It is challenging enough to own and manage multifamily assets in this era when rental increases are marginal and expenses such as real estate taxes, property insurance, utilities, payroll, and other variable costs continue to increase. Dealing with rent delinquencies only makes matters worse.
Often, developers don’t know that they have a troubled asset until tenant accounts receivable grow to the point where they become uncollectible, or accounts payable increase to a level that prompts vendors to call and threaten to stop supplying products or services to a property.
Here’s an outline of what to look for to assess whether or not your property is in trouble.
Once you’ve followed the steps below to identify a problem, it’s important to develop a plan of action to correct the issues and turn the property in a stabilized direction.
To identify the root problem, owners or managers need to evaluate the four P’s: people, property, price, and promotion.
Evaluate the entire staff. Is the manager organized and focused? One look at the manager’s office should help answer this question. Does the manager relate well to the staff and residents? Are the rest of the leasing/administrative staff real go-getters? Does the administrative staff dress professionally?
Is the maintenance superintendent a worker, or does that person manage the staff from behind a desk? More importantly, is the maintenance staff paying attention to the details of the property? Watch them. Do they pick up trash when walking past it, or do they just ignore it? These staffers should be dressed to match the standards for the property. A common problem is the maintenance staff dressing in worn or tattered work clothes.
It is very important to not be attached to a particular staff person, because he or she may be the problem. Look at the resident profile: How well do residents maintain their units? Do they adhere to the guidelines in the lease? Do they pay on time, or are they chronically late payers?
Take a step back when evaluating the property; it is imperative to look at a property with fresh eyes.
View it from the perspective of a potential tenant. Ask yourself whether you would want to live at the property. Is it inviting, or does it look neglected or worse? How do the “ready” units look? Are they in move-in condition, or is there a need for additional detail work? How does the property compare to its competition in the submarket?
What is the process being used for pricing the units?
This is the critical question.
Don’t be fixated on pricing the units based on the market survey because the competition’s rents will change without notice. Pricing should change frequently based on what is available. Price the units based on the relative strength or weakness of an apartment style, increasing the rents on whatever apartment style is in demand, and dropping the rents on the softer style units.
This may be the area least thought of in the management process. Developers tend to advertise in the rental periodicals, on the Internet, in the newspapers, and through signage, and never ask what is most effective at pulling in the qualified traffic to the property.
It is imperative to measure the effectiveness of the advertising. Refine the advertising to the four or five most effective advertising routes and be willing to change when one is ineffective.
A particular favorite is resident referral. This typically works well because only the better residents tend to refer friends to the property. The resident referral program can be changed frequently to focus interest to a particular style of unit where there may be softness. A resident referral fee can be paid via a credit to the rent, or in states that do not permit this, in an improvement to the apartment unit. A property should have an active outreach marketing program.
Develop a list of businesses and other establishments to be visited on a regular schedule for purposes of handing out fliers.
An added incentive is to offer outside referral fees for qualified traffic that become residents due to this recommendation.
Preparing a plan
Once you’ve assessed your property, prepare a written plan to correct the problems you’ve identified. This plan should have realistic goals and objectives, as well as a timetable for correction of the problems.
Have all affected parties agree to this plan and acknowledge that the timetable is realistic. It is at this point where those that have a part in the stabilization of a troubled asset will be held accountable.
It is very important to measure the results of the implemented plan and be willing to change the plan when you learn that parts of it may have flaws.
For example, the resident referral program may be too lean and not provide enough of an incentive for a resident to refer a friend. You might decide to double the rental referral program for the next month; this could be just what’s needed to increase the application traffic for the units remaining vacant.
Don’t expect a quick fix. It may take up to two years to fix a troubled property, depending on the depth of the problem. It may take a name change. It may require a complete transition of the households living at the property.
Remember, it potentially will take an investment of money to make the changes that will allow a property to become more rentable for the desired profile. The money, if well spent, will be returned with increases in revenues and cash flow.
10 Symptoms of Troubled Properties
Owners should keep an eye out for the following symptoms, which often signal an underlying problem that needs to be rectified to get a property back to stabilization.
1. A vacancy rate higher than 7 percent
2. Economic occupancy at 85 percent or below
3. Bad debt higher than 2 percent of adjusted gross rent
4. Aged rent delinquencies that begin to climb to 30 days and beyond
5. Aged accounts payable that begin to climb beyond 30 days out
6. Operating cash flow that goes negative in consecutive monthly periods
7. Debt-service coverage that drops below 1.05x in consecutive months
8. Moves by vendors/suppliers to shut off property accounts, inhibiting work from being completed or needed supplies from being ordered
9. Poor curb appeal
10. Little to no qualified leasing traffic
Neil Rosen is owner of NJR Real Estate Consulting Services. His firm provides asset management services, conducts property workouts, and completes site visit reports and due diligence on the acquisition of properties. Rosen can be reached at (757) 422-3760, or firstname.lastname@example.org.