The Property Management Shop

Wake Up and Set Realistic Rents

by Marc Wilson

Q. I have always waited until an apartment is completely vacant and then touched up and cleaned before I place the unit on the market for rent. As a matter of course, I never show apartments that are still occupied to potential renters. This rental market is tough and it’s not getting any easier. Renting apartments is taking longer and longer. Should I show occupied apartments to potential renters? What do I do if the tenant in possession doesn't cooperate? What do you do?

A. I make these decisions on a case-by-case basis. Whether I will show an occupied apartment to rental prospects depends on the building, the building owner, the tenant in possession, the on-site management situation and the condition of the unit in question. There are some compelling reasons to show occupied apartments to prospective tenants. The most persuasive reason is the fact that prospective tenants associate value with extended move-in dates. Most tenants like the idea of selecting apartments that do not require them to take possession immediately, but rather give them 30 days or even 45 days before their rent monies are applied. This prevents the prospective tenants from having to double dip for their rent payments. Tenants hate to pay their old property owners and their new property owners simultaneously.

The ability to help a tenant avoid this cost is a major selling point. If a unit will be vacant on August 1, you can show the occupied apartment a full month earlier, starting July 1. I will usually rent the apartment with a move-in date of August 7. This gives you a week to have the place cleaned, touched up and ready for the new tenant. In this manner, you will only miss one week's rent during the vacancy process. This strategy works best if the tenant in possession is cooperative, you have strong on-site management at a fixed cost and the unit shows well.

You must understand that all conditions should be perfect in order to realize the benefits of marketing occupied apartments. For example, there are no benefits to marketing an occupied apartment that is not in near-perfect condition. Most prospective tenants either will not be able to imagine the unit when it is cleaned up or they will have little faith in your willingness to actually clean the unit up after the tenant has committed to rent the unit. Showing occupied units, or any units for that matter, that are not in near-perfect condition will seriously affect the rental value of the unit. Any negative effect on the rental value will seriously erode any financial benefits associated with a quick turn-around of the unit. Similarly, an uncooperative tenant in possession will quickly erode any benefits to showing an occupied apartment. Sure, the tenant has an obligation to cooperate with your marketing efforts and property showing, but that doesn’t mean that they have to clean up their unit, be nice to the prospective tenants or make your job easy.

What if you do not have strong, “fixed cost,” on-site management? This means that more than likely you will be showing the apartment yourself or paying someone by the hour to show the apartment. Assuming that your time has value, these costs can quickly erode any benefits associated with showing occupied apartments. The fact is that occupied apartments are more difficult and problematic to rent than vacant units in perfect condition. What do you do if you have committed the apartment to a new tenant and the vacating tenant decides not to vacate at the last minute? What do you do if you underestimated the time it will take to clean and repair the vacant unit and you cannot deliver the unit on the agreed-upon date? What do you do if the tenant in possession refuses to cooperate with your leasing agent? What do you do when the new tenant takes possession and is not happy with the condition of the apartment? How can you have a new tenant complete and sign a standard “move-in checklist” when the unit is still occupied by the tenant in possession with all her personal property? In most cases, the costs and risks associated with marketing occupied units for rent will exceed the benefits.

Over the long haul, and most of us are in this business for the long haul, the best strategy is to only offer vacant apartments in perfect condition for rent. You can still give your prospective tenants the benefit of late move-in dates. I always hang a sign in our vacant units that reads: “Ask about our flexible move-in date.” My standard offer to lease has a specific section that asks the tenant about his preferred move-in date. You will usually garner a little bit more rental value and find better applicants if the prospective tenant knows that they don’t have to start paying rent for 20, 30 or even 40 days from the signing of the lease. In most cases, I give the tenants the keys immediately after they sign the agreement and pay all of the money. Often times the rent money is not applied until 20 or even 30 days after they have taken possession of the apartment. The goal is to get the best tenant at the best rent. A down time of 20 or even 30 days is a small price to pay to obtain this goal. The fact is that I usually only lose two weeks’ rent on a unit turnover, even when I wait until the unit is vacant before starting the marketing process. Why? The answer is that I price the units appropriately.

What is the most important ingredient to a speedy and profitable vacancy turnover? Is it marketing the unit before the original tenant vacates? No. Is it hanging up a big “For Rent” sign? No. Is it offering one month's free rent? No. Is it new paint and new carpet? No. Is it the fact that you allow dogs in the unit? No. Is it that you are accepting Section 8 contracts? No. Are you getting the picture? It's the asking rent! What a blessing that so many San Francisco apartment building owners are in such hopeless denial. I would estimate that 35 percent of the total vacant apartments for rent are listed at rental rates that will never happen. This means that 35 percent of the total vacant stock is not now in competition with those of us who have the emotional ability to recognize and accept the current market. These people will, at some point, accept reality. When they do, the wheels will really come off this rental market. Remember, this is a falling market. Time is not on your side. Todays' wholesale rental value is tomorrow's retail value. I rented apartments six months ago for prices I cannot get today. Price your apartments correctly and get them rented quickly to the best tenants. Don't be worried about locking in low, rent-controlled rents. I had lots and lots of turnover when the market was going up and now I have lots and lots of turnover when the market is going down. Don’t try to make the market, because it is bigger than you.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Marc Wilson has been managing and selling San Francisco apartment buildings for over 15 years. Please send your questions concerning property management issues to Marc Wilson at 1699 Van Ness Avenue, SF, CA 94109. He can be reached at 415.229.1275.