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Harmonious resident relations begin even before anyone moves in—in fact, even before the leases are signed. They begin in the rental office when a prospect inquires about an apartment. If you have established fair and reasonable policies for dealing with prospects, you can prevent many of the problems that may arise after prospects become residents.
GENERAL RESIDENT POLICIES
It is crucial to establish and use resident policies. The manager must make residents aware of policies that affect them. After a resident understands policies relating to leasing and the payment of rent, he or she should learn the general policies that guide and influence behavior on the property.
A good way to set the tone of your property and let residents know what you expect of them is to publish a resident guidebook. It’s a smart idea to give each incoming renter this guidebook before the move-in date and certainly by the first day of occupancy.
The guidebook should be a simple explanation of all the rules, regulations, and policies of the management, along with some practical and useful information. It should be written in understandable language; a good free-lance writer, advertising copywriter, or publicist can write it for you. It is wise to avoid a list of negative dictates: “you can’t to this” or “don’t do that.” If possible, illustrate the guidebook with professional drawings. If the booklet is lively and interesting, people will want to read it. Don’t mail the guidebook or leave it inside the new apartment; hand it to the resident personally with the suggestion to look it over as soon as possible.
Some of the subjects a resident guidebook should cover are listed be low; managers should include any additional topics that are pertinent to their properties.
To assist new residents, you may also want to provide some practical information about the neighborhood, such as:
Guidebooks also help your rental personnel because they contain useful information for talking with prospects. A guidebook’s main our pose is to make residents aware of the property’s policies and procedures. The next few topics are subject areas that should be addressed in your resident guidebook.
Keys and Lockouts
Policies on keys and lockouts are needed for several reasons: to reduce replacement costs, to prevent wasted time, and to maintain security.
The renter moving in should receive a fixed number of keys. Charge a fee for extra keys or for replacement of lost ones. If the resident wants extra locks on the door or asks to have the lock changed because of a lost key, have this done at the resident’s expense; hut use your own personnel or an approved locksmith so that you can have the new lock fitted to the master key, as well as providing uniform and professional installation.
Lockouts can be a nuisance. You may have a working parent whose child is locked out of the apartment after school and comes to the management office for the key. There are always occasional adults who lock them selves out and need keys—often at one o’clock in the morning.
To discourage lockouts have a policy of charging a small fee (say $8) to let residents in during the day, $25 or more if it happens after 10 P.M.
Another approach is to render no help. This forces residents to gain access on their own and pay for any damages.
One important precaution: Never lend master keys. With this practice you run the risks of having the master key lost, stolen, or duplicated, and breach the security of the entire property. A building should have only a limited number of master keys. No keys should be identified as masters; they should be numbered and assigned to a few designated people such as the manager and the head of maintenance. It may be a good idea to have the keys returned to the office each night. If a master key is stolen, the manager should have all of the locks re-keyed to a new master. Although this is expensive, it is a necessary precaution.
Politics and Voting
Common sense suggests that your property and management staff should remain politically neutral, hut meeting facilities may be made available for political purposes provided they are made available to all political parties on the same terms.
That’s where political cooperation should end. Political signs in resident windows or anywhere else on the premises should be forbidden for reasons of appearance. Displays on bulletin boards should be allowed on an equal basis. Political canvassing or distribution of political literature on the premises should be discouraged.
Some complexes are large enough to constitute one or more voting precincts, and the local election board may ask to rent polling space in your building. This generally is an excellent idea. An on-site polling place is a convenience to residents and encourages their participation in the democratic process.
Door-to-Door Sales, Canvassing, Etc.
Rules on these matters pose special problems. Many communities have laws governing soliciting. Ideally, you should prohibit commercial salesmen in order to avoid disturbing your residents. There is, however, the question of your own residents doing the soliciting. A good policy is to permit them to invite contributions on behalf of a recognized nonprofit organization but to forbid door-to-door sales.
A move-in policy is necessary to ensure that an orderly procedure will be followed. This is especially important if a number of moves occur in the same building on the same day. A smooth move-in procedure will create a good impression for new residents and guarantee fewer management problems later on.
The move-in policy should require each new renter to let you know the date and approximate time of move-in so that you can be on hand to welcome him or her. This notice is also necessary in order to coordinate the use of elevators in high-rise buildings. People moving in become irritated quickly if they arrive to discover another party using the elevator; meanwhile, they are faced with mounting hourly charges as the moving crew stands idle.
Occasionally things do not go according to plan. If the old resident hasn’t moved out when moving day arrives, get in touch with the new residents right away and tell them to remain where they are. That’s the only thing you can do. If the new renters are already on their way, this can be a real problem. If it seems the delay will be a day or more, suggest that they move into a motel. You will have to work out some means of pacifying and compensating these people, even though you may not be at fault.
Someone may ask about moving in one or two days early if the apartment is already vacant. Although the resident technically is not on the lease for those few days, it makes some sense to permit an early move-in. Earlier occupancy may allow for easier scheduling and you will gain some goodwill at little or no cost.
Finally, the manager or a staff member should be present when the renter moves in to give whatever assistance is needed, explain procedures and answer questions, arrange for a tour of the premises, make note of any necessary adjustments or shortcomings, and explain to the new resident how and when corrections will be made. Before the move-in itself, a check list should be followed to ensure that everything is ready for the incoming occupant. The apartment should be given a final inspection; the temperature should be set at a comfortable level; the refrigerator should be turned on; keys, including the mailbox key, should he ready; the resident’s name should be on the mailbox; and the storage locker should be clean and secured. You may also find it worthwhile to inspect the unit with the new occupant on move-in day. After completing the move-in inspection, have the new resident review the inspection report and sign it; you should also sign the report. This way you have a document on file that verifies your mutual acknowledgement of the condition of the premises.
Some residents may want to improve their apartments by painting, installing paneling, putting up wallpaper, or laying new floor coverings. They may ask you first or just go ahead and do it, creating a surprise for you later.
As a rule, it’s a good idea to encourage residents to invest their own time, money, and energy in upgrading their apartments. By doing this, the resident’s sense of commitment to the apartment increases; this adds to the likelihood of developing long-term residents.
To understand how this sense of commitment is created, think about your purchase of an automobile. You don’t really regard it as your own until you wax it or add some bit of your personality to it. If you buy an antique ring, it doesn’t really feel like yours until you’ve cleaned and polished it. In the same way, an apartment isn’t really the renter’s home until he or she invests some extra money or special effort in it. Your job is to look for ways to help the resident make that all-important commitment.
Assume you are facing a series of move-outs to newer buildings with more modern kitchen appliances, yet you cannot afford to make mass re placements. Rather than lose residents who want new appliances, allow them to select a new appliance for their apartments. Let them pick Out something from a catalog or display—a stove with a self-cleaning oven, a self-defrosting refrigerator—and then go fifty-fifty on the purchase (the appliance then becomes the property of the building owner). Because residents pay half, they will take better care of the new appliances; at the same time their commitment to the property is heightened. Residents are often more financially equipped to participate in the purchase of a desired appliance or improvement than they are to incur the greater cost of moving and perhaps higher rent payments. If residents approach you, offer each of them the same deal. In doing this, you retain your residents while improving the property.
You have to protect against poor workmanship and the cost of restoring apartments at a later date, so consider a policy that tells the renter you favor improvements but with certain restrictions: (1) the resident must use materials that are removable during restoration (strippable wallpaper, and light-colored paint); (2) the improvements cannot be a danger to others (flowerboxes insecurely attached to balcony railings); and (3) the work can be done only after securing the approval of the management.
Some improvements should be prohibited outright. These include painting entry doors or those with a natural or stained finish; using adhesive-backed paper anywhere in the apartment (it is difficult to re move and leaves a coating that cannot be painted over easily); installing permanent, non-slip materials in tubs and on shower floors; and attaching any signs to the property.
Screw and nail holes of one-half-inch or less in diameter are “damages” created by an acceptable installation and must be tolerated.
The resident may want to install his or her own refrigerator or add other appliances and fixtures. Let’s consider these:
• Refrigerator. The resident wants to use his or her own refrigerator and asks you to store yours. This leads to problems, because a stored refrigerator will deteriorate quickly. You may decide to permit such an installation if the appliance can be utilized in another unit. If you do permit a resident to install and use a privately owned appliance, mark your records so there is no misunderstanding.
• Plumbing equipment. Residents should not be allowed to install dishwashers, disposals, washing machines, or dryers in their apartments unless your building is designed to accommodate such equipment. The existence of these appliances can lead to problems with vibration, flooding, noise, and plumbing back-ups. Also, some have special power requirements.
• Lighting fixtures. If the residents want to take down your lighting fixtures and put up their own, let them know they must restore the original lighting fixtures at move-out or pay for replacements and installation.
These are just some of the improvements that residents may request. Think about others that may occur on your property and formulate policies to deal with them.
In my experience, declining maintenance and service levels are responsible for more move-outs than any other category of complaints. The first step toward change and improvements requires an honest recognition that when maintenance and service decline, residents begin to look else where for housing. Residents need a constant show of appreciation. The best way to demonstrate appreciation for residents is to provide them with a well-maintained and improving property, together with a high level of personalized resident service.
The property manager must confront resident-related problems. Having Contingency plans for these situations may mean the difference between taking care of a minor difficulty and creating a huge dilemma. Let’s exam me a few of the most frequently encountered problems.
A complaint that is handled slowly is almost as bad as a complaint that isn’t handled at all. As a worst-case scenario you would handle a resident com plaint within twenty-four hours. Most top-quality management companies respond to service requests filed in the morning during the afternoon of that same day. Problems that develop in the afternoon are taken care of the next morning.
It’s important to keep track of complaints. Don’t try to do it by memory. Every complaint should be written down. If a complaint is made by telephone, write everything down and then repeat it so the resident knows you understand the problem. The very fact that the complaint has been acknowledged will help satisfy the resident.
Complaints usually concern three subjects: (1) other residents, (2) the apartment, and (3) the property.
1. Complaints about others. “My neighbors play their stereo too loudly.” “They’re fighting next door.” “I think the people down the hail are drug dealers.” These are the types of complaints you may get from some residents about others. Some of these are frivolous, others are serious.
If a complaint deals with an emergency or civil disturbance involving others, find out if the resident has already called the police or fire department. If not, ask him or her to do so immediately. If the resident balks, place the call yourself. Be quick to act if life or property is threatened. Be careful about trying to deal with civil disturbances yourself, particularly fights resulting from domestic quarrels. These are best handled by the police.
If there is a complaint about a non-emergency situation pertaining to others, tell the resident you’d like to see his or her experiences presented to you in writing. For every ten telephone calls of this nature, you’ll get only two or three letters. When you get the letter, visit the offending resident and tell him or her about the complaint, but do not identify the individual who filed it. After settling the matter, contact the person who made the complaint and explain what action you’ve taken. This can be done in person or by telephone.
2. Complaints about the apartment. Requests for repairs and maintenance should certainly be handled within twenty-four hours. If you need access to an apartment, let the resident know you’ll have to enter the apartment during normal business hours, assuming it’s not an emergency.
3. Complaints about the property. If residents complain about the way the property is maintained (“too much litter,” “the grass isn’t cut,” “the laundry room smells,” “recreation hours are too short”), pay careful attention. These criticisms of the property are warning signs of resident dissatisfaction. They are likely extend to many more people than those who actually complain. In fact, your very best residents may be equally bothered but say nothing; then one day they simply move out. So, if you start hearing general complaints, acknowledge them and begin a prompt investigation.
Life in an apartment complex goes on twenty-four hours a day, seven days a week, 365 days a year. While your office hours are established to take care of routine business, you need a policy to provide for emergencies in an orderly manner. The first recommendation is that you have a listed twenty-four-hour emergency telephone-answering service, it should be listed as an emergency number to distinguish it from the regular office number that might be used by prospects calling with questions. You may want to have the number printed on a sticker for residents to put on or near their telephones. Include the emergency number in the resident guidebook and post the number on bulletin hoards. The answering ser vice should know whom to call for various emergencies. This might be the site manager, although most developments rotate “on days” among several staff members.
The next recommendation is to let residents know what constitutes a real emergency. If a resident needs a replacement light bulb, that can wait; but if a water line breaks in an apartment, that’s a real emergency. There are six types of real emergencies:
1. Flooding caused by a plumbing breakdown. This must be corrected instantly. The longer repairs are delayed, the more extensive the damage will be.
2. Lack of heat in winter or air conditioning in summer.
3. Damage caused by wind, storm, or fire. In a disaster, you have to take instant steps to minimize the damage. Residents should call the fire department first in case of fire; if they haven’t, the answering service should do so immediately before relaying the message to building personnel.
4. When security has been breached or is threatened by burglary, vandalism, or other disturbances. Again, residents should call the police first, and the answering service should notify the appropriate staff member.
5. Back-up of a sewer or other sanitary facility. This is a health hazard and must be corrected immediately.
6. Electrical failures or short circuits. These can threaten the safety of the building and the lives of residents.
You should make residents aware of what constitutes emergencies and whom to call about them by publishing a separate information sheet or by incorporating the information into the resident guidebook. You also should make sure that your answering service knows whom to call for each type of emergency. The answering service should also ask residents with non-emergency requests to call hack during office hours.
Disasters are a period of extreme tension for a manager. After the initial shock of the disaster itself, there are physical and emotional pressures caused by injuries, deaths, or loss of possessions. Later, in the section on Insurance, we’ll discuss the manager’s obligations and responsibilities after a disaster.
At present, we will limit this discussion to the issue of rent. It’s a good policy to discontinue rent charges if an apartment is uninhabitable and to refund or give credit for any unused portion of that month’s rent. Then, depending on the terms of the lease, the owner usually has a period of time to determine whether to restore the apartment and continue the lease or to cancel the lease.
Remember, once you have established your policies for dealing with disasters, put them in the resident guidebook so everyone knows what to expect.
Illegal and Immoral Uses
How do you deal with a resident who engages in drug abuse, gambling, or prostitution in the apartment? Most leases state that the use of the apartment for illegal or immoral purposes is grounds for eviction, but eviction is a court procedure that is slow, expensive, and open to question. It’s better to meet with the resident, cite the objectionable behavior, and offer to cancel the lease and return the security deposit.
Before you take any action, consider whether you want to act against the offender at all. He or she rented the apartment for personal use. If what is done within the apartment is not offensive to others or damaging to the property, you may be better off ignoring it.
If you decide to take action, confront the resident by going to the apartment or asking him or her to your office. Do not write a letter stating the complaint. If the complaint turns out to be unjustified, the resident might use the letter against you in a court action. When you confront the resident, you can simply say, “I know what’s going on here, and I think it would be best for all concerned if you moved.”
In most cases, the offending resident will leave, not because of a legal requirement but because most people will do what they’re asked to do. Have the departing resident sign a mutual cancellation agreement, and re turn any prepaid rent or security deposit money you may be holding when the apartment is vacated. If the resident is suspicious that you won’t re fund the money once he or she leaves, offer to put it in escrow.
Resident abuses (i.e., disregard for fellow residents or the property) are a source of many complaints and problems for managers. One resident uses the balcony for storage; another leaves wet clothing in the coin-operated washers. There may be a family that is extremely noisy or a working resident whose children continually have to he let in after school.
The offending resident may not realize the problems being caused. The best way to deal with the situation is simply to show up at the apartment door and discuss it. Most people will agree to correct their ways.
Here again, don’t write a letter because it will probably be ignored, or the resident might over-react, exacerbating the problem. The resident can’t ignore a face-to-face meeting. If the offending activity continues, make a second visit. On this occasion, suggest that perhaps the resident should live elsewhere and offer to cancel the lease by mutual agreement. This tactic demonstrates your seriousness, and the individual is likely to reform. If the offer of cancellation is accepted, the problem is solved then and there.
Of course, the resident may reject your offer and continue the offense. In that case, court action is your next recourse. Be aware that going to court is a long, uncertain process, and the lease will probably expire be fore the action is resolved. You may be better off to put up with the nuisance until the end of the lease term, or you can begin the lawsuit in the hope that it will encourage the resident either to change his or her habits or to accept your cancellation offer.
The best protection you have against damage to the apartment caused by the resident is the security deposit. It is very difficult to collect in court for damages that exceed this amount. Your policy should be to try to collect damages at the time of the occurrence, thus preserving the security de posit amount to cover damages revealed when the occupant moves out.
For example, if the toilet overflows because someone has dropped a soap dish or rubber hail into it, let the resident know that this is not a normal malfunction and that payment for the repair is expected. Most reasonable people will accept this; if the resident refuses, you still must make the repair for health reasons.
Suppose a resident uses an ice pick to defrost the apartment refrigerator and in the process punctures the refrigerant tubing. In many jurisdictions, you’re under no obligation to repair or replace an appliance dam aged by a tenant’s gross misuse. Point this out to the resident and request payment for the damage. (By the way, if the refrigerator in this particular example is more than a few years old, you are probably better off purchasing a new refrigerator and applying the resident’s damage money toward that purchase. The new refrigerator should then be installed in the apartment of one of your best residents. Move their old unit to the apartment where the damage occurred.)
As for damage caused by resident neglect (e.g., water damage from a bathtub overflow or a window left open during a rainstorm), you should always try to collect—even though you may not succeed. Rarely will you be able to collect anything beyond the security deposit. If a fire is caused by resident negligence, you’ll have to rely on the property’s insurance for coverage. The insurance company probably won’t pursue the resident for payment, nor will a court generally rule against a resident in favor of the owner.
There are several other possibilities to be considered in setting a damage policy. Broken windows, for instance, are generally an ongoing maintenance problem; replacing them is a cost of business you should absorb. Property damage caused by a resident’s car may be collectible through a claim against the resident’s auto insurance carrier.
If you rent furnished apartments, it’s advisable to increase the security deposit to cover the added risk of damage. Also, inventory all the furnishings and indicate their condition before anyone moves in so you can use the security deposit to pay for any loss or damage. Photographs and video tape are an easy way to inventory furnishings and document their condition at the time of move-in.
Tenant organizations are one outcome of the impact of consumerism on rental housing. They are often the result of both owner and management insensitivity to resident requirements. I believe that the kind of sensitivity needed to provide the products and services residents want should come from management’s awareness of existing problems—not from collective bargaining. It’s difficult to manage real estate effectively by committee. If you attempt to satisfy every resident through a tenant organization, you may wind up satisfying no one.
Not content to act individually, some renters have realized the power of group action. They have seen what labor unions have accomplished and what civil rights groups have won. They have taken a cue from condominium associations that manage the affairs of buildings. Residents often band together in the belief that “the landlord can’t throw us all out.”
Many tenant organizations are started in response to nonspecific is sues. The residents have a general but undefined feeling that it’s unsafe to live in the property or they don’t like the way the place is run. Seldom do they focus on specific grievances such as loose carpeting in the second floor corridor. Because tenant organizations do not understand—and often have no wish to understand—the need for good business practices, they can make decisions solely on the basis of collective emotion and pressure.
Another factor leading to the formation of tenant groups is the idea that democratic principles should rule a community of residents. Participation is the watchword, an idea promoted by the U.S. Department of Housing and Urban Development in the housing that it sponsors or assists. HUD in fact requires the managers of federally assisted housing to support resident organizations.
Once owners or managers allow tenant organizations to tell them how to run their properties, they forfeit their rights to control and their expectations of maximum net operating income. A manager who becomes too involved with a tenant organization has to deal with the same kinds of problems faced by the manager who socializes with tenants; this softening of the relationship between resident and manager can easily create difficulties.
What should the manager’s policy he? You rent to tenants as individuals, and you should try to deal with them as individuals. This means you should not encourage or assist them in the formation of any kind of organization. Don’t even help them form a ski club, bridge club, or resident newsletter, as any of these can backfire. When a meeting is necessary you should call it, run it, and adjourn it yourself.
Residents are less likely to feel the need to organize when you adopt the following principles of action:
• Fair and reasonable policies, unapplied. All of your policies should be founded on sound reasoning, consideration of the residents, and fair and uniform enforcement.
• Good communication. If a problem exists, tell residents that you know about it and that you are seeking a solution. Don’t be mute or try to ignore a problem. You can communicate with residents through letters or personal visits. Incidentally, management news letters are not effective for this purpose.
• Prompt response to service requests and complaints. Satisfied residents have no reason to band together. By taking care of their individual complaints, you will eliminate most of the problems.
Tenant organizations do exist, however. The smart manager turns a bad situation into a good one by using the tenant organization to his or her advantage. You could, for example, use the tenant organization to en courage residents to report specific problems when they are small and controllable. It’s not necessary for an owner or a manager to relinquish control of the property to the resident organization any more than it is necessary for a fifth grade teacher to lose control of his or her class. Your written policies come in handy here, because you have established your position as the maker and enforcer of the rules.
Arbitration is a viable way to settle disputes. By including an arbitration clause in your lease, you and the resident can agree to submit any dispute to arbitration. Whatever the arbitrator decides is binding on both of you.
The usual procedure in settling a dispute is to contact one of the 55,000 arbitrators recognized by the American Arbitration Association.
The arbitrator hears both sides and then makes a judgment for one or the other of the parties. The fee, about $500, is usually divided between the two parties. If residents know their complaints will be settled fairly, they are less likely to resort to group action for satisfaction.
AFTER THE FIRST LEASE
There are ways to retain good residents. Naturally, the apartment manager would like these people to renew their leases continually. When this doesn’t occur, the move-out becomes an important part of satisfying residents. Maintaining good resident relations begins before any lease is signed and continues through move-out day.
A resident may ask to transfer to a different apartment during the lease term to accommodate a change in circumstances. Policies covering apartment transfers should take some variables into account. Generally, you should discourage apartment transfers because they create added administrative work and cause premature wear and tear on apartments, but you should also be flexible. A resident who is not satisfied with his or her particular accommodations and seeks a change will probably go elsewhere when the lease is up—and you’ve lost a resident. This is especially true if there are just a few months left on the lease.
In determining whether a transfer is a good idea, consider market conditions. For instance, if a resident loses a roommate and wants to move from a two-bedroom unit to a one-bedroom unit, you might have the resident agree to pay a prorated share of redecorating the old apartment in order to facilitate the transfer. This is certainly a good idea if two-bedroom apartments are in tight supply and one-bedroom units are plentiful. You’ve just rented a one-bedroom unit, and you should have no trouble re-renting the two-bedroom apartment.
It’s common practice to offer the resident a renewal lease prior to the expiration of the current one. Frequently, the new term would be for one year. I am learning that such a practice actually increases tenant turnover. Presenting existing residents with renewal leases has the effect of forcing them to decide what they want to do with their lives for that period of time. There are many people currently renting their accommodations who have long-range plans to own their own home. By presenting a lease to them, the decision is placed squarely on the table. It’s common for a couple to receive their renewal lease in the mail and to set aside the next few weekends to explore new housing developments and the possibility of making a move. Bypassing the formality of a renewal lease does not eliminate the thought of moving, but neither does it force people to action.
At the properties my company manages, we experience the least resident turnover if we first lease to a resident for a given period—say six months or a year—and follow that by an invitation to continue on a month- to-month basis, with the assurance that future rent increases will be limited to once-a-year on the anniversary date of the original lease.
Some building owners fear that residents will opt to move during off season (when there are few replacements available), or they may be concerned that their lender will prefer the security of having annual leases in the file. Nevertheless, people typically avoid off-season moves. So, while the risk is there, it is not a great one. Also, lenders are coming to the realization that signed residential leases in a file cabinet do not offer the same security as major commercial credit tenant leases. Hence, they are not as troubled by month-to-month tenancies as they have been in the past.
One of the most important policy considerations that you will have in the management of rental apartments is the way you plan to encourage a resident to renew a lease or stay another year. Existing residents will certainly notice that their new neighbors move into freshly prepared apartments (often with new carpet or appliances). Unless there is a specific policy to reward the existing resident with an apartment improvement for each lease renewal, the property will face a constant procession of move-outs, and operating costs will be driven to a point where all hope for profit is gone.
Many apartment operators provide a display showing the various apartment upgrades and improvement packages that can be selected by a resident who renews the lease. For example, if the person is just completing one year, the renewal reward might be a fairly inexpensive improvement such as wallpaper for the kitchen or bath, a ceiling fan, new hard ware or a new light fixture. On the second anniversary, the improvements should have more value. Examples might be a large bathroom mirror, new medicine cabinet, new kitchen floor covering, decorative chair rail, etc. Four- or five-year anniversaries might be rewarded with a new major appliance, new carpeting or a new tile job in the bathroom.
As you will soon see, the cost of turnover is the highest single expense in the operation of an apartment property. A great deal can be spent making existing residents more comfortable before you begin to approach the cost of replacing them.
Security Deposit Reduction
One of the best ways of showing confidence in your residents and ex pressing appreciation for their tenancy is to return some of the security deposit at given lease anniversary points. If the full security deposit was $150, you might have a policy to return $50 after one year, another $50 the following year and the remainder after three years. This process certainly acts as a reward and is welcomed by the residents. As time goes on, haven’t we really amortized many of our costs?
Such a policy has an additional benefit: It affects the resident’s cash outlay if he or she decides to move to another property. Let’s assume you decide to hold a resident’s full security deposit for the duration of tenancy. When that resident moves, he or she effectively transfers the security de posit from you to the next landlord and the out-of-pocket expense is only the rent on the new apartment. If you had given that same resident a security deposit refunding the cash outlay for a new apartment would have been the security deposit plus the rent. Remember, one of the deciding factors in moving is cost. With this in mind, we can adjust our thinking to make it more cost effective for the resident to stay.
Frequent tenant turnover is very expensive. In fact, it ranked right up with utilities and real estate taxes in a study of annual operating costs. Over a period of twenty years, national average turnover rates rose from 30 per cent to greater than 50 percent. In some communities, especially in the southwestern part of the United States, turnover rates regularly approach 100 percent each year.
A property’s turnover rate is the number of new renters moving in during a one-year period as compared with the total number of units in the property. For example, if forty-five new residents moved into a 100- unit property in one year, its turnover rate would be 45 percent.
There are two general types of resident turnover. The first is called economic turnover. It involves residents moving out of apartments be cause they have purchased a single-family home, townhouse, or condominium, or they are required to live in another part of the city or country as ‘a result of a job transfer or relocation. This is much more prevalent in higher-rent strata than in middle- and lower-rent brackets. The continued appeal of homeownership (including condominiums) is due in part to a desire to hedge against inflation and acquire tax advantages. There is also tendency to underestimate the costs of homeownership. Economic turn over will always occur to some degree in the better quality, higher-rent apartment complexes. Better service will help minimize such resident losses, but there will always be attrition.
Many apartment building owners and managers attempt to avoid economic turnover by intentionally keeping rent levels at the financial break-even point. By maintaining unrealistically low rents, they hope to cut operating expenses attributable to resident move-outs while still producing a high net operating income. The effect of this practice on a property’s economic turnover rate may be minor, but its effect on the economic viability of the property is almost invariably significant.
The turnover you can and should slow down, however, is lateral turn over. This type of turnover includes residents moving across the Street or down the road because another apartment complex looks nicer, has better service, or offers more amenities. Whenever the supply of apartments out strips demand, or conditions or service levels start deteriorating, this type of turnover will increase. The largest proportion of tenant turnover— about 70 percent overall—falls into this class. First-class conditions and top-flight service can affect dramatic reductions in both the rate of lateral turnover and its corresponding costs.
It is truly impossible to eliminate turnover in an apartment complex. Renters, even homeowners, come and go. We must minimize the rate of turnover, however, through careful screening and selection, fair rent pricing, constant product updates, and cheerful service and follow-through.
Controlled studies have shown that an apartment complex spends about three times the amount of the monthly rent every time a unit turns over. This figure includes cleanup expenses, decorating and carpet care, window coverings, repairs and replacements, advertising and promotion costs, and utilities and lost rent, as well as concessions and administrative charges. The average time between resident move-out and replacement move-in is over forty days. This includes periods of free rent that may be allowed or taken. In money terms, if the rent were $500 per month, the cost would be about $1,500. Put another way, you could spend up to that amount improving a particular unit if it would make the difference between keeping or losing the occupant. While these figures are averages, they do represent a realistic cost of finding a replacement resident.
Many firms have changed their chart of accounts or have added a special control category so that they can keep all the costs associated with turnover in one place. In doing this, they create a constant reminder of the importance of rewarding the existing resident so that the average stay is prolonged.
If you were to reduce the turnover rate in the property that you control by 10 percent, you would certainly increase operating profits. Or, you could charge less rent and deliver the same bottom line. Using typical numbers, each 10 percent reduction in the annual turnover rate, say from 50 to 40 percent, would allow you the benefit of charging around 3 per cent less rent while maintaining the same net operating income. A 20 percent improvement in turnover rate, from 50 to 30 percent would double the 3 percent possible monthly reduction. I certainly do not recommend chasing a rent reduction. I just want to point out that the high cost of turn over is a definite portion of each month’s rent. Reduce turnover and you lower the need for higher rent because costs will drop. Every move-out you prevent is one less apartment that you have to rent.
When residents advise you that they intend to move from their apartments, spend some time with them reviewing the different procedures so they will know what to expect. It’s crucial that the residents provide you with their moving date so you know when to begin searching for replacement residents. You also should remind the residents of move-out inspection procedures and arrange to inspect the premises on the day of move- out after the furniture and other belongings have been removed so that you can determine their security deposit refund. Finally, you should be interested in the resident’s reasons for moving in order to learn about any deficiencies in your property or your performance.
Security Deposit Return
A resident who is moving out may suspect you of trying to keep the deposit by finding as much damage as possible. Your policy should be to minimize these fears by establishing a procedure that will be completely objective and fair.
It’s to your advantage to have the occupant leave the premises in the best possible condition so that you can return the security deposit in full and not get into heated discussions about deductions. A well-planned policy will help you meet this goal.
Let the resident know what the move-out inspection will consist of, and also explain that a check will be issued promptly. You should always mail the security deposit refund check to the resident within fourteen days—and certainly no more than twenty-one days—after move-out. There is no excuse for taking longer. If you do take longer, you deserve the extra work and aggravation that result from following such a policy.
You should also be aware that local laws can dictate the amount of time you have to return a security deposit. Each year, politicians propose new and more stringent laws to rescue renters who experience difficulty with the return of their security deposits. Penalty amounts of two and three times the money on deposit are common. Your system should allow for a speedy return of security deposit money as well as a lenient evaluation of damages and corresponding charges.
Knowing that their apartments will be inspected on the day they move, renters are likely to take extra care that the premises are in good condition. Without such an inspection, renters may be less careful about the way they leave the apartment. You’ll find that your costs will be sharply reduced if these inspections occur in the last minutes of the move-out activity.
Another good reason for move-out inspections is that they enable residents to straighten out any misunderstandings about who did what. For instance, you may claim a renter chipped a washbasin. The resident may reply that the washbasin was chipped before he or she moved in, and it has been the same ever since. If you made an inspection when the previous occupant moved out or if you inspected the apartment with the resident when he or she moved in, you’d have a record of this. If the current occupants are right, then you’ll avoid the unpleasantness of arguing over damage they didn’t do.
An inspection may also reveal deficiencies the resident can fix on the spot. You may find the oven is dirty and say you’ll have to charge $20 for the cleanup. Rather than pay that, the resident may volunteer to clean it immediately.
When you make the inspection, be prepared to make allowances for normal wear and tear, such as nail and screw holes and other signs of occupancy. An apartment is a consumable commodity; it wears Out like anything else. You shouldn’t expect a resident to return it in the exact original condition; nor should you expect a security deposit to pay for whatever you’d normally spend to prepare the apartment for the next occupant.
Remember, the way you deal with any one person quickly becomes common knowledge throughout your property and in the community. Fair ness is absolutely essential if you’re to preserve good resident relations.
After the inspection is completed, make note of what has to be done, indicate the necessary deductions, and give the resident a copy of your worksheet. This will avoid disputes over what has to be done, and it also acts as a receipt to assure the resident that the remaining portion of the security deposit will be returned.
Your last step in dealing with the resident is to get all the keys to the apartment and mailbox and obtain a forwarding address so you can mail the refund check. Knowing the forwarding address is a big help if you need to contact this individual later and is very useful information for your marketing people.
You should always strive to have the resident leave in the best possible frame of mind.