that firm, knowing that it's typically a consistent policy. So they'll, I like that apartment. Oh, it's managed by the firm with the lax screening policy. So they become targets. 

James Cook: This has been one of those podcasts where I went into it not knowing anything about it And I feel like I'm just so enriched from both of you. So Kent, Mendowa. Thank you so much for joining me today This has been a great conversation. 

Kent Simpson: Thanks for having us. 

Mendowa Martin: It was wonderful. Thank you. 

James Cook: If you liked this podcast, do me a favor and go into the app that you're listening to right now and give us a rating. Even better. Give us a little review, just write a sentence about one thing that you liked about the show. Of course, you need to be subscribed to trends and insights, the future of commercial real estate in that same app to get a new episode every time we publish. Or you can find us on the web anytime at jll.com/podcast. We'd love to hear from you. Send us a message, a note, an idea for a new episode, whatever. Email us at trendspodcast@jll.com.

This episode of trends and insights was produced by Randy Hofbauer. Our theme music was written and performed by Joel Caracci. 

Contact Mendowa Martin

Multifamily Senior Vice President

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