Resident Fees, Broker Opinion of Value, & More

release edition [028]

read time [6 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

• Fees: Resident Burden
• BOVs: What Matters Most
• Weekly Listen: Peter Linneman

Fees

Evaluating a property's performance can be tricky without all of the information.

For example, many owners will focus on comparing rent comps to their subject property as a means of benchmarking performance.

But what about fee income? Do you know how your properties compare to the comp set?

While rent levels are important, they don't tell the whole story when it comes to the overall resident cost burden.

If you're looking for a competitive edge to improve leasing velocity or physical occupancy, here are a few fees to evaluate and potentially reduce temporarily to avoid starting a concession or pricing war with neighboring properties.

1. Application Fees

When a prospect applies, they are charged a fee, and this is reasonable since there's a cost to running their application, background check, etc. But you might be surprised by the margins in these fees. In many cases, the cost of processing an application is just $10-$15 while the prospect is charged $40-$50. Waiving application fees can be helpful for generating leases.

2. Administrative Fees

Believe it or not, many owners charge administrative fees upwards of $300-$400 per household. Reducing these to $99, or waiving them, can be powerful for generating more leases as it gives the staff a meaningful reason to follow up with past prospects. Reimbursing this fee at move-in is another way to reduce move-in costs while also incentivizing an applicant to follow through with living at the property.

3. Pet Fees and Rent

Pets can be expensive, and many pet owners have accepted this reality. That said, prospects may perceive this combination of pet fees and pet rent as burdensome. For example, charging a $400 pet fee and $50 per month in pet rent could be a deterrent for a prospective new resident. Reducing the pet fee, or making part of it refundable at move-out, can be an easy way to lower the barriers to entry for applicants.

4. RUBS Fees or Charges

RUBS, or ratio utility bill-back system, is how owners can recoup utility costs on a monthly basis based on actual usage. Some properties elect to charge a flat fee per utility, while others are individually metered and charge back the exact dollar amount that each unit uses. While adjusting these fees as a means for generating traffic or leases can be challenging, it's important to consider the impact of RUBS costs as part of the total resident burden when determining rent levels and other fees.

5. CAM Fees

Common area maintenance fees, or CAM fees, is quite common in the commercial world, but less so in Multifamily. That said, some Multifamily owners or management companies do charge them, and rightfully so. Well-amenitized properties that require an extra maintenance technician or a porter can easily justify billing back some of those charges to the residents.

Summary

Other income revenue at a Multifamily property often accounts for a meaningful percentage of total revenue. This is why reducing these fees can be a great way to generate more leases and gain occupancy.

Rather than undercutting market rents or increasing rent concessions and creating a race to the bottom, consider reducing fee income the next time you need to generate more leases or improve occupancy.

BOVs

Receiving a broker opinion of value, or BOV, is a great mechanism for benchmarking today's market value of a property.

Recently, we had several brokerage firms give us BOVs on one of our assets.

I learned or observed several things throughout this process, so I thought I'd share them below.

1. Great brokers are great at framing conversations.

Answering the question, "Is now a good time to sell?" is the perfect opportunity for a broker to frame a conversation. Any good broker is going to find a way to answer "yes", because it serves their best interests, and because it's probably true.

Selling at peak pricing is obviously a great idea to realize healthy profits. Selling in a challenged market can also be a great idea, if the Seller intends to reinvest or 1031 back into the same market environment. Selling into a soft market is a bad idea is if there's no plan to reinvest or there's no time pressure to sell.

2. Trustworthiness is about honesty, not certainty.

Providing real-time data with an honest opinion comes off as far more authentic than speaking in absolutes or with 100% conviction. This is because there are very few variables in this business that can be known ahead of time with total certainty. Instead, great brokers provide a range of possible outcomes with their best guess of the probabilities of those outcomes.

3. Overselling can come off as desperate.

Some brokers over-pitch or over-sell, and as a potential Seller, this comes across as desperate. I understand the need to communicate with conviction, honesty, and in a consultative manner, but it's often best to stop there. Taking it a step or two further by over-selling the timing, pricing, or supply/demand imbalance can feel needy.

The best BOV pitch that we received felt friendly, conversational, and consultative. The most grueling one felt like a pressure cooker where we would be the foolish ones if we chose not to go to market today.

4. Brokers are only as good as their information.

Brokers are not market makers. Despite what they will claim or communicate, brokers represent the market, they don't make it. And this is okay. This is why the broker with the best information usually creates the best outcomes. We see this reflected in the marketplace when large listing brokerages consistently achieve record setting pricing. As a Seller, make sure to provide as much information to the broker as possible so they can clearly convey the investment opportunity to prospective buyers.

5. Pricing is a function of supply and demand, upside, and story.

As great as a broker may be, they are ultimately beholden to certain variables, three of which include: (1) the supply/demand dynamic, (2) the upside potential in the property, and (3) the overall story.

If a property is competing with many others just like it then differentiating will be challenging. If a property is fully renovated then pricing on a cap rate basis will actually get worse because there's less upside to be achieved by the next buyer (this is why value-add properties can trade at below-market cap rates). If the story or investment thesis isn't credible or believable then buyers won't underwrite it aggressively.

Summary

Ideally, properties should be sold in a thinly traded market with little inventory for sale, provide significant upside to the next buyer through value-add strategies, and that story should be provable or tangible based on a recent renovations and/or rent comps.

Great brokers are tremendously valuable, and it can be tough to choose the right one for the sale of a property. Whether you're buying or selling, think about the above when you're interacting with brokers.

Remember, brokers get paid when a sale takes place regardless of what the future may hold. Do your homework, and never forget: caveat emptor, or buyer beware.

Weekly Listen

This week's listen is the quarterly conversation between Willy Walker and Peter Linneman on the Walker Webcast.

This has become one of my favorite recurring conversations. I'm certainly interested in what they have to say, but to me, it's far more interesting to think about how they arrived at their conclusions. This episode explores numerous topics, and it's certainly worth a listen.

You can listen to the full episode here.

Wrap Up

That's it for this week. I hope you found this edition of The Multifamily Download insightful and enjoyable.

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