Improved Customer Retention Begins with Quality Leasing

An overlooked function of customer retention is quality leasing.  We have a 40 year old property with 346 units and reject about 1/3rd of applicants.  Our average turnover rate for the past 10 years is about 28%; the NAA national average is 60%. About 1 out of 3 of our customers have resided with us more than 5 years, 1 out of 5 more than 10 years, 1 out of 9 more than 15 years, and 17 more than 20 years. We have increased rents twice so far in 2009 and during the course of this year have been virtually 100% occupied in a market with about 9% unemployment and steady negative population growth for more than 10 years.

Improving customer retention begins before the lease is even inked, i.e., at the point of application approval. Here are just a few of the approaches we take toward the goal of quality leasing:

1. Many things are easiest when they are discussed up front. So, during the leasing process we stress the fact that our lease is a minimum 12 months with no opportunity to break it, short of a military transfer or moving into senior housing. We want to screen out prospects that are looking for short-term leases. Then, when a prospect decides to complete an application, the prospect signs a separate statement that he/she understands the lease is 12 months with no opportunity to break it, even with a job transfer, purchase of a home, etc.
2. If during the leasing process a prospect asks how to break a lease, that question would be a clear red flag for our leasing staff and they are trained to determine whether the prospect is willing or capable of fulfilling the 12 months of the lease (e.g., the prospect has been told by his/her employer of an impending job transfer).
3. We are willing to leave an apartment vacant if it means rejecting a marginally qualified applicant. If a prospect will have difficulty affording the rent because of credit issues or income problems we are not doing the prospect any favor, or ourselves for that matter, by accepting his/her application.
4. There two simple questions we have when approving applicants: "will they be good neighbors?" and, "will they pay the rent?" We look at 5 years of landlord history; many properties use as few as 2 years. We also look at the percentage of overall debt/rent in a way that mortgage companies use to underwrite mortgages before they lost their minds and approved people for homes they couldn't afford. We delve deeply into understanding the applicant's credit scores and credit issues. This more holistic approach requires a high sensitivity to issues related to the FHA, and that the approval decision is properly documented.
5. In circumstances where an applicant's credit does not meet our expectations, we have offered the opportunity to prepay the rent, generally 6 to 12 months of prepaid rent. A surprising number of applicants who would be rejected choose to prepay rent, amounting to hundreds of thousands of dollars of rent income. Why would someone prepay rent? - to live at a quality property, which is the derivative of quality leasing.

With 346 apartments, we average about one eviction every two years (just two full-scale Sheriff's evictions in the past decade). Within the first 5 days of each month we collect about 96% of our rental income, and reach virtually 100% before the end of the month. A couple times a year we will have a customer become 30 days past due.

Further, as the residency of customers stabilizes, that stability itself begets improved customer retention; the converse is also true - instability begets instability. There is no question, however, that it is difficult to get out of the cycle of low customer retention.

There is a huge temptation for property managers to take marginal or short-term applicants because a key metric for gauging his/her success by his/her superiors is occupancy. The problem for many American companies is resorting to short-term, quarterly thinking. Short-term thinking, however, is like the effect of crack cocaine - a short burst of feel-good, and then an emotional crash.

We need to realize that customer retention cannot be accomplished through gimmickry or purchased with rent giveaways.  Customer retention is built on quality leasing and requires long-term thinking. It requires strong-willed management willing to say no to feel-good leasing, particularly during the transition of a property to quality leasing. The dividends of quality leasing, with the result of improved customer retention, are measurable and unmeasurable.