It’s long been argued that relying on credit scores for things such as evaluating rental applications is an old-fashioned model that needs to be done away with.
But the question of how to determine whether or not a rental applicant is truly a risk has remained.
One proptech startup has made it its mission to offer landlords a more equitable way to screen residents, and verify their income. Founded by two former executives at a large Chicago-based institutional REIT, Rent Butter’s screening tool aims to level the playing field for people who may have fallen on hard times in the past but have managed to turn their finances around and yet still are penalized for long-ago mistakes or payment transgressions.
Tom Raleigh was an attorney who was often involved in cases dealing with residents who were in arrears on rent, and Chris Rankin had worked on the company’s tech stack. In his previous role, Raleigh worked closely with residents, usually working together on court-ordered payments plans.
He saw cases, for example, where hard-working single mothers found themselves in trouble because of a temporary blip in their financial estate and were worried about their long-term ability to get approved for rentals, because of how long an eviction is considered public information and how long a late payment affects a person’s credit score.
“While we represented the landlord, I almost became a mediator,” Raleigh told TechCrunch. “The majority of families going through evictions were good people with 2-3 months of bad financial health.”
He recalls the case of one single mother who told him landlords looked at her credit score and eviction history and immediately turned her down.
“And that’s when the light bulb went off,” Raleigh said. “It was like ‘there’s got to be better alternative data out there to help tenants apply for a more stable housing environment.”
So in 2021, Raleigh and Rankin teamed up to start Rent Butter. Their goal was to create another way for residents to convey to potential landlords they were financially stable enough to be good tenants, and to give landlords a way to better screen applicants so they could see reduced risk, fraud and turnover.
How it works
Rent Butter works by connecting to an applicant’s bank account to give a leasing team access to assess them based on alternative data such as banking account information, rent payment history, an analysis of their credit behavior and income/expense information. The company argues that it can provide more than just a credit score; it claims it can reveal how that actual score is trending as well as provide insight into applicants’ credit and banking behavior. For example, if a credit score is going up steadily, that means the candidate is more likely to be a “safe” tenant. But if the number is trending downward, or the applicant has recently, say, had a surge in debt, then the tool alerts leasing teams to those facts.
And now, the company has raised $3 million in a recent funding round led by RET Ventures’ ESG fund. The firm is backed by large multifamily real estate owners and operators who collectively manage 2.6 million units in the U.S.
Rent Butter today has properties made up of 120,000 residential units — including apartment buildings, single-family homes and trailers — using its tool. Those properties are as little as 100 doors and as many as 50,000 doors.
It essentially replaces companies’ native screening solution, Raleigh said, by plugging into existing systems.
“Then landlords begin leasing to people they would normally turn away,” he added.
Getting it right from the beginning
Aaron Ru, vice president and principal at RET Ventures, said that his firm’s LPs — who are mostly large REITs — are “frustrated by how static credit scores are.”
“There is an increase in fraud because of how easy it is now to buy fraudulent financial documents or IDs. And then, evictions are increasingly difficult,” he said. “So if you get something wrong at the beginning of an application process, it’s very, very costly to undo. And so, we’ve spent a lot of time as a team looking at screening solutions over the past year.”
The firm found that many are punitive, or didn’t necessarily align with RET’s incentives.
“We really liked Rent Butter’s approach to addressing housing affordability and access,” Ru told TechCrunch. “By utilizing some of these advanced underwriting metrics, you can form a pretty complete picture of a renter’s financial health and I think that actually helps open the funnel and make it slightly wider….This gives our operators the granularity to really double click into and look into making decisions outside of just credit scores.”
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