A new report from Forrester Consulting shows that in the last two years alone 97% of property management decision makers have experienced fraud in the properties they manage.
On top of that, 83 percent of property management companies have experienced fraud 20 times or more in the past two years, according to a release from TransUnion which commissioned the survey and interviews with 153 property management decision makers.
59 percent of rental applications now online opening up property management to potential fraud
“Property managers responsible for managing thousands of units, particularly in urban corridors, have moved the rental application process online to cater to customer preferences for digital interactions.
“But as a consequence, they have opened the flood gates to savvy fraudsters who constantly evolve their tactics to stay one step ahead. Now rental management teams can’t verify application validity as easily, so they unknowingly accept fraudulent applicants. Even if 1% of applicants were fraudulent, the consequences would be severe. To avoid wasting thousands of dollars, damaging their reputation and losing customer trust, property managers have to think about how to avoid this situation,” the report says.
Key findings on how fraud is becoming an operational headache for property management
- Rental fraud is growing. The rise of online rental applications has increased the amount of fraud that property management companies are experiencing, leaving them unprotected and scrambling to react to constantly evolving fraudsters.
- Fraud prevention today is reactive, not proactive. Most experience fraud after move-in — an indication that the damage could have been prevented if companies had the right tools in place. But most rely on manual processes to identify and prevent fraud, leaving gaps in protection and creating a largely reactionary strategy. And what makes matters worse is that firms don’t have a clear understanding of the differences between the applicant screening process and fraud mitigation; conducting a background check or scanning a driver’s license does not equate to fraud prevention.
- Property management companies need tools that are advanced enough to proactively mitigate the aftermath of a determined fraudster. Property management decision makers told us they need a fraud technology solution that is easy to use, enables advanced analytics, and integrates well with other systems. A solution like this would have a notable and positive impact on preventing bad reputation and debt, evictions, and vacancies. The director of real estate for a property management company said, “If you cannot point to a robust solution to prevent and identify fraud, you’re not going to have a good sales pitch to a client,” according to the survey.
TransUnion commissioned Forrester to conduct the August 2018 study that explored fraud in the single and multifamily rental industry. The research study, titled, “Misunderstanding and Inconsistency: The State of Fraud in the Rental Housing Industry,” is available for download here. Rental industry executives can also register for TransUnion’s Property Management Summit to learn more about this research.
In this study, Forrester conducted an online survey of 153 multifamily and single-family property management organizations in the U.S. to evaluate fraud in the rental industry. Survey participants included decision makers in the organizations and was completed in August 2018.
“Working closely with property management companies for the last few decades, it was apparent to us that the prevalence of fraud was rising in the rental industry. The Forrester study confirms this,” Mike Doherty, senior vice president in TransUnion’s rental screening business, said in the release.
“In the last two years, virtually all of the property managers surveyed have experienced fraud, and the research highlights that this is a costly problem from both a fiscal and reputational standpoint.”
The study found that the advent of online rental applications is a primary driver for the fraud that exists in the rental housing industry today. Online applications are now outpacing those that are submitted in-person, with nearly 59% of applications taking place online. As a result, more than half of property management companies surveyed identify online applicant-based fraud as a critical or near-critical issue.
3 types of fraud property management is facing in rental housing
To mitigate fraud risk in the rental industry, property managers must be aware of the key forms of fraud taking place – synthetic fraud, digital fraud and true name fraud.
- Synthetic fraud has become a new weapon of choice for sophisticated fraudsters in which the “applicant” is nothing more than a manufactured identity. In the rental industry, these fraudulent identities are used during the application process, and if approved, the fraudster now has access to an address for the purpose of establishing credit. While the fraudster is running up high balances or maxing out credit cards under this false identity, property managers are left with a resident that does not exist. As a result, property managers are unable to collect rent.
- Digital fraud is also increasing due to the use of manufactured identities. Often, these backroom operations are running a variety of IDs and credit cards to find a potential “match.” Spoofed IP addresses are used to indicate the applicant is local, even if the operation is taking place across the country. Unless sophisticated technology is in place to flag suspicious information as part of the verification process, the fraud may not be realized until months after approval.
- True name fraud is another problem facing the rental industry and occurs when a victim’s personal information is fraudulently used in an application. Fraudsters may obtain pieces of information such as a name, date of birth or social security number in hopes of getting an application approved. If the property management company is unable to flag these inaccuracies at the time of application, the fraudster may succeed in getting approved as a tenant while the victim is on the hook for an apartment they never applied for.
“In all of these cases of fraud, a property manager will find that the resident they may try to evict does not actually exist or is not the person in their rental unit. As a result, the property management company can lose thousands of dollars of potential income and impact their hard-earned reputation,” Doherty said.
In the study, 95% of property managers admitted to experiencing difficulties identifying, mitigating or preventing fraud. A significant problem that was acknowledged was the timeframe in which the incidence of fraud was first recognized. Three out of four property managers identified fraud after move-in, with more than one-quarter discovering the fraud much later into their lease – seven months or later.
“Skipped” rent payments are usually what tips off property managers that a fraudulent issue is at hand. According to the study, turnover occurs during the lease cycle, costing property managers thousands of dollars.
How long after move-in were you able to identify the fraud?
More than 12 months after move-in
7 to 12 months after move-in
2 to 6 months after move-in
Within 2 months after move-in
*Base: 108 asset management decision-makers at US residential real estate/ property management companies
This can quickly become an expensive problem as TransUnion’s ResidentCredit has found that the average eviction or skip balance owed is approximately $4,215. It can take anywhere from 90-150 days to evict a tenant, and additional expenses such as lost rent, back rent, and leasing and marketing costs can also pile up.
Discovering Fraud and Preventing it in the Future – Keeping up with the Sophistication of Fraudsters
A common misconception surrounding fraud prevention is the distinction between applicant screening and fraud mitigation. About 55% of property managers indicated that background checks were what triggered a fraud alert.
However, conducting a background check is not the same as applying fraud detection before move-in. It was also noted that many property managers assumed that a driver’s license scan was an effective fraud prevention measure; however, this tactic does not protect against the full scope of fraud that is prevalent today.
“Many property managers do not realize that true fraud mitigation should take multiple factors into account for a comprehensive solution,” said Doherty. “Property managers are in need of better technology so they may flag fraud at the first warning sign. Once they are more effective in getting the right renters, they will reduce the involuntary turnover cost, impact to reputation and become more cost efficient.”
Study participants seem to understand this. Nearly all (94%) of property management decision-makers surveyed believe there will be severe implications to not investing in a fraud technology solution.
“With fraud proliferating in the rental industry, property owners and managers can only keep up by radically transforming their approach to preventing and managing rental fraud,” concluded Doherty.
To learn more about the Forrester Fraud Study, please click here.
About TransUnion (NYSE:TRU)
Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion has a global presence in more than 30 countries and a leading presence in several international markets across North America, Africa, Latin America and Asia. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide.