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.
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
Don’t miss Revenue Management:Power Pricing Workshops in Dallas on March 23rd & 24th
Receive ideas, trends and tools INSTANTLY when you join our FREE! “Too Great To Wait” E-mail Subscription!
If you want to be the first to know what’s working in multifamily leasing, marketing, management and training then sign up to receive out TGTW emails.