Thursday, September 18, 2008

Popularity Contests!

Rental demand in San Diego is crazy right now. Who knew?!

A few years back, we accidentally started a rent payment bidding war on a 3/2/2 rental house. We had already been scheduling cattle calls for our units, but this once, we had prospective renters actually offering to pay more rent than we had advertised.

Obviously we didn't know our market. Obviously we had advertised too low a price. Obviously we got a hint when our phone rang off the hook.

It's fun knowing what we offer is in high demand.

However, it's a hidden sin to lease out a house for less than it's worth. Sure, we get all giggly listening to all those voice mails.

But it's smarter asking for more money and being OK with fewer calls. This seems self-evident, huh? Well, there's lot of landlords that are too ignorant, insecure, if not impatient to negotiate top dollar rents.

Today we can spot an amateur in a nano-second that doesn't know his market, when he brags about how fast he leases up his units, and the numbers of call he got. Uh, huh. After he finishes indirectly bragging about how ignorant he is about his market, we ask facetiously, "Wow, you got ninety calls for your unit and rented it in less than a day!? That's just fantastic. So how many more dollars do you plan to continue to drop in the toilet each month so you can remain popular?"

That's our polite way of asking a braggart how much money he plans to lose by negotiating stupidly, if at all. Maybe that's not more polite... Oh well.

Meanwhile, several years ago now, we advertised a 3/2/2 in Orange County for a $1,300 bucks which we reasoned was probably market value. At the time, this was actually $300 under market. We're guerilla market testers, and just needed some feedback. Our phone r.a.n.g. o.f.f. t.h.e. h.o.o.k from prospects!!! We scheduled our routine cattle call, not realizing the full impact of our offering price on demand. We had a stampede of "Lookee Lous".

After all was said and done we had negotiated the rent up to $1,600 a month, received a gigantic (probably illegally large) deposit, and had the unit re-rented within seven days of the last tenant moving out. We probably could have reduced the down time by three days, if we had scheduled our cattle call the day we had the house ready for re-renting. However, a week is acceptable in our book. A month used to be acceptable until we learned better.

"Are auctions always good?", one might ask. Yes, we believe they are. However, at the auction, we don't want prospects feeling like they are being treated like suckers, or they bail in disgust and contempt for us.

The secret we think in having a successful auction, especially if the prospects are not expecting an auction, is first to create scarcity through the cattle call itself, and then "let the cat out of the bag" to the prospects privately, that there is an outstanding bid from "x" dollars for the house. Then we give the prospects the chance to mull it over, while asking which of them would be willing to pay this much, or say Twenty-five dollars, more. Frankly some prospects that were only curioius, but not really prospects will leave immediately. We want them gone!

Meanwhile, as experienced negotiators, we can deftly go round robin with the prospects until we get the rent we sense we can command under the circumstances. We've had tenants pull out wads of cash trying to get to the head of the line. It's important to remember that the most likely prospects to win the bid, will have terrible credit. For us that's great. It just gives us that much more leverage on deposit sizes, co-signer requirements, and higher rents --- and longer leases.

It's OK to say, "We'll rent to you, but we want a 24 month lease, so we can cover ourselves in the event you get 'flakey'". Or to be a tad more professional, we couch the demand as a benefit to the lessee (who is paying over retail rent) by saying, " give you time to improve your credit and establish a positive rental history, we need to commit to a 24-month rental agreement."

Notice what we said here. "time to improve your credit", "establish a positive rental history", "we need to commit". We're saying.... The tenant "needs" time... The tenant "needs a proof positive history of on-time rent payments... and we've included ourselves, as the Landlord, in the tenant's problem with the use of "we need to commit" [to a long term lease].

The only thing we're committing to is gobs of extra cash for two years from this guy! Yay!

I love auctioning off gargantuan rent payments, collecting confisicatorily huge deposits from desperate, anxious, credit challenged people!

Anyway this might be an alternative way for some to positively get retail (or more) rents, from people happy to pay --- and not throw money down the drain trying just to be popular. You can be "popular" and get all the money due you! Who knew?!


MattJohnson said...

Jay, you greedy capitalist b@st@rd.....LOL.

Absolutely brilliant. I'd heard of this strategy for selling, but it had never occured to me to do it for rents as well.

On the subject of rentals: Dave Lindahl says the drop in a city's apartment market lags the drop in the single-family market by about a year, due to people staying in the area and renting (after losing their house) before they move on. I was wondering if you'd mind sharing your experience and/or predictions as far as when/how much the rental markets around here will drop.

Having heard Robert Campbell's warnings about rents going down, in your experience, about what type of an adjustment will we see? I know some areas have declined to the point where they'll cash flow, but I'm wondering how long this crazy rental market will last, and approximately how much of a drop we're looking at.

Jay said...
This comment has been removed by the author.
Jay said...

Yes, I'm a greedy SOB!!!!!! Actually I love being the hero for the folks that get rejected by other professional landlords (and especially the amateurs).

Regarding Robert Campbell's predictions, I haven't read them.

However, as for how far the rents on multi-s will drop. That IS the question of the times.

I can only guess based on past experience in the mid '90's that rents could fall 15% (at least).

Many apartment owners that refused to adjust their rents to reflect demand had huge vacancies. Some couldn't reduce their rents without actual negative cash flow. I know I was in denial about rents for a while, and had a vacancy issue myself.

I can't argue with Dave Lindahl, except to say that apartments offer a little more insulation against up and down turns. Everybody doesn't move at once.

If we read John T. Reed's book on property management he suggests keeping track of moving averages on rent/vacancies. This has really been helpful in keeping extremely close and accurate track of the vacancy factor. If I'm not mistaken Reed suggests (at least this is my operating principal) that if the vacancy factor drops under five percent, my rents are too low and I'm losing money. If the vacancy climbs above five percent, I'm also losing money, and need to either upgrade the building, or lower the rents to reflect demand when it's not something in my control. Five percent vacancy reflects the best operating temperature.

That said, there a bunch of stuff that causes a deterioration of the actual income levels. That's the appearance (maintenance), and over all marketability of the building. A building that is allowed to look dumpy will REALLY negatively impact the bottom line, regardless of market conditions.

I would add that when the market is soft, that buildings we own, better look spiffier than anything around. People "rent" buildings, as much as they rent an apartment. And if there's a genuine competitive alternative, I want to be the first choice.

That's alot!!! Whew!