Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

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1 A Forrester Consulting Thought Leadership Paper Commissioned By TransUnion August 2018 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry Property Management Companies Lack A Layered And Systemic Approach To Fraud

2 Table Of Contents Executive Summary Rental Fraud Is Prevalent And Rapidly Growing Property Management Companies Are Not Armed To Fight Fraud Property Management Firms Need A Robust Fraud Technology Solution Key Recommendations Appendix ABOUT FORRESTER CONSULTING Project Director: Andia Tonner, Market Impact Consultant Contributing Research: Forrester s Security and Risk research group Forrester Consulting provides independent and objective research-based consulting to help leaders succeed in their organizations. Ranging in scope from a short strategy session to custom projects, Forrester s Consulting services connect you directly with research analysts who apply expert insight to your specific business challenges. For more information, visit forrester.com/consulting. 2018, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. For additional information, go to forrester.com. [O ]

3 The vast majority of property management companies, 83%, have experienced fraud up to 20 times in the last two years. 95% of property management companies experience difficulties identifying, mitigating, or preventing fraud. Executive Summary In today s property management environment, rental applications have mirrored our desire to do more online and less in person. However, with this increase in accessibility and convenience comes risk which property management companies are not appropriately prepared for. Unbeknownst to them, the housing industry is experiencing an intense increase in fraud, and current fraud identification methods have not been able to keep up with today s savvy fraudsters. To protect their reputations and pockets, companies must implement robust technology solutions that identify, mitigate, and prevent fraud while easily integrating with the other systems in place. The alternative? Property management companies will continue to lose financially and reputationally to fraudsters. In June 2018, TransUnion commissioned Forrester Consulting to evaluate fraud in the rental housing industry. To explore this topic, Forrester conducted a study with regional managers and above who have oversight on a portfolio of assets within a multifamily or singlefamily property management company. We found that fraud is prevalent and spreading with the rise of online applications and increasingly sophisticated fraudsters. KEY FINDINGS 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. 1 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

4 Rental Fraud Is Prevalent And Rapidly Growing 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. This is the reality for many property management companies today. In conducting interviews and a survey with 153 property management decision makers we found that: Fraud is prevalent in the housing market. In the last two years alone, 97% have experienced fraud in the properties they manage. And more surprisingly, over 80% have experienced it up to 20 times. Digitizing experiences makes room for new types of fraud. Customers increasingly transact online, and property management companies are gratifying these needs by moving the application process online. Survey respondents reported that 59% of their rental applications are submitted online versus in person. And as online rental applications exceed inperson applications, so does applicant-based fraud (see Figure 1). A regional VP at a property management company explained the situation: [Applicant-based fraud] is a big issue, particularly in urban locations. We re moving more into online fraud now, because we re encouraging everyone to lease an apartment online, get their credit checks online, sign the lease online. We love being off paper, but sometimes we don t meet applicants until they move in, so this increases the risk for fraud. Fraud has lasting consequences. Most of the decision makers in our study believe that over half of bad renter outcomes (evictions, etc.) are tied to some sort of fraud. And property owners and management companies suffer serious ramifications as a result of this fraud: reputational damage, increased evictions, and more time spent on applications are the biggest implications (see Figure 2). A director of real estate told us: One of the biggest concerns is how [fraud] impacts our reputation. It can cost us business from our clients and it will often times cost us business from other clients who weren t even impacted by the fraud. It can even cost us a management portfolio. We look at that as a smear against our reputation and our operational abilities. There is a very high cost and it s not so much about the monetary implications as much as it s about the reputation. A regional VP put the financial implications into perspective: On average, it takes days to evict someone. That can be at times $16K in rent, plus an additional $1,500 in legal fees to evict the fraudster. So the financial loss is huge, especially compared with the much lower screening fees. 97% of property management companies have experienced fraud in the properties they manage in the last two years. 2 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

5 Figure 1 To the best of your knowledge, what percentage of your rental applications are submitted online versus in person? (Showing average) 59% Online 41% In person To what extent is applicant-based fraud an issue for your company for each of the following application methods? Please rate on a scale of 1 to 5 (1 = Not an issue to 5 = Critical issue ) Critical issue 34% Online 22% Online 22% In person 10% In person Base: 153 asset management decision-makers at US residential real estate/property management companies. Figure 2 What impact did this incident or incidents of fraud have on your organization? 59% Increased reputational damage 51% Increased evictions 46% Internal time spent comparing applications to find discrepancies 35% Increased financial loss 32% Higher vacancies 22% Increased bad debt 3% Don t know Base: 148 asset management decision-makers at US residential real estate/property management companies. 3 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

6 Property Management Companies Are Not Armed To Fight Fraud With breaches becoming regular news headlines, Forrester estimates that one recent breach alone caused a 5% to 10% increase in identity theft-related fraud in the United States. Fraudsters are progressively getting smarter, making it difficult for companies to keep up with their advanced tactics. And to add insult to injury, we found that most property managers do not make a distinction between applicant screening and fraud mitigation. Understanding the differences between the screening process and true fraud mitigation would make property management professionals more: 1) effective in getting the right renters and 2) cost efficient by reducing involuntary turnover cost. To accomplish this, property managers need better tools to combat fraud. CONFUSION EXISTS BETWEEN APPLICANT SCREENING AND FRAUD MITIGATION The increase of online applications creates the need for technology solutions that identify, mitigate, and prevent fraud more accurately than human reviewers. One property manager reinforced this notion and told us: [A fraud technology solution] wasn t as important five years ago, when we could speak with every applicant in person and verify information in person. Because we ve expanded into the electronic world and are growing faster than we are prepared for, it s becoming crucial to invest in a technology solution. It s no surprise that fraud technology solutions are widely used 63% of study respondents say they ve already adopted it, and a quarter are planning on doing so within the next 24 months. But property managers in this study also report that they primarily rely on tools built in-house to provide fraud alerts; only 24% outsource a fraud detection technology solution (see Figure 3). There s a discrepancy here: firms are confusing the applicant screening process with fraud mitigation. Conducting background checks is not the same as applying fraud detection before move-in. And driver s license checks and scans do not equate to fraud prevention, and, in many cases, on-site teams are not even seeing this in an online application transaction. True fraud detection takes into account: Identity verification (AKA proofing and vetting). Identity verification of applicants which is also an integral part of up-front fraud detection helps with avoiding synthetic identity fraud and identity theft. Potential past history of activity. Understanding and using past transactions and their disposition for risk scoring current and future transactions is a powerful tool in filtering out fraudulent activity. Consortium data. Using consortium data (data about other confirmed fraudulent activity) also greatly helps with detecting fraud and uncovering fraud rings. This is especially important on digital channels where fraud management solutions can automatically share and screen for fraudulent devices, locations, and fraudster behaviors. Conversely, fraud management tools can speed up new user enrollment/onboarding by fast tracking known good user behaviors, devices, and locations. 4 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

7 Figure 3 Which of the following best describes your organization s process for detecting fraud? 38% In-house built tool operated by in-house employees that provides fraud alerts 24% Outsourced service/technology solution conducting fraud detection 23% In-house built tool operated by outsourced provider(s) that provides fraud alerts 12% In-house employees conducting manual fraud detection 4% No formal tool used; visual, experience-based risk assessment only Base: 153 asset management decision-makers at US residential real estate/property management companies. CURRENT FRAUD SOLUTIONS DON T CUT IT For most companies in this study fighting fraud is no easy task. In fact, 95% of companies surveyed experience difficulties identifying, mitigating, or preventing fraud. For over half of companies, excessive time spent on applications tops the list of issues, and both the inability to respond quickly to fraud and the lack of skilled resources follow closely (see Figure 4). A director of real estate claimed: Our primary goal from an applicant base is finding the applicant that is willing, or most likely to serve the term of the lease, pay their rent on time, and not damage the community. But along the way, we find a lot of fraudsters trying to circumvent our system and get into the apartment. So, the resources we spend range from time spent by on-site managers and their staff in reviewing applications and getting additional verification if it is required. And if there is some fraudulent intent then there is additional verification needed. We have regional resources that help the on-site managers either approve or deny the applications and look for the fraud. We have the software costs that we incur. We perform regular audits of the application process, either performed by regional support staff or independent audits from clients or the company on a more randomized basis. But again, these are costly in regard to financial resources and take time away from other operational and fiduciary responsibilities. 5 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

8 Figure 4 What difficulties does your company experience with identifying, mitigating, or preventing fraud? 54% Excessive time spent comparing applications to find discrepancies 50% Fraud changes too quickly, we are not fast enough to respond. 41% Lack of skilled resources 36% Existing tools are too expensive 28% Existing tools require too much supervised training and model updates 25% Existing tools do not meet our criteria. 5% None of these; we don t experience any difficulties identifying, mitigating, or preventing fraud 1% Other, please specify Base: 123 asset management decision-makers at US residential real estate/property management companies. The reality is that current fraud solutions aren t adequate because: They are reactive. Of all the possible points in the process to identify fraud, 73% experience it after the applicant moves in. And over 70% identified the fraud within the first six months after move-in, leading to forced turnover well before the typical end-of-lease cycle (see Figure 5). This is an indication that current methods are not keeping up with fraudsters resulting in losses that could have been prevented. Being proactive in preventing fraud is more cost effective than not investing in the tools that companies need to combat it. As a regional VP put it: Most of the time, we unfortunately identify fraud after move-in. Which is terrible, and it puts us in a terrible position. If we can identify it in advance, that s great. 6 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

9 Figure 5 Thinking about the incidences of fraud that have occurred over the past two years, at which point(s) in the process did you identify fraudulent activity? 73% After move-in 52% At the time of application 36% At the time of move-in 33% At the time of eviction Base: 148 asset management decision-makers at US residential real estate/property management companies who have experienced fraud in the past 2 years They are manual. Thinking about the fraud that they have experienced in the past two years, most companies were made aware of the fraud from background checks or credit reports, not from an automated system yet another indication that today s fraud management methods aren t adequate. A property manager told us: Outside of screening, the process is very manual. The on-site team scrutinizes the documents, which is hard to do given today s advancements in fraud. And unfortunately, due to fair housing laws, there is only so much we can do in respect to scrutinizing things. A regional VP echoes the difficulty: A major challenge is that the salesperson is leading the application review process. In an ideal world, they re taking time on this, but it can be time consuming, so they often gloss over this part. An electronic verification process would be something I d be highly interested in. They lack advanced capabilities. When interviewing property management professionals, we found that some consider a scan of a driver s license as a fraud check. While this is a step in the right direction, it does not cover the full scope of fraud that is prevalent today. Additionally, existing solutions don t compare an applicant s risk to established indicators, nor do they seamlessly add identity verification into their brand. The lack of these advanced capabilities deters property management companies from preventing and mitigating fraud. 7

10 Property Management Firms Need A Robust Fraud Technology Solution Today s market dynamics and sophisticated fraudsters mandate a fraud technology solution. And property management decision makers from this study agree: 94% believe there are severe implications to not investing in a fraud technology solution, with reputation and revenue taking the biggest hits both of which are hard to reverse or fix after the fraud is committed (see Figure 6). One director of real estate told us: 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. Figure 6 What are the implications / perceived implications of not investing in a fraud technology solution? 68% Reputational damage 55% Revenue loss 39% Crime/risk of crime 29% Risk of physical harm 6% None of these; there are no implications for not investing in a fraud technology solution 1% Don t know Base: 153 asset management decision-makers at US residential real estate/property management companies. 8

11 Property management decision makers need a fraud technology solution that is easy to use, enables advanced analytics, and integrates well with other systems. Upwards of 85% report these capabilities are valuable or very valuable when considering a fraud technology solution (see Figure 7). A director of real estate says: We need speed, safety, and convenience. How fast can we get credit and criminal results back? How safe is that process in terms of detecting and preventing fraud, but also, for maintaining safety in the residents personal information? For convenience, will it talk to our other software so we re not duplicating efforts? Can the information in the application flow in a safe way to our other technology platforms and allow for simple integration for lease preparation or putting in the rent-roll for operations? Having a fraud technology solution that has all those capabilities would have notable positive impact across the company. Companies would benefit on reputation, bad debt, evictions, and vacancies as a result. A regional VP claims: I really need this solution, especially with our business being conducted online. [Fraud] is costing me thousands of dollars a year. Figure 7 When considering a fraud technology solution, how valuable are the following capabilities? Please rate on a scale of 1 to 5 (1 = Not at all valuable to 5 = Very valuable ) Very valuable Ease of use by applicant 47% 38% Using advanced analytics to gauge applicant risk based on established fraud indicators 42% 36% Easy integration with existing systems 43% 33% Evaluating the risk of the device used for an application 32% 23% Seamless integration with our brand 28% 18% Identifying applicant through text messages and targeted questions 31% 14% Base: 136 asset management decision-makers at US residential real estate/property management companies. 9

12 As a result of investing in a fraud technology solution, most expect: Lower friction for customers. Preventing good applicants from being approved is one of the biggest concerns for property management companies. It comes as no surprise that the biggest benefit companies need from a fraud detection solution is to expedite the approval of quality applicants. Reduced reputational risk. A damaged reputation impacts the bottom line. Sixty-seven percent of property managers surveyed say a technology solution would lower the risk of damaging their reputation. Lower application review costs. Almost 60% of property managers surveyed would see improved accuracy of new application reviews as a result of implementing a fraud technology solution. By improving accuracy upfront, property management companies avoid unnecessary costs down the line. 10

13 Key Recommendations 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. Forrester recommends a combination of the following key elements to build your rental fraud management strategy: Build a robust fraud management strategy to quickly identify fraud. Look at fraud management when a rental application is submitted allowing the operator to be proactive and ahead of the game. Waiting to do this after the screening or worse, finding out after the renter moves in, is proven to be detrimental to property operation. Integrate fraud management with screening. Using disparate background checks/screening solutions separately from fraud management and risk scoring tools is inadequate. Unify the screening and fraud management processes and look at them holistically through a single pane of glass, i.e., policy management, risk scoring, auditing, etc. Do not rely on your staff alone to detect and update new fraud patterns. Fraud patterns and techniques change quickly and frequently. Use a versatile screening solution that is integrated with a fraud management functionality and is updated periodically and automatically to detect new emerging, complex types of rental fraud. 11 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

14 Appendix A: Methodology In this study, Forrester conducted an online survey of 153 multifamily or single-family property management organizations in the US to evaluate fraud in the rental industry. Survey participants included decision makers in the organizations property management company. Questions provided to the participants asked about their experience and system for managing fraud within the life cycle of personal property rentals. Respondents were offered a small monetary incentive as a thank you for time spent on the survey. The study began in May 2018 and was completed in June Appendix B: Demographics/Data LOCATION RESIDENTIAL PROPERTY MANAGEMENT AREAS 70% US only 100% in real estate/property management 11% 11% Single-family rentals Multifamily rentals Both NUMBER OF UNITS MANAGED TITLE 24% 10,001+ units 24% 2 to 199 units 36% 39% 9% 16% 32% 2,001 to 10,000 units 20% 200 to 2,000 units C-level executive Vice president Director Manager MANAGEMENT RESPONSIBILITIES 10% Single property LEVEL OF RESPONSIBILITY WITH ASSET MANAGEMENT 44% 27% 29% 90% Multiple properties I am the final decision maker for my organization s asset management. I am part of a team making decisions for my organization s asset management. I influence decisions related to my organization s asset management. Base: 153 asset management decision makers at US residential real estate/property management companies 12 Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry

15 LOCATION SECTORS WITHIN REAL ESTATE/PROPERTY MANAGEMENT Operations 24% Property management residential 100% Finance 21% Property management commercial 47% Legal 19% Real estate residential 44% Risk/compliance 13% Real estate commercial 25% Accounting 13% Real estate industrial 20% Auditing 10% Property management industrial 19% Base: 153 asset management decision makers at US residential real estate/property management companies Appendix C: Supplemental Material RELATED FORRESTER RESEARCH Now Tech: Identity Verification, Q1 2018, Forrester Research, Inc., February 27, Top Trends Shaping Identity Verification (IDV) In 2018, Forrester Research, Inc., March 29, Vendor Landscape: ecommerce And Retail Fraud Management Solutions, Q3 2017, Forrester Research, Inc., October 6, Misunderstanding And Inconsistency: The State Of Fraud In The Rental Housing Industry