Late spring and early summer mark an important milestone for young adults. Across the country, millions of young men and women are graduating from colleges and universities. They’ve attained years of academic experience that represent a significant portion of their lives. Although they will graduate with degrees in hand, many of these emerging consumers will enter the working world with limited to no rental or credit history. The challenges for this year’s graduates are even more significant, compounded by the global pandemic and skyrocketing unemployment. With uncertainty looming in the real estate and rental market as well due to COVID-19, it is clear a creative solution is needed for the benefit of both property owners and potential tenants to bolster the residential property rental market.
Current State of Residential Property Rental Market
There has been a lot of speculation about the near-term impact COVID-19 will have on the real estate market; however, one thing does seem to be agreed upon: There is a high probability that the market will take a dip in home sales and valuations due to the pandemic. Likewise, the residential property rental market may also see a steep downturn. Experts are even predicting the rental market will be hit with a landslide of evictions. For graduates moving around the country for new jobs, this adds an additional barrier they must overcome along with an already uncertain job market.
The excitement and stress of securing their first post-grad apartment or rental home is compounded by the fact that many new or recent graduates have not had the opportunity to accrue a substantial rental history. This group of nascent consumers shouldn’t be immediately disqualified as a potential tenant. But indicators of whether they will be a good renter or not in the tenant screening process are scarce. It just may be the right time to incorporate alternative data sources to assist in the tenant application process. By incorporating alternative data into the tenant application process, property owners and managers will be following in the wake of lenders who are starting to use this type of data in their underwriting practices.
Tenant Screenings for Young Adults
Currently, potential renters are evaluated based on a few different factors during a tenant screening, primarily focused on prior rental history, a credit check, and an assessment of their ability to pay, often including a review of current bank statements and financial assets.
While these tenant factors are viable and important to consider, they may miss a larger historical view into the young adult applicant and may incorrectly disqualify them as a viable tenant based on a lack of rental and credit history.
The Value of Academic Data
There has, however, been a trend in recent years for credit checks to include the use of alternative data, including academic transcript information. Such data offers behavioral insights. For recent grads, academic data generated after two to four or, maybe, even five years of higher education represents 20% to 25% of their lives. That is a significant amount of information. Put another way, current tenant screening processes are ignoring almost a fourth of the data a young adult applicant has in their background. These young adults should receive credit for time spent at school. It is a win-win scenario for renters and owners. Academic performance—grades and/or course load—provides behavioral insights such as level of responsibility, persistence, and resilience. Moving beyond the hypothetical, financial technology companies have demonstrated the correlation between this data and credit risk. By leveraging academic data, property managers can augment credit information that is arguably scarce with rich, insightful data providing a more complete picture of their applicant. For tenants, they are empowered to use their own academic performance to their benefit.
This idea is great in theory, but how do we get there? Technology holds the answer.
Adding Academic Data to the Tenant Application Process
An enabling infrastructure, such as an API (application program interface), could be the answer to providing easy access to this missing yet robust information. If there was a data source that could aggregate and standardize academic data, property owners and managers could seamlessly incorporate these insights into their analysis of young adult tenants. With the fintech industry already exploring use cases of alternative data such as academic performance the precedent for this use case already exists. It is clear using academic achievements will create more opportunities for young renters with little credit history, and also provide more opportunities for property managers to find the right tenant for their properties.
