Wednesday, February 8, 2012

Negotiating Rent

Like anything else, you can negotiate the terms of a Lease. But be aware that negotiating rent is not like negotiating the price on a For Sale home. Real estate for sale is often advertised well above the seller's bottom dollar, anticipating a lower offer. For rentals, advertising at an inflated price will result in few inquiries, so owners advertise at close to the least they can afford to accept in rent.
For single family homes, the published rental price is usually very close to the cost of ownership, leaving little if any negotiating room. This is especially true of private owners who are leasing the property because they needed to relocate but couldn't sell or did not want to sell at a loss in the current market. Since those owners are leasing at their cost or even below they often cannot accept a significantly reduced rent.

A common fallacy is that offering the owner a multi-year lease will entice them to accept lower rent. While a multi-year lease may offer the owner some relief from a vacancy (if the tenant doesn't break the lease early), it also locks them in to the lower rent amount for a long period. For example, a $200/mo reduction on a $1500/mo home for 3 years costs the owner $7,200. The owner can wait for a full price renter, with the property vacant, for 4 to 5 months for that same cost. Most will take the risk and wait.

Another approach is requesting lower rent in return for a purchase option. If the owner really wants to sell the property, this can make sense - but only if the agreed purchase price is high enough and only if the renter can show that they will qualify for a loan at that price at the end of the lease. A purchase option will also most likely require a significant down payment.

Offering lower rent because you do not perceive the house to be worth the asking price is a possibility. Some homes are overpriced, usually because the cost of ownership is high. For a top quality renter, owners might take less if they can. Presenting actual examples of homes priced more competitively is important here. A copy of an ad for the alternative house is a good tool. Keep in mind, if the owner can't afford to take the lesser rent, you may be better off to just rent that alternate.

If you feel the rent is appropriate but only if some things are improved or repaired, you need to understand the owner's situation. An investor who wants to lease the property for long term gain may consider improvements like fencing, light remodeling, etc. Owners tryng to cover their costs until they can sell the home rarely will.

In winter months, the term of the lease can be a good negotiating point if you have some flexibility on the length of the lease. Owners would much rather have your lease end in the spring, near the end of the school year. The home is likely to re-lease faster at that time. A lease ending at the right time may reduce potential vacancy by a month or more. If so, the owner gets about 1/12 more total income so they may be able to pass some that back to you. A word of caution, Never commit to a lease longer than you think you will stay. The penalties for breaking the lease early are substantial and most leases require that you pay the remaining months' rent even after you move out (until the house is re-leased).

The most effective negotiation is offering a reasonably reduced rent for a quick move-in by a highly qualified renter. An excellent credit rating and rental history help the owner be confident the rent will be paid. A reduced risk of missing a rent payment may persuade them to reduce rent. That reduction has to be relatively small, almost never more than 5%-10%. Keep in mind that in considering an offer, the owner is looking at not just the rental income but the risk of damage to the property. Large animals or multiple pets increase that risk substantially and will almost always eliminate your negotiating position.

The least effective approach is "I love the house but I can't pay quite that much". This signals the owner that your budget is already stretched and will probably decrease your chance of the owner accepting a lease from you, regardless of rent amount.

Most owners, property managers and rental agencies will consider a reasonable offer. It just can't be a Big decrease in rent. Do your homework on competitive homes and get any  information you can on the owner's situation and goals. Then, if you feel you will be a highly qualified renter, make an offer!

1 comment:

  1. Choosing a good place is, of course, the first step, and it’s different from buying because a renter typically commits for only a year or two.