Friday, January 6, 2012

Incentives...

Everyone has heard the expression "win/win" but how many business people really go out of their way to structure their "deal" so that all the incentives are in place to insure a win/win.

The "standard" way of doing things almost always has misincentives.   Example - a lease with a late fee. Providing a tenant with a negative "slap on the wrist" using this arrangement has almost never worked for me in the long run.  Tenants become resentful and find all kinds of excuses in their mind as to why they were justified in being late.  

Lets look at an alternative.  What do you want as a landlord?  You want tenants that pay on time, stay a long time and take amazing care of your home, yes?

What if instead of a late fee the lease had these provisions:

1)  We'll never give you a rent increase for the next 10 years IF you make all your payments on time and don't default on your lease.

2)  We'll make an annual improvement to your home again SUBJECT TO again the same simple provisions.  It is cheaper to make an annual improvement than turn an apartment every year.  Doing an annual improvement makes financial sense because your incenting them to STAY and you're improving the property while it is financially productive.

3)  We'll give you a DISCOUNT on your rent IF you comply with those provisions and pay us on or before 12:00 noon on the last business day of each month.   We will serve you with a notice at 3:00 that same day if we have not received the rent.

These provisions are much more likely to yield the right results because more of the incentives are lined up than a simple late fee.

Focusing on the long run, it is cheaper to attract and keep a long term tenant than incur vacancies, turning costs, housing court and management issues.

Now couple those provisions with a few questions you might want to ask and VALIDATE before you choose a tenant:

1)  When exactly did you pay your last 3 payments to your previous landlord?   (Let me let you in on a little secret - if they aren't paying their past landlord on time they won't pay you on time.)

2)  How often did you move over the past 5 years?  Tenants that move every year or two are NOT the tenants we are looking for.

3)  And finally a question for YOU the landlord.  Would I EAT in their current home?   If you wouldn't why would you even consider renting to them?  (Oh, you didn't take the time to meet them in their current home?  Why is that?)

For 15 years I studied martial arts and I can't tell you how many times I heard students ask Sifu (teacher) what he would do if they were in a certain situation.   I can't tell you how many times his response was, "well, I wouldn't put myself in that position in the first place."