Maybe the Model is Broken

by Eric Brown on August 17, 2008

Broken By Eric Brown

Can the apartment industry benefit from benchmarking against other industry standards? Are the metrics that property management company’s use in sync with the changing world? Maybe what we have always done isn’t producing as favorable of a result as what we could with a paradigm shift. Brent William’s blog post about lease renewals and how they stack up against cell phone plan renewals has provoked contemplation on the topic. The cell phone companies have likely created a renewal model that does work better than a typical apartment renewal. The rent increase argument is flawed and can be diffused with an increased renewal percentage.  The cost of getting a unit market ready, leasing and marketing cost is far more than a rent increase. Rent increases are certainly required, but perhaps a more targeted approach would provide a better yield.  The whole concept is convoluted, on one hand we ask for a rent increase, and on the other hand sometimes give away something to secure the renewal.

What if the apartment leases self renewed, similar to the cell phone renewal policy. What if the burden to terminate the lease was solely on the resident and we didn’t talk about it much after the lease signing? What if you redeployed the savings from managing the renewal process to a planned and systematic series of surprises? Change the lease term to something other than a standard twelve months, so with one auto renewal, the property exceeded the typical 50% or 60% retention target. How it is ever OK to say that half or close to half of your customer base is turning over year after year. It isn’t OK, and we should find an innovative way to solve this.

The current thinking and training may be flawed.

Ideas, comments, thoughts, we would love to hear them.  

You can check out Brent’s blog post here

Stopping the Buying Mode

Eric Brown

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  • http://david-damore.blogspot.com/ David Damore

    Powerful stuff in this post. Will probably stir some great thought and ideas from your readership.

    Would love to learn of the idea that is created when a reader collaborates with one of their contacts. They may come up with the IDEA THAT CHANGES EVERYTHING. Yes!

  • http://thatguymj.blogspot.com Mark Juleen

    Great post Eric. For the first few years in property management I contemplated the same idea, and I still do today as we really don’t provide any more for the resident (i.e.- a better apartment or upgrades) yet we always ask for an increase. So, how do you justify a rent increase other than by claiming inflation?

    Now, I think most would agree from an ownership standpoint rent increases are great. Increased NOI = Increased value for a property. But from a brand management standpoint I think as an industry we ask for rent increases for the wrong reasons. How many can go to the president of their company today and demand that in order to justify more than a 2-3% rent increase (inflation) we must make some type of improvement to the resident’s apartment? When I suggest improvements I’m not saying a carpet clean either. True and honest upgrades like better quality carpet/flooring, new and updated light fixtures, new hardward, new counter-tops, new faucets, new amenities, etc., etc. My guess is the majority of people reading this probably could not make a strong enough argument to their president to influence a change such as this. However, if your community is more than 5-6 years old I believe upgrades such as these need to be made in order to demand significant rent increases.

    For our company the goal is to show NOI improvement for each asset every year, and we do so by increasing rents. Increasing rents can quickly create more value for a community than controlling expenses ever will. The strategy today is the way it is because many owners wish to see the value of their communities increase and they know raising rents will help achieve that. My position is that rent increases need to stay as long as they do not hinder your occupancy. What I am suggesting companies also do is help your brand by going that one extra step and provide the free prize inside or cherry on top that makes your residents feel good about their decision to renew and take that rent increase.

    Just some “Tidbits from a Marketing Nerd.” Thanks for reading.

  • http://urbaneapts.com Eric

    @David,
    Thank you for stopping by and commenting. We welcome your input on the topic, even from a residents prospective, what works, what makes your life a little easier,

  • http://urbaneapts.com Eric

    @Mark,
    Great comments and thank you for sharing. I agree with part of what you are saying, but would suggest that we all think completely outside the box on this issue. What if the apartment industry completely changed the way it addresses and manages renewals, and the result was what everyone wants lower turnover, and that savings from the lower turnover lowers the operations cost, and drives up NOI

    As an owner, I fully support rent increases, however the typical approach seems broken to me. Other industries are reinventing themselves every day. Other industries are completely changing how they do business. The apartment industry is very slow to react to anything new or outside the norm. The world is changing. There are certainly great apartment management companies out there leading the march, but by and large the industry is antiquated.

    How do we turn lease renewal on its head, create a remarkable experience for the resident and significantly increase retention. What is fascinating is that when reinventing, the gains are monumental for those with enough courage to Break from the Pack.

  • http://thatguymj.blogspot.com Mark Juleen

    Eric,

    I completely agree with you, something needs to change. However, I don’t think change results in rent increases going away. It’s not just about the Free Prize Inside or Cherry on Top either, it’s the entire way we approach the increases and how it is perceived. I like what Brent said in his blog last week about rephrasing the terminology of the lease to “renewal date” instead of “termination date”. I think it’s all perception. Right now the current resident thinks they are getting screwed with a rent increase. How can we change their perception so they feel the rent increase is justified? It’s what we do everyday while they are living in our communities. It’s the services we provide, the smiling faces, the superior upkeep, and passion for our customers that makes them want to stay. At Urbane you are doing it by being different than the norm, providing fun online interactive environments, holding resident events, participating in the community. When someone first buys from you they don’t really know all of that is included, they just think it’s a really nice apartment, in a great location, that fits their budget. All those extras and the more extras you can provide while they are staying helps to justify any renewal increase.

    What I am proposing is what more can we do? Unfortunately even what good companies are doing now in our industry just isn’t enough for some? We have a unique opportunity in our industry to have multiple touch point with our customers. How are we maximizing those moments, those interactions with our residents? That is where we are missing out.

    Let me share a few analogies. Coming from the car business, most customers purchased a vehicle and then you never saw them again. Our huge push was to encourage servicing your vehicle at the dealership. How many car owners actually do that? In our industry all our customers service at the dealership, and we have the opportunity more so than other products to insure that our product is 1st on their list when they decide to buy again (renew).

    In our industry we take these touch points too much for granted. Look to the hotel industry. They want to keep influencing their customers over and over until their hotel brand is the only option for their customers. Even with hotel points they still have to provide quality experiences for people to actually come back. The airlines have failed miserably at this as they thought with points people would keep coming back, but they lost sight of the service side and what people really want (an inexpensive flight with a friendly staff). Why is Southwest still doing well? I don’t like fighting for a seat, but with a low cost option and friendly staff they quickly move to the top of my list of airlines.

    Disney is probably the best example of service I can think of. When was the last time you went to Disney? I am completely blown away everytime I go, and everytime I go it’s more expensive. They seem to justify their increases because even though people may complain about the prices they keep going back because of the experience.

    Training & good people go a long way to creating a brand. It’s not just fancy countertops and flooring, it’s the experience at every touch point. As an industry I think most do a poor job of creating “Moments of Magic” at these touch points, and we need to think more like Disney. How can you turn your communities into ones “Where Dreams Come True”?

  • http://www.behindtheleasingdesk.com Heather Blume

    We’ve been mostly focused lately on how to make the process more resident friendly, like going to their homes to sign the renewals, but I agree with you that the whole process is aimed in the wrong direction.

    I love the auto renewal option! I think it would work a lot better than what we currently have since it’s “inconvenient” for residents to have to schedule appointment times to come in and see us and then go through the lease all over again, etc. Honestly, if you believe in your team and you know that they are a great retention team, why not just allow all leases to roll MTM on the auto renew? We do this with mtm leases anyway, so just let all leases roll mtm and don’t charge them the $150 on top of it. I know it’s risky, but if your team is provides the customer service they should, it’s a sure thing. Nothing is more of a pain in the butt than moving.

  • http://urbaneapts.com Eric

    Heather, Thank you for commenting.
    I think your position about residents not having the time or not wanting to take the time is a significant point. A self renewing lease is easy to craft. Our Freedom Lease is self renewing and it works fine. What I think needs to change is how we package it, how it is presented and how it is managed. I am not sure that we could get away with or want month to month leases. Lenders and Owners would be pretty uncomfortable. The point that Brent started out with was the comparison to cell phone plans, which we don’t even ever think about as a renewal, nor is it discussed much when you purchase your phone. Why does the apartment industry talk about renewals and spend so much time attempting to manage with such lackluster results?

    Lisa Trosien tweeted today “If you view it as a renewal, you miss the point. It’s releasing or re-renting. Residents view the renewal as a separate sales transaction” which is likely correct, however what if the resident didn’t view it as anything, not a renewal or a separate transaction. They just simply forget about it until their life heads them in a different direction and they NEED to move. Residents that move out don’t need to, they do so because of a variety of reasons, sometimes because the need to but all too often for many other reasons, starting with the fact that we remind them that there is a renewal date.

  • http://profile.typekey.com/iamdavidk/ David K.

    A few years ago I worked for a company that started using this strategy for its lease renewals. Internally it was referred to as “Silence is Golden” and for the most part we would allow people’s leases to extend on a month-to-month basis and instead of charging an extra fee we would waive it indefinitely without ever telling them their lease term had expired or formally asking them to sign a new lease.

    The idea “worked” and you could argue that by not doing anything we were able to secure a few extra leases (the argument being that sometimes thousands of dollars worth of month-to-month fees were being written off at each property after a few short months, which would indicate that lots of people stayed on the property under this program), but how can you gauge the effectiveness of no effort versus a year-long resident retention plan? Or for that matter a 90-day plan that only consists of the standard renewal letters sent 90, 60, and 30 days prior to the lease expiration?

    The intention was not to have everyone lease on a monthly basis, but at a time when you couldn’t afford for anyone to leave it was thought best not to remind them that the opportunity to move was pending. After a month or so of waiving their fee they would be casually contacted to see if they wanted to go ahead and sign a new 6-12 month lease at their existing rate. At this point it was intended to seem like a bargain and for the most part people jumped at the chance (plus we would “waive” all of these fees as a courtesy to them for renewing).

    Overall silence wasn’t so golden and as it turned out our residents appreciated the opportunity to negotiate a new lease just as much as we did. As much as I’d like to think that we give our residents every opportunity to report problems and we repair everything they call in, that’s just not the case. Unfortunately you still have quite a few people that are in the mindset to bring all of there service requests up at renewal time because that feels most appropriate to them (and they also expect for their carpet to be steam cleaned, which always makes me laugh for some reason).

    After almost a year of doing this we ended up with about the same turnover. The lesson we learned was that taking away the resident’s opportunity to tell us what they wanted repaired in their apartment and to try to talk you out of a $5/monthly rental increase was more valuable to them than we realized.

    I agree with Lisa Trosien’s comment regarding the lease renewal being a separate transaction. You can choose to avoid the opportunity for a second transaction by automatically renewing residents. I would rather have the chance to talk to them and hear what they have to say rather than not do business a second or third or fourth time. Isn’t that one of the goals of sales? To have repeat clients?

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