What types of application fraud should you be looking for?
Having the ability to process rent payments and applications online is a blessing and a curse for many multifamily businesses. On the one hand, it speeds up the process of getting funds from residents into your accounts. On the other hand, it opens the door for applicants to commit fraud by shielding their true identity or by creating an entirely new identity to sneak by your screening process and get approved for a unit they might otherwise have been denied, or present you with payment methods that don’t have the necessary funds.
As rental rates have increased in the post-pandemic world, so has rental fraud. In 2021 alone, applicants submitted 11 million falsified or altered applications. An added side effect to increased rent and fraudulent applications is an increase in delinquent rent payments and unfortunately evictions.
All of which are costly for your properties. It is estimated that evictions that come as a result of late payments cost the property $7,500 on average for each eviction. When you take into account that there are more than four million evictions every year in the US alone, those costs really add up.
One of the root causes of delinquent payments and as a result evictions is application fraud. This is why it’s important to have guardrails in place to nip that fraud in the bud from the very beginning. Let's talk about the types of fraud that are on the rise, how you can recognize them and steps you can take to limit the number of fraudulent applications and payments you receive.
Types of application fraud to look for
First Party Fraud. In this scenario, the applicant has someone they know that can pass the credit checks and income verification on their behalf, but the original applicant has no intention of ever living in the unit. While this type of fraud does happen, it’s less frequent than the other types of fraud we’ll describe because the original applicant is putting their credit on the line.
However, it’s one of the hardest to stop and detect because It involves a real person going through the application process. And once the actual resident is moved in the process of removing them for application fraud can be not only costly, but also time consuming.
Third Party Fraud/Identity Theft. Next, is actually stealing someone’s identity. Identity theft has been on the rise in recent years. According to the FTC, 1.1 million theft reports in 2022 and one third of all Americans have been the victim of identity theft at some point in their lifetime. It’s so common that someone is the victim of identity theft every four seconds. While consumers lost an astronomical $8.8B to fraud and identity theft, businesses lost $660M up by more than $200M from the previous year.
Identity manipulation. Sometimes applicants will slightly alter their identity to conceal who they are. Change their date of birth, transpose numbers on their social security number.
Synthetic Fraud. In this scenario, the applicant creates a new person out of whole cloth, purchasing the new identity on the dark web, including a name, date of birth, and social security number. These could either be completely fabricated or be the name, DOB, and SSN of a child or deceased person. These can be difficult to catch at first, especially if you're only using credit reporting because when a new SSN is submitted to the credit bureau, it isn’t flagged, it just creates a new report that doesn’t have any credit associated with it.
There are significant costs associated with synthetic fraud, including “lost rent, attorney fees, court costs, law-enforcement service fees, locksmith and cleaning fees, property repair and replacement costs, storage fees, remarketing expenses, and labor and operational costs.” However, the bigger threat can come to your residents if you let residents into your community who have committed violent crimes, you put other residents at risk if they were to commit new crimes in the future.
To learn more about how to prevent fraud at your properties, download our latest ebook, Don’t get duped | Tips for reducing the risk of fraud and late payments in the multifamily industry.