Imagine if you will, your property manager just called you to go over some rental applications for the house you used to live in which is now a rental. The prospective tenants paid $45 each, filled out applications, credit and background were run, income was reported, and everything was reviewed by your manager. One application is from a couple where the husband had poor credit, and the wife couldn’t verify income. They are a no. The other is from a single guy with a 672 credit score whose gross earnings are just over three times the rent amount. You think he’s probably OK but want to see if someone better comes along. After all, it is a nice house in a great little neighborhood. Is there anything wrong with this? You bet there is, and I’ll explain.
What may have been perfectly acceptable tenant screening practices in 2024 and before will no longer work moving forward. Now California landlords need to follow the rules laid out in AB 2493.
Assembly Bill 2493 changes the way California residential rental property owners and managers need to process rental applications starting January 1, 2025. Here we will briefly touch on why this law was passed, go over the new and very specific rules with two options landlords will need to follow, and explain which option is the best choice for landlords and why.
AB 2493 was passed because tenants searching for a new place to live were getting killed by application fees. Much of the problem was that the fee was charged without clear-cut criteria to be accepted. Prospective tenants would pay and hope the landlord would not find somebody they liked better. Prospective tenants were spending hundreds and in some cases thousands of dollars without being approved.
How Does AB 2493 Work?
If a landlord is going to charge a non-refundable application fee, they must use the first qualified applicant method by doing the following:
- Applications must be processed in the order received. This is a completed application. Once a completed application is received it must be processed. The first completed is the first processed. You don’t get to process the ones you like the best before other completed applicants.
- Rental criteria must be given in advance. The applicant needs to be given the rental criteria in writing with the application, so the applicant is aware of the criteria before the application is processed and any fees are charged.
- The first application that meets the criteria needs to be approved. This means that you can no longer wait for the “most qualified” applicant. You now need to take the first qualification. Landlords are no longer allowed to “shop” for tenants.
- Rental criteria must state that the First Qualified Applicant will be approved. You can’t wait until you receive applications and then choose the method in which you will process. Protect yourself by including language stating, “First come, first qualified, first served.” with the application.
- If multiple applicants are working on applications at the same time and one is inadvertently charged, the applicant must be refunded their fee within 7 days, or the application and fee can be applied to a different property under management at the applicant’s request.
- Applicants must be given a copy of their credit report. If you run a credit report you must supply a copy to the applicant within 7 days even if not requested. It is already a law that states you must supply a copy of your credit report within 3 days if requested. Therefore, we recommend that you automatically build it into your system sending a copy within 3 days of running any credit reports.
- Application fees can only reflect the actual cost encored from tenant screening and the applicant must be given a receipt breaking down these expenses. This may include a legitimate expense for handling but may not include any profit to the property owner or management company.
- You must refund application fees if the application was not processed. If you approved an application that was turned in first, then you must refund the fees charged for any unprocessed applications.
- Application fees may not be charged for any property that is not available or will not be available within a reasonable period.
Is There Another Option?
AB 2493 does provide a second option for landlords besides the first qualified applicant method. The alternative, often called option B, is as follows:
“An application screening process in which the landlord or their agent returns the entire screening fee to any applicant who is not selected for tenancy, regardless of the reason, within 7 days of selecting an applicant for tenancy or 30 days of when the application was submitted, whichever occurs first.”
This means that you would have to return all application fees to everyone who you did not accept.
Which “Option” Are Most Landlords Choosing?
Landlords are overwhelmingly choosing Option A and using the First Qualified Applicant Method.
Three Reasons Landlords Choosing “Option A” Over “Option B” for AB 2493?
- Expense - A big reason landlords will choose the first option is that Option B can be very expensive for the landlord. Applicants are more likely to give it a shot when they don’t have to bear the cost. Even applicants who know they have poor credit still let you run it just in case. We see that when tenants are paying. Just imagine how many bad applications you would get if the applicants knew they would get a refund.
- Fair Housing Risk - The biggest reason to stay away from Option B is that it leaves landlords open to more fair housing risk. Option A may seem a little rigid but at least it is objective. But option B can turn more subjective and may have you needing to defend your tenant selection in a court of law. Fair housing experts have been recommending the First Qualified Applicant method for years. That is why most of the larger apartment complexes had it in place before AB 2493.
- Reduced Vacancy Time - The First Qualified Applicant Method reduces vacancy time. This method motivates tenants to hurry up and get their complete applications in. It also forces landlords to move forward with an acceptance once the criteria are met. Many a landlord has lost a good tenant because they stalled hoping to find someone better.
Bottom Line
A new law passed in California called AB 2493 will significantly affect the way application fees are charged and how tenants are screened. Starting January 1, 2025, landlords must decide upfront if they will be charging non-refundable application fees using the first qualified applicant method of screening following very specific rules or if they going with “Option B” which requires a full refund of the application fee to any applicant who is not approved regardless of the reason.
“Option A” requires applications to be processed in the order received, rental criteria must be given in advance, the first application meeting the criteria needs to be approved, the method must be stated ahead of time, a refund must be given within 7 days if an application is charged but not completed when another is approved, applicants must be given a copy within 7 days even if not requested or within 3 days if requested, application fees can only reflect the actual cost encored from screening, fees must be refunded if not processed and fees may not be charged for a property that is not available or will not be available within a reasonable time.
Most landlords are choosing Option A because of the expense, fair housing risk, and reduced vacancy time. Tenants should benefit from less dead-end application fees and uncertainty. Many larger landlords have been using this First Qualified Applicant Method for years and it works.
We hope that you found this helpful and informative. Remember we are not attorneys, so we don’t give legal advice. Laws are constantly changing and vary depending on the specific municipality in which the property is located. For legal advice please consult a real estate attorney familiar with the laws in your area.
For Real Estate Advice
If you are looking for a reliable property management company to help you handle a rental property or a real estate broker to guide you through the sales process in Long Beach, Los Angeles or Orange County, California; or you are just considering it and have a few questions about real estate contact the Mike Dunfee Group today! We are happy to help.
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