Apartment Leasing:There’s Free Rent Down the Street!
Feb 8th
There comes a time when we decide it’s time to stop giving away free rent and the competitors aren’t on the same page. I wrote this article to help you and your team make the transition.
Here’s how it started. A future resident at my apartment community sent an e-mail to his leasing professional. He’d recently toured the community, was extremely interested, and had a couple of questions about the community’s technical features. He also mentioned that he wondered why our community wasn’t offering a special incentive, since the others in the neighborhood were giving away as much as two months free rent… he was still impressed and interested, but choosing our community wouldn’t be as easy to justify.
The apartment leasing professional gave the matter a great deal of thought, then forwarded the gentleman’s e-mail message to me, having added a rather convincing case for us to consider offering concessions too. Instead, I responded with all of the reasons why, in my experience, it’s far better to avoid concessions at all cost than to succumb to them.
Our future resident, and the Leasing Professional, had a seemingly valid point. They needed a better understanding of why I continued to stick to our rental rate when our competitors were giving their apartments away for free. The crux of the matter is that our future resident and our Leasing Professional were posing an objection.
Why is it really important to avoid concessions? There are plenty of answers, but they all boil down to one basic principle – the desire for a concession is really just an objection… and objections can be overcome.
Why do Future Residents Object, Anyway?
An objection is defined as any obstacle, however slight, that stands in the way of and prevents a signed lease. Naturally, our goal is to remove obstacles, but objections must be understood before they can be removed.
Life can be pretty complicated these days. Everything is specialized and customized. Whatever we may want, we can almost always choose from several varieties of it. Now that’s all well and good, but if you’ve ever wasted twenty minutes in the shampoo isle, then you know that choice is a mixed blessing. How do we know that underneath all the splashy colors and shapes, what’s inside isn’t pretty much the same? How could they charge me more for this one than that one? They’re all pretty much the same, aren’t they? It’s almost second nature to think “there’s just got to be more to it than this!” That need to know more — to understand the difference, to have it explained or resolved in a way that makes sense — is the seed from which objections grow.
Before we begin to analyze concession or rental rate objections and preventive techniques, you should begin to recognize all objections as a necessary part of the leasing process. No one signs a lease without first satisfying their need for information. An objection is nothing more than a request for more information, and in the case of a concession or rental rate objection they simply want you to give them a good solid reason why your community is worth paying more.
Concession and Rental Rate Objections
These objections are by far the most common and the ones that most apartment leasing professionals dread dealing with. Consider how careful you are in parting with your own money, and you’ll understand your future resident’s point of view. The key to successfully handling rental rate or concession objections is to understand the reasons behind the future resident’s protest, but to be fully prepared to defend the value that your rental rate represents.
A future resident that objects to your rental rate sincerely believes that the rate is too high. See the situation from his or her point of view. They’re worried about the cost, not just the rental rate. They’re imagining the sum that you just quoted in the context of their budget and the sum seems inordinately high. Of course, you can’t change your rental rate to suit every budget or whim, but you can change the future resident’s perceived value. How? Make the cost insignificant in light of the value that the future resident will receive in return. If they are not objecting to the rental rate then they may be asking you for a concession.
Begin by showcasing your features, services, and amenities; then explain exactly how and why the future resident will benefit from them. Remember what I said about the stresses of daily living and working these days? We’re all looking for ways to make our lives easier. Next, sell yourself. You’re there to make life easier, and that’s part of the package. Never apologize for your rental rates or for not offering a special. Quote your rates with confidence. Now you’re ready to tackle the objection head-on.
Make certain the future resident understands, and sees (if possible), all of the extras that come with the rental value (special features, appliances, amenities, services, etc.). What else are you selling? You’re selling peace of mind. The service technicians are on call twenty-four hours a day in case of a maintenance problem. You’re selling an improved self-image. Higher rent helps your community maintain a better resident profile. Everyone has to meet the same high standard, so the prospect will be living among his/her peers.
Tips for Avoiding and Overcoming Concession Objections:
1. The Future Resident understands that the fastest, most effective way to get you to lower your rental rate or give away a month’s free rent is to tell you that your rental rate is too high, or that your competition is cheaper. It works, so they use it! When the Future Resident talks about the rental rate being too high, it’s your time to talk about all the benefits the Future Resident will receiver when living in your community. When they mention that the community down the street is giving away free rent, it’s your cue to spotlight everything about your community that makes it the better choice (remember to do this professionally. The goal isn’t to trash the competition, but to show your community in the best possible light). Please don’t offer them free rent or a color television when they simply say, “Your rate is too high.” They are just trying to negotiate the price down, and it’s up to you to “stick to your guns” and illustrate why your community is worth it’s asking price.
2. JUSTIFY your rental rate. When a Future Resident says something about your rental rates, what he is really saying is that he doesn’t appreciate the VALUE your apartments and community offers. You MUST review the benefits and build VALUE.
3. If you drop your rental rate or give the Future Resident a discount, you probably don’t realize how much you have weakened your leasing position. Your response says: “This apartment and community isn’t worth very much in itself so let’s just decide how much you’ll pay and sign the lease.” In the end, your Future Resident may lose trust in you for initially asking for a higher price while trying to rip him off.
4. Realize that beneath the objection, most people generally believe that “you get what you pay for.” They will respect you and your community for successfully defending its true value, and they will be pleased with themselves for selecting a home that is worthy of its price. Cutting the price undermines your own personal reliability and respectability as a sales professional, and devalues your community and your future resident’s choice.
The objections that most apartment leasing professionals have the hardest time handling and overcoming are: “The apartments down the street offered me one month’s free rent” and “What’s your special?”
Tried and True Techniques for Overcoming Concession Objections:
LP: “I’m glad you brought that up. Let me ask you a quick question: Why do you think they are giving away______________ ?”
FR: “I don’t know, why?”
LP: “I’m not permitted to talk about our competition, but…I can tell you that we don’t have to offer specials nor do we have the type of residents who move in and out of our community because of specials.”
LP: “I’m glad you mentioned that special…let me ask you, did they guarantee that your rental rate would remain the same at the end of your lease or tell you how much of an increase to expect?”
FR: “No, they didn’t mention that.”
LP: “Specials are usually given to attract you to a community. Once your lease expires, it only makes sense that they need to recover their loss. In other words, they’ll probably need to pass along a rental increase. We feel that specials are only a temporary benefit. We prefer to offer the long-term benefit of a high quality apartment with_________ and a quality community where residents don’t move in and out looking for the next special. We prefer long-term quality and stability. Don’t you agree that’s more important?”
LP: “Thank you for bringing that to my attention. Our community is known for quality in its residents, management and service. We have a community where you can feel comfortable and confident that you and your family will be well taken care of. Don’t you feel that those things are more important than a temporary concession?”
LP: “Yes, I’ve noticed that they recently had to start giving away the moon to attract residents. I’m sure that once you compare our community to theirs, feature to feature, you’ll understand why they have a need to give away a special, and why we don’t have to.
(Use this one with Service/Maintenance Guarantees, and “You’ll Love it Here!” Guarantees)
LP: “There are many reasons why other communities have to offer specials. Our community, on the other hand, gives each and every resident dependable, caring management and service. We back it up with two very important guarantees. First, we guarantee you’ll love it here. (Hand the future resident the guarantee.) Our second guarantees you prompt courteous service on your routine maintenance requests. (Hand them the second guarantee.) Isn’t knowing you’re going to be happy and comfortable more important than a concession?”
Your Rental Rates are Too High!
What if the future resident objects because your competition costs less?
The first step is to be certain the future resident is comparing “apples to apples.” Ask the future resident is he or she genuinely sees the competing community as offering the same value as yours. Walk the future resident through a step-by-step comparison of benefits and features. When the future resident is convinced that the competition costs less, take it as a sign that you’ll have to demonstrate how the value of your community is much greater than the perceived cost difference. Prove that there is really very little cost difference, and you’re offering the better value.
Don’t concede! The future resident often views and poses a rental rate objection as the easiest means of getting you to give away a month’s free rent or to lower your rate. Dropping your rate or giving away a gift or discount as a means of overcoming objection only serves to permanently weaken your leasing position. The message is ”My community really isn’t worth much, so I’m open to negotiation. You just decide how much you want to pay – any old amount is fine with us – and then you can sign the lease.” Don’t give anything away unless you get something in return! Ask for a longer lease term, prompt rent payment by the 30th of the month, or a higher security deposit. View every concession as a loss of profit, and protect your community from that loss by getting a return on your investment!
No matter where your community is located or how low or high your prices are, you have probably heard, “Your rates are too high!” or had someone hang up on you after you gave them the rental rates. Why do future residents raise the price objection?
Let’s take a look from the future resident’s point of view. Money isn’t easy to come by, and parting with it represents a bad thing – a cost. In order to justify the cost, they need to be certain that they’re getting a fair return – a value. The key to overcoming a rental rate objection is to successfully move the future resident’s focus from cost to value.
RENTAL RATE
VALUE
= COST
Value is made up of all of the benefits that the future resident will receive. Since you can’t change your rental rates for every future resident’s whim, the only thing you can change is the perceived value. In other words, you must build up the value to lower the cost of the apartment.
Help your future resident to envision and understand all your features, services and amenities, and explain why he or she will benefit from them. Remember when selling your services that everybody today wants things that make life easy, and they also want to know “what’s in it for me?” – So tell them!
Tips and Techniques for Overcoming Rental Rate Objections:
1. Compare apples to apples. “Let me ask you if we are comparing prices of other communities or comparable worth?” In other words, are the competitions “apples” the same as yours? Perhaps you’ll find its apples to oranges! Make sure the comparison is fair. A fair comparison begins with benefits and features.
2. When the Future Resident thinks that the competition costs less you must take this as a sign that you’ll have to demonstrate how the value of your apartment and community is much greater than the price difference that the Future Resident perceives. To do this you simply show that there is very little price difference. But much more value when living in your community.
3. Remember the Future residents automatically make a rental rate/value comparison to determine the COST. You must look for and increase their perceived value.
4. Understand that “your rental rates are too high” can be a buying signal. Don’t let it slip away!
5. If you get backed into a corner and have to quote the rental rates before you are ready, try saying, “Let me tell you what’s included in that rental rate,” and then go straight into all your benefits.
6. The price objection is usually a hidden request or a way to hide the real reason for not leasing. Don’t give up! You now have an opportunity.
7. Break the monthly rent down by the week or the month.
8. Question the competition’s lower rental rate. Why do they charge less? Where do they cut expenses to operate the community? Service? Lawn Maintenance? Etc.
9. Offer a written guarantee that they’ll be happy living in your community.
10. Admit that your rental rate is higher and tell why, i.e., services, maintenance, grounds, amenities, quality, etc.
11. Be confident that your apartments and community has good rental rates for the value. Your confidence is contagious and will rub off on your Future Resident. When you hear “Your rate is too high” or “That’s more than I wanted to spend”, you will be glad to answer with enthusiasm if you develop your skills.
12. Try asking, “Compared to what?” By saying that, you will isolate what the Future Resident thinks is the going rate and then sell VALUE, don’t sell price.
13. Energy efficient – you’ll save $ on utilities. Point out all the energy saving features of your apartments.
14. Figure out what the real objection is.
a) The rate is more than the Future Resident budgeted.
b) The rate is more than the competitions.
c) The rate is unexpected.
In handling:
a) More than budgeted: Find ways to suggest economics.
· What is the rate per week? Per day?
· Closer to work?
· More energy efficient, explain to them why and what you have to offer?
· What other areas will the Future Resident save $$$ in? Services? Time?
b) The rate is more than the competition:
· Build Value
· How are your apartments and community different?
· Compare the floor plan, which layout is better for them
c) The rate is unexpected: This objection is probably the easiest. Simply show and tell the Future Resident why the rate is reasonable. Review ALL the features / benefits and services.
How Well Do You Handle Rental Rate Objections?
Test Your Rental Rate Objections Handling Skills.
Never Sometimes Always
I give up if a Future Resident objects. _____ _____ _____
I feel like I should offer a concession/special
I get defensive. _____ _____ _____
I argue the rate is valid. _____ _____ _____
I feel rejected. _____ _____ _____
I feel that the rental rate is out of my control. _____ _____ _____
I ignore the objection and keep selling. _____ _____ _____
Add up the total number of points. 1 point for each never, 2 points for each sometimes and 3 points for each always. If you scored between 7 and 10 points, you are doing a good job. Between 11 and 15 points, work on fine tuning your skills. If you scored between 16 and 21, work on your skills so that you will be able to close more leases.
Avoiding or Offering Apartment Concessions the Smart Way
Feb 4th
This article is being republished for Alicia and Derek.
Special Note to Alicia and Derek: When you have no availability in your one-bedroom apartments, it’s time to increase the rents. One of the biggest issues I see with apartment communities across the country is that they treat community occupancy as a whole when they should be focused on apartment-type occupancy and availability. Rents on a one-bedroom can be higher than on a two-bedroom! I have achieved this with success!
I wrote an article a while ago that addressed the issues of offering concessions. Actually, it was more of a rant, but you can believe that I meant every single word of it. The truth is that at the time, I was face to face with a tough decision to toss my convictions aside and offer concessions at McNeil House (the first apartment community I built, 193 units in Austin Texas), or continue receiving only three or four new leases per week, while around twenty new apartments per week were completing construction and ready to lease!
Anyone who knows me, including our long-time subscribers, can attest that “concessions” is practically an expletive in my vocabulary. Choosing whether or not to offer them in my very own community was probably the toughest decision I’ve had to make as a developer – well, the second toughest. The toughest was whether or not to build in the first place!
The fact that I had to approach the issue from all angles, or even approach the issue at all instead of dismissing it without a second thought, opened my eyes a quite bit to the many factors involved. Now, don’t get me wrong – I’m still up on my same old soapbox. Concessions are NOT the answer to your occupancy problems. The whole reason why companies and communities offer concessions or incentives is to gain a competitive advantage, right? So, let me ask you this… if everyone in the market is offering concessions, then where’s the advantage? It only puts us all right back where we started, on a level playing field. We all end up giving away the farm rather than educating our prospects and residents, and playing the never-ending game of one-upsmanship that some of us have been trapped in since time immemorial. Concessions are one of those things that works well in theory, but actually creates a world of, well, concessions (I was going to use a four-letter word there, but the one I used is worse).
Hey, I understand that there’s something to be said for a level playing field, but remember when Mom used to ask, “If all of your friends jumped off of a cliff, would you do it too?” Mom was giving you some amazingly valuable marketing advice there, and you didn’t even know it. My experience with McNeil House has given me a much clearer understanding of the facts that have to be carefully considered where the concessions issue is concerned. If you find yourself in a similar situation, I hope you’ll take the time to consider these factors with an eye for the “big picture”. I had to think, and rethink the issue before making my final decision, and I’ll let you in on all the factors that I considered and the steps that I took to sensibly approach the issue of offering concessions. Next, we’ll discuss my final decision, and the results we received. We’ll answer the important questions: Would I do it all over again? What would I change? What did Lori (the community manager) have to say?
If your community occupancy falls below a profitable level, or you find yourself with more supply than demand, perhaps this common-sense approach will help you as much as it helped me!
Review The Overall Picture
- Meet with the entire staff, and ask for feedback from everyone on what they feel is happening. (Actually, you should do this regularly anyway, whether you perceive a problem or not. Some of the best and most practical insight comes from your “front line”.)
- Have your entire staff shopped along with your top three competitors. Use a third party independent company so that you’ll be able to compare the whole apartment shopping experience from your prospects’ perspective, and make adjustments if needed.
- Meet with the staff again. Review the shopping reports together, make the necessary adjustments, and arrange for one-on-one training where it’s needed.
- Review each floor plan independently, and consider its pricing carefully. Make any necessary adjustments to the rent based upon the floor plan’s strengths, weaknesses, and competition within the marketplace (compare your floor plans to your competitors’ similar floor plans and pricing). In other words you need to do a side-by-side, floor plan-by-floor plan comparison of your community versus your competitors’ floor plans. Jennifer Nevitt Casey of Bravo Strategic Marketing has created a comprehensive and widely used method for doing exactly this. Jennifer shared her system for comparatively rating floor plans. Jennifer and I also worked together to create the ultimate evaluation tool! NOTE: Alicia and Derek Read The Finer Points of Floor plans I am tracking this down so I can post it for you both.
- Walk all of your floor plans with a critical eye for weaknesses. Create a training list with tips and techniques for overcoming objections and selling the strengths of each floor plan as compared to the competition.
- In existing communities, I would also take the “less desirable” locations and floor plans and determine if there is anything within budget that we could do to improve the interiors. I’ve used this technique repeatedly with great success.
- Create / evaluate the model. We completely upgraded our model with added crown molding, optional paint color, special plumbing fixtures, special lighting fixtures and ceiling fans, closet organizers etc. In other words, we dressed the model up with all of the added options that were available for our residents to choose from. This showed our prospects what they could do with the apartment home if they chose to. We priced each option by adding only a 15% mark-up to our cost. Five percent of the mark-up is given to the leasing professional who sells the upgrade, and the additional 10% is administrative income. We call this our “Custom Home Apartment™. Several companies, including ZOM Residential and Post Properties have used similar custom upgrade programs with success.
- Photograph the entry of your community and your competitors’, and compare them. Make yours more inviting. Look at your advertising. How does it stack up against your competitors? Do you sound different? What do you offer that they don’t? KEY: Are you advertising the floor plan with the highest availability? Are you showing both photos of your community, model and lifestyle photos, or are you showing the same thing as the competition?
- Have you tried offering an incentive (i.e. a washer/dryer, ceiling fan, upgraded fixtures, crown molding and so on). The best incentives are stay with the community long after the resident is gone, and create added value in the long run.
Determine if you have a leasing problem or a marketing /advertising problem.
Don’t let the formulas scare you. Once you’ve filled in the blanks, you’ll find the process to be fairly straightforward:
Objective: To reach your leasing objectives, they must be qualified in terms of numbers, time to lease up, and people. Complete the information below to determine your objective. Remember to be realistic.
Leasing Objectives
Number of occupied apartments desired (ex: .97 x NO. Units) __________________
Number of apartments currently occupied -_______________
Pre-leased (vacants and on-notice) -_________________
Subtotal additional apartments needed =_______________
Estimate Skips +_______________
Current Notices +_______________
Estimated Canceled preleased apartments -_______________
Lease expirations +_______________
Lease renewals expected (include residents going month to month) -_________________
Subtotal number of new leases needed =_______________
Estimated canceled and rejected leases +_______________
Net Total Number New Leases Needed =_______________
Traffic Needed to Reach Objectives
Leases needed ¸ closing ratio = traffic needed to reach new lease goal.
____________________ ¸ ___________________ = ____________________
* Average closing ratio including unqualified and cancels
Note: By increasing the closing ratio, you will be able to decrease the amount of traffic necessary to meet the objectives. This greatly saves your marketing / advertising dollars.
Rentals Per Leasing Professional Number of new leases needed per month ________________
Number of leasing professionals ¸________________
Number of new leases needed per month,
per leasing professional =_______________
Leases needed per week (¸ 4.3) =_______________
Telephone To Traffic Ratio
Total appointments kept ¸ total phone calls = Telephone to Traffic Ratio
____________________ ¸ ___________________ = ____________________
* Goal = more than 60% of all appointments kept
* Goal = 25 -50% of closing ratio
Cost Per Traffic & Cost Per Lease
A. Monthly or weekly cost of a specific media or traffic source ¸ traffic generated by _____
this source = cost per traffic
$______________ ¸ ____________ = $ ____________ Cost Per Traffic
Monthly or weekly cost of specific media or traffic source ¸ total new leases
generated by this source = cost per lease
$______________ ¸ ____________ = $ ____________ Cost Per Lease
B. TOTAL of all Traffic Sources expenditures ¸ total traffic = average cost per traffic
$_____________ ¸ ____________ = $ ____________ Average Cost Per Traffic
TOTAL Traffic Sources expenditures ¸ total new leases = average cost per lease
$_____________ ¸ ____________ = $ ____________ Average Cost Per Lease
Do you need to increase traffic?
- Pull your last two weeks worth of guest cards, and call each and every one. Tell the prospect that you’re conducting a third-party audit of the apartment shopping experience, and need to ask them three quick questions. Promise that you won’t take more than a couple of minutes of their time. The questions we ask are:1. Have you made a decision on where you are going to move, and if so, why did you select that community? (If they say that they’ve chosen your community, community, thank them, set an appointment for the signing of their lease if needed, and move on to the next person.) 2. Did you visit _________ apartments (your primary competitor), and if so what did you think about the community? Is there a specific reason why you’ve decided not to lease there?
- Invite local businesses to attend resident functions. This increases your word-of-mouth referral network by leaps and bounds.
- Beef up your resident referral program. If you have a referral program in place, sometimes all it takes is a well-designed flyer to remind residents of it. If your program has grown stale, give it a fresh twist. If you don’t have a referral program in place, get busy! (If you’re considering offering cash rewards, make sure they’re legal in your area, but please consider that there are plenty of great alternatives to cash or rental rate rewards!)
- Make marketing calls. I highly recommend that you not only call on the Human Resource Departments of local employers, but that you also take time to introduce yourself to the receptionist. She knows everyone in the office and everyone communicates with her on a daily basis. And these are usually the people that everyone turns to for information when they’re new to the company. Establish a long-term program that keeps you in touch with these valuable people. Once a month, deliver donuts, cookies, candy, flowers or some other small gift to the receptionist that she/he may share with the rest of the employees. Include a friendly note with a few business cards enclosed for them to pass along.
Increase Closing Ratios!
- Provide continuous motivation for Leasing Professionals to stay focused on the goal (i.e. charts, graphs and incentives placed where all can see).Extend office hours and raise bonus amounts for leases closed during a specific timeframe.
- Establish a rotating bonus plan based upon leasing certain apartment types. For example, “All A-1’s leased this week are bonused at $100!” I typically select the apartments that have either been vacant the longest or have the highest availability. Establish team goals with bonus incentives. Any opportunity to foster teamwork is too valuable to pass up!
- Bring in your company’s very best leasing professionals to obtain their perspective. Have everyone shopped, and review the shopping reports carefully to apply training where needed.
- Provide weekly articles of interest that focus on overcoming concession objections and closing. I faxed our community a new article every Monday morning. Keep the tone encouraging and motivational.
- Ask yourself this: If you increased the closing ratio by ___%, how much more traffic would you need to reach the desired goal? Is this possible? Can you generate that much traffic? Can you handle that much traffic? Here’s my “Feasibility” worksheet:
Traffic Increase Feasibility
Is the number of leases needed per month significantly higher than current performance?
How much more would traffic have to be increased if closing ratios remained the same to equal the needed goals?
Needed leases goal. Current closing ratio _____ = _____ new amount of traffic needed less current amount of traffic _____ = _____ amount of extra traffic needed. Is this possible?__
How much more would closing ratios have to increase if traffic remained the same to equal the _____ needed leases goal?____________________________________________
Needed leases goal _______ ¸ current traffic _______ = new closing ratio needed _____. Is this possible?___________________________________________________________
What is the monthly goal per leasing professional?__________________________
How does this compare with current performance levels?_____________________
___ __________________________________________________________________
__ __________________________________________________________________
__ __________________________________________________________________
Ask yourself the big question.
Finally, when all is said and done, ask yourself whether it’s really necessary to give away such a valuable commodity as the opportunity to live in your community, not to mention cutting profit from your bottom line! In light of all of the other things that you can do to increase traffic, better motivate your staff, and gain a profitable long-term advantage, should you really give in?
My answer was a resounding (brace yourself), “Yes!” As sick as it made me, I made the decision to give concessions. I actually get chills as I sit here and write this. Can you guess what happened next? As a result of my decision to first consider all of the above, and then give in to concessions, leases increased — by leaps and bounds! The on-site staff is more aware of the competition, more motivated, and more skilled at closing than ever before!
The decision to give away rent took me five to seven months to make. What if I had to do it all over again? I’d follow all the same steps that I took, but I’d do it faster. I should have made the decision to offer concessions about two months earlier than I did, based on my lease-up schedule.
What else have I learned?
- We could never have truly known whether or not we could have leased-up without concessions if we didn’t try to avoid them in the first place;
- The staff became a powerhouse of product knowledge! They were more educated than ever before about our product and our competition;
- Our competitors thought that we were crazy (actually, they thought that I was crazy, and pitied my staff), so we were easily dismissed as viable competition. Now, because we tried it the hard way first, they realize that we’re a force to be reckoned with. They knew that we don’t offer concessions as standard practice, and that when we do, they’d better jump!
- If you have to give something away, ask for something in return. Along with the free rent, we asked the resident to sign a paying lease term of either six months or one year. In other words, their free rent period, although covered under the lease, was not included when the lease term was calculated. For example: with one month free rent, the lease term was 13 months. This enabled us to get full years collection of rent without increasing our operating expenses the next year. If you don’t do this, (as you may be aware), your turnover expenses are divided into 11 months instead of 12, so the concession actually costs you more than a months’ rent. Note: Alica and Derek this is why I asked you to read Lease Renewal Strategies that Help You Manage and pay close attention to staggering leases by apartment types.
- Cover your bases. As even further protection, we asked the resident to sign a concession agreement, stating that if their lease is broken for any reason, the entire amount of the concession is due and payable. Where the lease terms and conditions are met, there is no liability.
- Sometimes it makes sense to spread the concession over the first six months of the lease. We did not use this method, but I have heard of many companies that have used it with success. I think it’s a great idea, where the market is receptive to it. Because we decided to offer concessions in order to be competitive, we had to also consider that part of our competitive edge involved how and when the concession was delivered. In our case, the market was most receptive to a one-time offer; and you’ll find this to be true in many areas where residents view the concession as a welcome means of offsetting moving expenses – but I think the six month idea is a great one if you can pull it off.
- You really can increase rents even though you are offering concessions. In fact, it’s probably easier to increase rent in some places, where the market is focused on the short-term benefit instead of the long-term effect. This rings especially true when you are offering the better product. An apartment community in Dallas leased 100 plus apartments (70%) in two months by giving away 1.5 months’ rent. Unfortunately, they didn’t increase the rents while doing it, not to mention that they weren’t under the gun because they didn’t even have the apartments out of construction yet. Don’t miss the opportunity to raise rents when offering concessions, whenever you can do so sensibly.
- If you are offering concessions and decreasing your rents at the same time you had better have done all of the above and make absolute certain you are handling each and every unit type and floor plan on a unit by unit basis and monitor it with every single new rental.
After all was said and done…
I know your burning questions are (1) how did the community manager feel about the entire experience, and (2) what kind of concession did we finally settle on.
Lori’s last words were “I have learned a lot!” When asked if she would do it all over again, her response was “People can’t believe that we leased all those first apartments without concessions, but I would give the concessions the next time around instead of waiting until we had vacancy loss”.
As for our decision, we first decided to offer the market standard one-month free on a one-year lease, and 2 weeks on a 6-month lease. We quickly adjusted that to $500 on a 6-month lease and $1000.00 on a one-year lease (which is less than a half a months’ rent and a months’ rent, respectively). We only offered concessions only on floor plans with the highest availability. In addition, and this is key, we continue to adjust our rents upward as we leased apartments (see #7 above). We actually charge more for a one bedroom floor plan then we did for a two bedroom floor plan.
If you’re caught in the concession trap, or even considering giving in to it, please take the time to consider the HOW, WHAT, WHEN, and WHY of it all before you follow your competition over the rail of that proverbial bridge! Depending upon your own unique situation, there is either an economically smart way for you to avoid concessions, or to offer them wisely. I found my answer, and so can you!
The Great American Apartment Industry Takedown
Feb 2nd
By Bradford K. Marting and Jennifer A. Nevitt Casey
Establishing prices for apartments has become an often debated topic of late. Whatever system used to evaluate and set rent levels is considered a pricing model. There are manual systems, automated systems, and hybrid systems. Pricing models support various strategies at different times based on particular market conditions, property conditions, and personal paradigms and prejudices. However, one thing can generally be agreed upon – it can be brutal out there right now.
One well known pricing strategy is known as the “takedown.” A takedown is when an extreme price reduction is applied to a specific apartment type by floor level and can range anywhere from a 10% to 20% price reduction from the current market rent. Usually, takedowns are used for a period of hours or days in order to quickly absorb an oversupply of a specific product type and, a decade ago, they were never intended to be considered a permanent solution to oversupply.
However, in the past year, takedown pricing has become more extreme, more universal, and threatening to become more permanent. During inflationary times, pricing models focused on finding the inefficiencies in capturing income. Utilizing the same rule sets and algorithms during deflationary times can result in very different outcomes and can be financially destructive to the investment property. What is meant by financially destructive? If takedown pricing is held for too long a period of time while occupancies by unit types are in fact increasing at lowered rent levels, the ability of investors and owners to make their mortgage payments can become difficult or even impossible. Yes, impossible.
In the past, competing properties typically would try to gain market share by matching or beating each others’ lowered rents and concessions. Add to this price war the effort to secure longer lease terms than the typical 12 months and you have a long-term recipe for financial disaster. This constant matching of current price or special discounting programs is only causing a downward spiral for the entire industry to a point where recovery will be prolonged. In the past decade, fluctuations of pricing from 8 to 15% discounting ranges specific to unit types or floor levels have been recoverable income offenses if used for brief periods. However, 20%-35% takedown pricing on all unit types across-the-board for extending periods of time will prove to be destructive, possibly resulting in massive commercial loan defaults in the near term.
If apartment investors are looking for 8% returns and income streams have declined by 25%, not only is there no money to pay the mortgage payment and tax bills, but no cash for the desired return. In fact, if there is no positive cash flow, the investor will be forced to contribute additional funds just to keep the property operating. They will be forced to make a difficult decision of putting additional money into a losing business or allowing the property to be foreclosed or taken back by the lender.
There is little question that new situations require new thinking and tools such as the “Marting Nevitt Survival Plan.” The plan reveals the breakeven points and the point of no return (no pun intended). After studying the pricing dynamics in major markets over the past six months, it is clear that pricing models are falling below the point of no return with no voice of reason to assist corporate decision makers in setting a boundary for income reduction that will force their assets into loan default.
Manual pricing models continue to have limitations based upon personal paradigms, prejudices, and unparalleled financial interests with the investment objectives. It is not unusual for the leasing team members not to be able to meet the financial requirements to qualify to live where they work. In other words, they cannot afford what they are expected to sell. Therefore, because they are likely paying much less rent at a lesser property, they may feel the product they are leasing is already “overpriced” and resistant to raising prices. There can also be resistance to raising prices from the onsite leasing teams because they perceive it as making their job of selling more difficult. And this can be true. This can result in resentment against management and a reduction in productivity.
Automated pricing models are relatively new compared to manual pricing models. There are but a few even commercially available. The premise makes logical sense and time will tell how successful they will be. Removing the human fear of adjusting rents either too high or too low is a substantial benefit of software. As with any new technology, it has its supporters and critics.
The hybrid pricing model is a mixture of both manual and automated pricing models. The automated model is allowed to run its program and make pricing recommendations. The recommended prices are then scrutinized or challenged by humans. The result is that the automated recommended price will either be accepted or overridden. Some companies are even creating job positions where reviewing prices is the sole responsibility.
No matter which pricing model you choose, it is imperative to understand basic real estate investment theory and the ultimate affect it can have on a multifamily real estate investment. Pricing too high can result in higher vacancy, which can lead to financial ruin. Pricing too low can result in prolonged lower cash flows, which can also lead to financial ruin. Fortunately, there is a sweet spot somewhere between the two. Utilizing new technologies and new tools can provide you with a competitive advantage necessary for survival and success.
Don’t miss Brad and Jennifer’s workshops on March 23rd and 24th in Dallas
Revenue Management – Basics-Day One
Pricing is key to successful marketing, but can be one of the most difficult aspects of the marketing process. This session delivers essential skills and knowledge needed to optimize your pricing while minimizing costly trial and error. You’ll learn the fundamentals of ‘Power Pricing,’ gain an understanding of pricing dynamics and key metrics used to set up a manual pricing model, and walk away with the skills and knowledge you need to set up an individual manual pricing model for your product.
Revenue Management – Advanced-Day Two
This session goes beyond the fundamentals of ‘Power Pricing’ to deliver the knowledge and skills needed to execute and maintain your manual pricing model to increase cash flow and the overall value of your organization. Learn how to use reports and graphs to more effectively communicate with your team and stakeholders and confidently manage your organization’s revenue. (Prerequisite: Revenue Management – Basics)
Our workshops are designed to deliver the skills you need to compete in today’s challenging environment. Choose from Power Pricing: Revenue Management BASICS or ADVANCED courses, individually priced so you can attend the course-level that you need most, or choose BOTH! To take advantage of discounted individual course pricing:
Power Pricing BASICS ONLY – MARCH 23 – ONLY $175
Pricing is key to successful marketing, but can be one of the most difficult aspects of the process. This session delivers the skills and knowledge you need to optimize pricing while minimizing costly trial and error. Learn the fundamentals of Power Pricing; gain an understanding of pricing dynamics and key metrics; and how to set up an individual manual pricing model for your product!
Power Pricing ADVANCED ONLY – MAR 24 – ONLY $175
Go beyond the fundamentals and learn how to execute and maintain your manual pricing model to increase cash flow and the overall value of your organization; use reports and graphs to more effectively communicate with your team and stakeholders; and confidently manage your organization’s revenue.
BASICS+ADVANCED! (2 DAYS) – MAR 23-24 – ONLY $304!
DON’T MISS IT! Register to attend these workshops .
Workshop Leaders:
Brad MartingMr. Marting is a professional speaker, trainer, and consultant for OptiYield, a consulting company specializing in profit optimization for real estate investments. His formal education includes a Bachelor of Science degree in Business and a Masters of Business Administration degree. He is a licensed real estate broker and holds designations as a Certified Property Manager, Certified Commercial Investment Member, Certified Apartment Property Supervisor and an Accredited Apartment Association Instructor. He has more than 30 years of real estate experience and has served as an officer and past chapter president for both IREM® and NAA®. In 2009, he was the Chairperson for the Income & Expense survey for residential real estate assets for IREM®. He is an award-winning author for his article in the Journal of Property Management on Yield Management and was co-founder and co-inventor of YieldStar®, a rent optimization system. He has acquired, managed, sold and consulted on more than three-billion dollars of real estate investments.
Since 1993, Jennifer Nevitt Casey, Chief Executive Officer of Bravo Strategic Marketing, Inc., has developed return-on-investment strategies for multifamily real estate investment portfolios with a capitalized value exceeding $6 billion. She is also a highly successful income growth strategist for residential assets and considered one of the nation’s most innovative real estate marketers. She is also President of Rohman Management and a Partner in Rohman Development, a New York City-based real estate development firm formed by a group of veteran professionals targeting the southeastern United States as its focus point for apartment development. She provides consultation on product design, the importance of a development’s timing, correct market positioning and proven successful leasing and for-sale marketing strategies. She is a contributing author of the Urban Land Institute’s book, “Developing Multifamily Housing,” and co-author or the National Association of Home Builder’s book, “How to Excel at Leasing Apartments.” Her credits also include inventor and founder of YieldStar Technology, LLC, a yield management, B2B software application that optimizes revenue for the multifamily real estate industry and whose assets were acquired by RealPage. A dynamic speaker known for captivating audiences, she has trained over 20,000 professionals within the multifamily industry and sales teams for newly constructed condominiums and single family homes.
Strategically Managing Lease Expirations
Feb 2nd
This is a great tool given to me by my Asset Manager to better manage my lease expirations with my traffic trends. This idea took some getting used to because I was trained that we only offer 6 and 12-month lease terms. Those were the options no matter what month you leased an apartment home. With the Lease Expiration Board and your Traffic Trend numbers you determine how many leases you’d like to expire in any given month according the number of traffic expected. As long as the lease term is at least six months the new resident can choose the month they would like their lease to expire according to the availability of expirations for that month. It’s a great tool to manage turnover and I have even shown the board to residents to help explain the reason why the lease may be able to expire in August but not September.
You can make a Lease Expiration Board out of a large magnet board and magnets that represent each apartment. The reason I use the board instead of a “Report” is to have it out in the open where the staff can see it and to be able to physically move the apartment numbers around the board from month to month.
Contributed by Michelle Whiting, Property Manager
Interested in learning more? Try a Revenue Management Workshop
Lease Renewal Strategies that Help You Manage
Feb 1st
Wouldn’t it be nice if we didn’t have to worry about lease expirations? If every resident simply moved in and stayed….and stayed…and stayed? Ah, but this is the real world—and in the real world, leases expire and residents move out. Even the best resident retention plan won’t eliminate turnover.
Because lease expirations are a fact of life, they must be managed like any other aspect a property. You need techniques for ending leases at the most appropriate times and in manageable numbers. You also need strategies for getting a little more mileage out of a resident—for those times when the market is terrible and your occupancy is not all that it should be. This article will look at some lease-expiration strategies that help you protect your occupancy and your income.
It’s Staggering!
One of the most effective techniques for controlling expiration’s and ensuring that your occupancy doesn’t take any sudden plunges is to stagger lease-end dates. Some companies follow very strict policies about how many leases can end in a given month, ensuring that only a certain percentage of the total number of apartments turn over at the same time. Others try to make sure that most of their leases end in the spring and summer months, when traffic is at its highest. Companies with high numbers of student residents often write their leases with the school year in mind, offering lease-end dates that coincide with the ends of semesters or terms. By controlling the number of leases expiring in a given period, you make life easier on yourself and your entire staff. Your service teams won’t be faced with a daunting number of make-readies all at once, and your leasing professionals won’t suddenly find themselves with impossible numbers of vacancies to fill.
Another approach involves staggering leases by apartment types. This ensures that you don’t end up with an oversupply of one apartment type and no availability in other types. If you are very in tune to your market, and you notice that there is a higher demand for certain floor plans at certain times of the year, you can stagger leases to ensure that vacancies in specific apartments coincide with demand for those apartment types. If you don’t have a sense of which apartments are most in demand at certain times, review your traffic reports and lease information for the past couple of years and see if you can discern a trend. You might be surprised.
Any staggered expiration approach will almost certainly involve offering non-standard lease terms. For example, if a resident signs a lease in February, and you have already scheduled your maximum number of move-outs for February of the following year, you will have to offer either an 11-month or a 13-month lease. If you’ve already filled up your move-in slots for January and February and March, the lease expiration will have to be pushed into either December or April. Some companies put a “flexibility” sales spin on the funky lease terms, allowing residents to pick their own move-out month based on expiration availability.
Going Month to Month
Offering residents a month-to-month option may also help you manage move-outs. There are some disadvantages to the approach—the most obvious, of course, being its uncertainty. The more residents you have on month-to-month leases, the more precarious is your occupancy. You have no way of accurately forecasting your turnover beyond 30 days unless you REQUEST a 60 to 90 day notice to vacate.
But stress level aside, month-to-month agreements can work wonders for a community’s occupancy. If you simply can’t afford to lose residents, they can be just right carrot to entice those who are hesitant to sign a year or six-month lease. A month-to-month can also be useful for eking out just a few more months of occupancy when you need them most. For example, if you can convince a resident whose lease is ending in February to stick around for just another two or three months, you will be that much closer to warm weather—and to the traffic you need to fill vacancies.
If you opt to let residents renew their leases on a month-to-month basis, you are entering into what is properly called a “rental agreement” rather than a lease. Essentially, this agreement expires at the end of each month, and is automatically renewed when the resident pays his or her rent for the next month. In addition to specifying the standard terms that all leaseholders agree to (resident and management obligations, rules, etc.), the agreement should specify:
· How much notice the resident must give if he or she decides to vacate, and
· How much notice the property or manager must give the resident in order to either change the terms of the agreement or end the agreement
The length of both these notice periods is often 30 days, but may vary from state to state.
If possible, when offering a month-to-month lease you should ask for more rent. In many markets, residents are willing to pay a premium for the flexibility of such an agreement. However, if it is the weakness of your market that is forcing you into a MTM in the first place, you may find it impossible to increase the rate. If this is the case—and if you really need the resident for a bit longer—don’t get stuck on the idea of charging a premium. Keep your eyes on the prize: you’re NOI.
The Ostrich Approach
In markets that are extremely difficult, some communities may opt to simply ignore lease expiration’s altogether. That is, they do nothing to bring the lease end to the resident’s attention, in the hope that the resident will simply go on living there—and go on paying rent—as if nothing has happened. Doing this creates a “tenancy at will,” which means the tenancy has no specified duration and can be terminated at any time by either party. Laws may vary from state to state, so you should check, but in most cases, the original terms of the lease are still binding (with the exception of the lease term dates). Either the resident or the community may residency the tenancy with a certain amount of written notice, which varies from state to state. The community may also change the terms of the lease—such as the rent or security deposit—with a specified length of notice.
In practice, then, this approach differs little from a month-to-month rental agreement. The main difference is the lack of paperwork. Another practical difference is usually the ability to charge a premium. While some communities charge a higher rate for the month-to-month option, those that opt to create tenancies at will are almost certainly not asking for more rent. Quite the opposite, in fact— they generally need their residents so badly that they’ll do whatever they can to avoid rocking the boat.
Squeezing in Some Marketing
Which ever strategy or strategies you use for renewals, one challenge you undoubtedly face is managing them in such a way that you have enough time to market newly vacant apartments. This requires balancing two sides of your managerial personality. On one hand, you want to give a current resident every possible chance to renew his or her lease—right down to the wire. On the other hand, you need to know what apartments are vacating so you can start advertising them. The longer you wait to market, the longer the apartment may have to sit vacant. So how do you satisfy both of these demands?
Part of the solution may lie in how much in advance you contact your potential renewals. The question of when to first approach residents with notice of their impending lease expirations depends largely on the state-mandated length of notice they are required to give of their intent to vacate. The general rule if to make contact at least one month before this formal notice is required. Following that guideline, then, communities with a 30 day-notice might make contact 60 days in advance, while those with a 60-day notice might make contact 90 days prior to lease end. Giving yourself the extra month accomplishes two things: (1) it allows you to surface objections that can be overcome, overcome them, and get the renewal, and (2) it allows you to identify those “solid” no’s, so you can start looking for replacement residents.
Solid no’s are generally those residents who are making major life changes—buying a home, moving out of town, getting married, etc. While it’s not impossible that they’ll change their minds, it is mighty unlikely. You are probably safe to assume that they’ll be vacating. Other solid no’s are those residents who, for whatever reason, are clearly unhappy in your community. You know who they are—every property has at least one.
Once you’ve identified those residents you know will be moving out, you can start your marketing efforts for those apartments. If you have a close-knit community, you may want to start close to home—with the neighbors of the soon-to-be-vacant apartment. Simply call those residents in the vicinity of the apartment, and say, “Mrs. Smith, can you think of anyone you’d especially like to have as a neighbor? The apartment right across the hall from you is opening up next month, and I wanted to let you know before we start advertising it, in case you had someone special in mind.” Who knows—you might just get a referral! And even if you don’t, you’ll win points with Mrs. Smith and the other residents you contact.
Visit http://www.multifamilyrevenue.com/For more articles
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