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Get Tenants to Take the Bait
by Marc Wilson
Q. I am having trouble renting a one-bedroom unit in the Western Addition. This unit literally flew off the shelf 16 months ago at a rent of $1,800. I have been actively marketing this unit for over 30 days and no one is biting at an asking rent of $1,675. What gives with this rental market? Should I lower the rent?
A. In a word? Yes! Now might be a good time to review the last 10 years of the San Francisco rental market; this will help us to understand, and maybe even accept, what the next 24 months will bring.
Flash back to January 2000. For two glorious years, I had been renting apartments at astronomical rents to tenants whose employers’ names all ended in dot-com. It was ridiculous and it was historical. Toward the end of the mania, I rented a one-bedroom apartment in the Western Addition for $1,900 to a young gentleman who had a plug in his ear. He was a web page designer for another dot-com start up. The NASDAQ was at 5,000, all my new tenants worked for startups, and I didn’t understand how any of these companies generated income or ever would generate income. When I got home that night, I told my wife I wasn’t renting to anyone whose place of employment ended with dot-com anymore. If I had six applications from dot-com tenants and one from a teacher, I simply went with the teacher. I wanted a more diversified tenant profile and rent roll.
Twelve months later, the NASDAQ was at 1,500 and the rental market started to falter. Almost all of the dot-com companies were gone and we all ended up looking like idiots. This became the golden age of the “negotiated rent reduction agreement.” For the first time in history, owners were negotiating dramatic, and hopefully temporary, rent reductions with existing tenants. I, myself, entered into over 50 such temporary rent reduction agreements during this era. By the time it was over, rents had fallen 25% from their peak. It is interesting to note that I do not have any remaining tenancies subject to a temporary rent reduction credit; they have all since moved out and moved on.
This was such a classic bubble, so why not let everyone lose their money, learn a lesson and move on with their lives? This is exactly why we have bankruptcy court and unemployment benefits in the first place. But, what does the government do? The exact opposite: it starts printing money. Ultimately, the morons at the Fed brought the federal funds rate down to 1%, where it remains to this day. Then what happened? Lots of things. Property values in San Francisco almost doubled and rents regained their pre-dot-com crash levels. This was also the time of the invention and proliferation of the zero-down real-estate transaction, no doc loans, inflated appraisals, double-digit appreciation and securitized mortgage portfolios. In short, another classic bubble.
So, what does this mean? What in the world does this have to do with San Francisco rental rates? It means that, once again, market rate rents will fall by around 25% during the next 16 months. The only question now is: How are you prepared to deal with this reality? I have some ideas.
Deliver your vacant units in nothing but absolutely perfect condition. Do not skimp on anything. The competition for qualified tenants will be fierce. You will have no chance if your units are not in perfect condition. Fresh paint, new kitchens, new flooring, modern light fixtures—spare no expense when it comes to preparing your units for market.
Research the proper asking rent. Take a look at other available apartments in your neighborhood, scour the Craigslist advertisements and select an asking rent 5% below the competition. The sooner you drop your rents, the sooner you will lock in a one-year tenancy. Be sure to post pictures with your Craigslist advertisements. It won’t be long before there will be so many advertisements on Craigslist that only those ads with pictures will get “hits.” Don’t sacrifice the quality of your tenant profile. Don’t rent to high-risk applicants; drop your rents instead.
Get yourself ready for the inevitable requests for rent decreases. It won’t be long before the tenant community knows what we already know, that the rental market is receding. I had good luck with my standard “rent credit” agreement after the dot-bomb implosion. The key is to have a written agreement that grants a temporary rent decrease, without waiving your right to increase the rent at a later date.
Most attorneys will advise you that such an agreement does not exist. But I was never taken to the San Francisco Rent Board over a subsequent rent increase pursuant to a rent credit agreement. I dropped many rents only to raise them back to the original amounts once the economy recovered. None of my tenants complained about these increases and none of them took to me to the Rent Board. I don’t know how I would have fared at the Rent Board and I don’t want to find out. The reality is that my tenants read and understood our agreements and they agreed to them. I actually believe that most of my tenants didn’t take me to the Rent Board because they preferred to honor our written agreement and to honor their word. They might have been able to prevail at a Rent Board hearing, but they couldn’t do that and preserve their self-respect, so they took the high road.
I have reduced rents in tough economies before and I am prepared to do it again. I would suggest that you get yourself a workable “rent credit” agreement before the music really stops. Important note: given the uncertainty relative to the enforcement and legitimacy of temporary rent reductions in general, one should never lower a rent unless one is willing to accept the new rent permanently.
Even as you lower your rents, do not waver from a zero-tolerance policy with regard to late rent payments. Rent must be due on or before the first of the month and there are no exceptions. Please do not lose the will to enforce the terms of your rental agreement at exactly the time when you will need it (your will) the most. Do not accept partial payments; return them with a Three-Day Notice to Pay Rent for the full rent due and payable. Do not return your tenants’ “hardship” telephone calls relative to tough economies, skimpy employment opportunities and late rent payments. If rent is not tendered pursuant to the exact terms of your rental agreement, serve your tenant with a three-day notice. If the tenant does not comply with the notice, immediately proceed with eviction proceedings. An empty apartment is an infinitely better alternative than an occupied apartment with no rent payment. You have an obligation to yourself and to your property to manage the creditworthiness of your tenant profile. Tenants who do not pay their rent need to be shown the door, no exceptions.
It’s nothing personal. Your tenants are not your friends. Do not personalize late or absent rent payments. Do not engage in verbal communication with your tenants relative to rent payments (or anything else for that matter). Notwithstanding the mantra of today, we are not all in this together. Take every opportunity to enforce absolutely each and every term of your rental agreement at all times. It is worth enforcing all the terms of your rental agreement. Remember: no good deed goes unpunished.
This is a normal business cycle. Keep your head up. Decide to be the best property manager and property owner that you can be. Be a consummate real-estate professional at all times. Show yourself and the community that you can handle this market. The prize goes to those who can last.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Marc Wilson has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2009 by Black Point Press. All rights reserved.