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Brent Williams' Apartment Blog

Thoughts, comments, and ideas about the overall multifamily industry, as well as a property-specific focus on resident retention and apartment marketing.

How Much Should You Negotiate With a Lease Renewal?

How Much Should You Negotiate With a Lease Renewal?  Often in the renewal process, residents will get their renewal rate from the renewal letter on their door and make a decision based upon that number.  Some, however, will take that renewal letter, come to the office, and seek a better rate.  Do you have a set strategy to handle these situations?

Each manager tends to have a different plan when it comes how they handle these types of requests.  Some are not good with confrontation and are quick to give away a renewal increase, and others like to "stick to their guns" and refuse to budge a penny.  I'm not saying either is right or wrong, but my goal is that each reader of this blog uses it to really assess their own strategy, or develop one if they haven't yet taken the time!

Before we take into consideration the negotiation itself, let's first consider the basic economics of turnover and a related renewal.  As you all know, existing residents are more profitable than new residents, based purely on turnover cost, which usually hovers around $3,000/unit.  But not all of the costs in that figure are "variable".  For example, if you retain a resident, you can't reduce your maintenance tech's salary by a small percent to offset the lack of a turn...  So instead, you must look at actual dollar savings per saved resident to determine how much more profitable they truly are compared to a new resident.

Once you have that figure, you can calculate the "break-even" point where a renewal is equal in profitability to a new lease.  You want to get a figure on a per month basis, so you need to convert that number based upon your turnover first.  So let's say your apartment community has the national average for turnover rate at 60%.  This means that the average resident stays 20 months.  So you need to apply your actual-cost turnover cost over 20 months.  For example, if your actual out-of-pocket expense is $1,000 to turn the apartment, then you can offer a renewal rate of $50 less than what you would offer an entirely new resident.  ($1,000 divided by 20 months)

Of course, unless you have a strategy of lower prices for longer term residents, you wouldn't use that number for renewal rates to all existing residents - you would be throwing away money for no reason.  But what about during a renewal negotiation?  If a resident comes into the office, upset about a renewal rate, do you "stick to your guns" and not offer them any better rate?  If you are interested in earning the most profitability for your community, you definitely do not "stick to your guns", and instead negotiate up to the break-even point!  And often you do not have to go anywhere close to that number.  In general, people want to feel good about their purchases and just want to "win", which is exactly why many managers have a knee jerk reaction to not reduce the rate at all (because they are extremely competitive).  But in reality, giving the resident a small reduction in the renewal rate will make them feel much better about their "purchase", making for a much higher renewal success rate and happier residents.   

The Social Media Effect

One thing to consider in this process is how social media can affect this strategy.  First of all, your residents will be talking, so many managers will feel that if they give a discount to one resident, there will be a flood of requests down the road.  To a certain extent, that is true, but I do believe the concern is slightly overblown.  First of all, not all residents will bother researching that information, let alone finding it.  Ultimately, you can even plan that spread of information into your calculation, and although that is a bit too much for this blog, feel free to contact me if you would like information on how to do that. 

The other social media reaction actually favors this strategy.  If you aggressively try to raise rent, you will probably get quite a bit of negative feedback, and considering how it is not necessarily an easy thing to move, many people will feel like you are strong-arming them.  So it is not unthinkable that you will get negative reviews on ratings sites that imply that you are trying to "force them out".  And even if they ultimately renew, they still might have felt forced.  And in general, if people feel as if they got the raw end of a deal, they will do unpleasant things to "even the score".  So you might have "won" a higher renewal rate, but it might cost you more than you expected!
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This comment was minimized by the moderator on the site

This is what works for me; it's been met with little resistance and has rarely resulted in a resident feeling the need to leave.

When I make my renewal letter, I first THANK the resident for their residency. I understand that housing is perhaps the single biggest line item on most people's budgets. Then I say it is time to consider renewing. I give them 3 figures: their current rent, the current market rent, and an offer somewhere between the two. For example:

Resident Current rent: $1200
Current Market rent: $1400
Renewal offer (12 month lease): $1300

That said; I ALSO include the following offer, based on the length of the residency:
If the residency is less than 3 years, I offer to schedule a free carpet cleaning. If more than 3 years, I offer them the choice of NEW carpet, or a fresh coat of paint. I schedule it for a weekend day and provide a small storage area for furnishings, asking the resident to remove items that could be damaged or in the way. I also give them a list of things the vendor needs them to know to prepare for them. I call them when the work is scheduled to confirm.

I would say this results in a retention rate of close to 80%. Those remaining could not be rescued for other reasons.

  Johnny Karnofsky
This comment was minimized by the moderator on the site

Sounds like you have a great budget Johnny!

Our budgeted carpet life is seven years, but even then, we try to save it if we can. We paint when necessary at turnover, but we don't have any painting vendors that are willing to paint occupied units for insurance reasons.

Our 'market rents' here in Oregon are significantly higher than what units are actually renting for. For example, our two bedroom apartment market rent is $735+water and sewer. We have two vacant that we have been trying unsuccessfully to rent for over two months for $685. Down the street several of our comps are offering a rent of $599.

We do also thank a resident in the lease renewal letter. We offer a carpet cleaning if they ask for it or are undecided about renewing. We also always ask if there is any maintenance needing done. We notice that residents will frequently fail to report maintenance issues, then complain at lease renewal time that nothing was fixed. For some reason they can't put it together that we can't fix it if they don't tell us something is wrong.

As far as negotiating, we generally against it. Rent amounts are set by the Market and Management company and are not negotiable. I do get a few complaints about this, but this is why I like working for a management company. Since it's out of my hands, the resident tends to accept the increase a little better. Very few end up contacting the management company, and when they do, they are rarely successful in getting a reduction. I'm not entirely sure I agree with this, because these unhappy residents have been very vocal online at ratings sites, even when their demands were completely unreasonable.

  Rose M
This comment was minimized by the moderator on the site

It's not about budget; it is about economics.... If I can spend $1000 and KEEP a resident, versus spending $3000 in turning a vacant unit (based on average hard costs PLUS marketing costs for an indefinite period of time). If I can save $2000 AND keep a resident; that's what I am going to do.....

If your residents are failing to report maintenance issues; you need to be proactive and schedule some routine preventive maintenance time in each unit. Schedule 1 day a week where that is ALL maintenance does (aside from emergencies) and plan what units the team enters. Notify residents 72 hours in advance that you need to enter their unit to do these things.

Stress the fact that you need to do this because the residents are not reporting issues when they should. Once caught up with this; then you can implement a strategy where your team ASKS residents if there are any issues that need attention whenever residents and staff have contact. This could be when the resident comes into the office to pay rent, or to pick up a package.

  Johnny Karnofsky
This comment was minimized by the moderator on the site

As far as painting and doing carpet for an occupied unit, if your current vendor is not willing to do so; find one that will, or do it in house.

  Johnny Karnofsky
This comment was minimized by the moderator on the site

Thanks for the comments, Johnny and Rose. Johnny, I actually have another blog in the works that focuses on your comment.

Rose, I don't get the no-negotiation strategy (I realize that it's not your policy). For me, it's purely an economic calculation - the numbers don't lie, unless I'm missing a variable somewhere in the process. Even a small reduction in the rental increase will make a huge difference in the resident feeling as though you are working with him/her. This would be my strategy:

1) Issue the rent increase with good communication, and many people will accept it. For those who don't:
2) Gauge the level of anger regarding the increase and if only slight, try to "stick to your guns".
3) If they are really upset and thinking about leaving, then give the manager the authority to give a slight reduction to the rent increase, like $10 or so. This will stave off many who just want some relief.
4) If they are still upset, have them contact a corporate contact who can negotiate up to the break-even point.
5) If they still want to leave, let them! At this point, you have done everything you can to appease them, and if it was done in a professional manner, that will at least reduce the number of negative ratings.

By giving the manager a set negotiating amount, it should also limit the time requirement for the corporate rep. It's not worth his or her time to negotiate a $10 reduction in the rental increase...

  Brent Williams
This comment was minimized by the moderator on the site

I agree wholeheartedly Brent! I do wish I had the authority to negotiate a bit, but I can also understand the management companies desire to enforce a blanket policy.

I only have to do a few lease renewals per month. But with hundreds of properties, I can't imagine how my corporate office could handle thousands of residents calling to ask to negotiate the terms of their lease. For this reason, they encourage site managers not to negotiate. We also don't want to be accused of fair housing violatings, because if we negotiate with one, we must negotiate with all.

I post rent increase/lease renewal letters on the 15th of each month, giving residents six weeks to decide whether or not they want to accept the new terms and renew. Residents typically wait until the afternoon of the last day of the month to come in to ask to negotiate the amount. So if I call my corporate office, and my boss is already busy with her own obligations, I have to leave a message. If they call me back the next day, it's already too late to get a new lease entered and signed at the negotiated amount by the end of the month due date. Our company requires that a new lease be signed by the end of the business day on the last day of the month or the premium Month-To-Month rate applies. Then, if a resident pays their old or new lease amounts because they are still waiting to hear back about their request to negogiate, we cannot accept their payment and have to return it to them, resulting in an additional fee for being late. So now the resident is faced with the original amount of the rent increase, plus the MTM premium fee, plus the late fee. So, negotiating the lease could cost my resident $275 by the time their request is denied by the corporate office. It's in my residents best financial interest if I don't allow them to submit a request to negotiate.

As far as painting and installing carpet in occupied units, I'm against it. There is no reason to wait to do this necessary...

I agree wholeheartedly Brent! I do wish I had the authority to negotiate a bit, but I can also understand the management companies desire to enforce a blanket policy.

I only have to do a few lease renewals per month. But with hundreds of properties, I can't imagine how my corporate office could handle thousands of residents calling to ask to negotiate the terms of their lease. For this reason, they encourage site managers not to negotiate. We also don't want to be accused of fair housing violatings, because if we negotiate with one, we must negotiate with all.

I post rent increase/lease renewal letters on the 15th of each month, giving residents six weeks to decide whether or not they want to accept the new terms and renew. Residents typically wait until the afternoon of the last day of the month to come in to ask to negotiate the amount. So if I call my corporate office, and my boss is already busy with her own obligations, I have to leave a message. If they call me back the next day, it's already too late to get a new lease entered and signed at the negotiated amount by the end of the month due date. Our company requires that a new lease be signed by the end of the business day on the last day of the month or the premium Month-To-Month rate applies. Then, if a resident pays their old or new lease amounts because they are still waiting to hear back about their request to negogiate, we cannot accept their payment and have to return it to them, resulting in an additional fee for being late. So now the resident is faced with the original amount of the rent increase, plus the MTM premium fee, plus the late fee. So, negotiating the lease could cost my resident $275 by the time their request is denied by the corporate office. It's in my residents best financial interest if I don't allow them to submit a request to negotiate.

As far as painting and installing carpet in occupied units, I'm against it. There is no reason to wait to do this necessary maintenance until after someone moves in. It is not a good idea to have residents in a unit with carpet glue or paint that could damage their health or belongings. Or kids tripping over tools and equipment. We always refurbish the units between residents so we wont have to endanger them.

As for doing major maintenance in house...it would be a really, really bad idea for me to paint a residents unit. The risk of damage to the residents belongings would be even greater, and being under 5' tall, painting a 9' ceiling is not an easy or quick task for me. I have actually painted an apartment before. My corporate office told me to never do that again (I suck at it!) There's a very good reason I' a manager and not a painter. The thought of carrying a roll of carpet three times larger than I am is even more comical!

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  Rose M
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I send 2 renewal notices; one 6 weeks out, and a 2nd 3 weeks out. If I have no contact from the resident 1 week out, I pick up the phone and CALL them (or I knock on their door). I have never had a problem with renewals due to lack of contact from the resident.

As far as contractors not doing work in an occupied unit; I have not had a problem with this because the residents are given clear instructions as to what the contractor needs to ensure the work is done safely. All my contractors use safe and environmentally friendly materials. I was at a property where all painting was done in house and we bought the maintenance team an air compressor with a paint tank. He used a water based paint and a paint roller that took from the paint tank and could paint an entire 3 bedroom unit in less than 4 hours, with 9' and 10' high walls. He went around the upper part with a ladder first, then took the ladder away when he no longer needed it.

With regards to the children and pets, the resident is asked that they not be there during the work; this is generally pretty easy to do. In fact, the contractor asks that one household member be present to observe the work. They usually sit on the patio and read. This has been met with no resistance from the residents because they understanding that we are doing something FOR them, and we are only asking for a little help to do so. Something else that I did not mention was that, before I was given the go ahead to do these things and find a vendor willing to work with our requirements; my retention rate was closer to 65%, after implemented, it rose to close to 85%. If your retention increased that much, what kind of effect would that have on your NOI?

Take into account what you are actually spending when you need to turn a unit when you have to repaint and do new flooring. Compare that to the cost doing EITHER new paint or flooring for an existing resident. Remember that you are ALSO getting an increase in rent from them at the same...

I send 2 renewal notices; one 6 weeks out, and a 2nd 3 weeks out. If I have no contact from the resident 1 week out, I pick up the phone and CALL them (or I knock on their door). I have never had a problem with renewals due to lack of contact from the resident.

As far as contractors not doing work in an occupied unit; I have not had a problem with this because the residents are given clear instructions as to what the contractor needs to ensure the work is done safely. All my contractors use safe and environmentally friendly materials. I was at a property where all painting was done in house and we bought the maintenance team an air compressor with a paint tank. He used a water based paint and a paint roller that took from the paint tank and could paint an entire 3 bedroom unit in less than 4 hours, with 9' and 10' high walls. He went around the upper part with a ladder first, then took the ladder away when he no longer needed it.

With regards to the children and pets, the resident is asked that they not be there during the work; this is generally pretty easy to do. In fact, the contractor asks that one household member be present to observe the work. They usually sit on the patio and read. This has been met with no resistance from the residents because they understanding that we are doing something FOR them, and we are only asking for a little help to do so. Something else that I did not mention was that, before I was given the go ahead to do these things and find a vendor willing to work with our requirements; my retention rate was closer to 65%, after implemented, it rose to close to 85%. If your retention increased that much, what kind of effect would that have on your NOI?

Take into account what you are actually spending when you need to turn a unit when you have to repaint and do new flooring. Compare that to the cost doing EITHER new paint or flooring for an existing resident. Remember that you are ALSO getting an increase in rent from them at the same time.

Let's say your turn costs $3000, but you spend $1000 on new carpet for the resident. You have saved $2000. Now say you increased their rent by $100 per month for 12 months. You have increased your income on that resident by $1200. This savings PLUS the increased income is greater than the cost of an average turn. The increase is even greater if the resident asks for paint and not carpet.

I understand that doing these things for existing residents is not normal, but sometimes it is important to think outside the box. In this economy; we cannot afford to miss opportunities like this. Contractors not willing to adjust their practices to meet your needs are missing an opportunity as well. It's not rocket science... Missed opportunities equals lost income. I am not one to accept the status quo as 'that's the way we have always done it'; especially if I see a better way to do it that increases income, without costing a lot to do.

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  Johnny Karnofsky
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Hi Rose,
First of all, great comment on the Fair Housing implications - I've just called in the experts to hopefully get clarification on that and will share that in a new blog.

As for the timing issue of renewals, I'm not sure if I see the problem if communication is good. For example, if they wait that long, you can just tell them that you can't get back to them in enough time, so unless they want to pay the premium, you can't help them. like to be accommodating to residents, but if they wait until the 11th hour to talk about things, they lose many options.

But this also is a good argument for having a max negotiating amount for managers - if you had the ability to reduce the increase by $10, you could stave off a move because you had that flexibility.

  Brent Williams

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