What do you do if your tenants ask for a shorter lease?

Question

Hello,

Six weeks before renewal time, I told my tenants that I would help this year by not raising the rent because of covid. Far from being happy, they asked then whether I could lower the rent because "some units in the complex are running for 10% less." I told them that I wasn't sure about those units but that all my costs had gone up. So if it really helped them, I could write off $50 a month. They didn't write for 2 weeks and then said they wanted to meet with me in person and "finalize this." When I met them, they told me that they had been trying to buy a house but that the market was crazy and that they knew they needed to stay but wondered whether they could get a shorter term, like 6 months. In my area, there is not much movement after schools start (August), so I do not want to do that. Then they asked again about a lower rent mentioning the units they claim to have been rented out for less. I told them I would think about this and get back to them. They are good tenants and I want to keep them. I am thinking of offering a slight discount for 12-months or the $50 off for 11 months, but less than 11 months on the lease would not be a good idea. Any suggestions that have worked for you in the past?

Thank you.

Sean McDonnell · Answer

Shorter term = higher rent

Todd Rasmussen · Answer

@Maria G.

Offering a reduction to meet the average rent seems like you are going the wrong way...

I'd write a year lease and just let them out of it if they buy a place. If they buy a house, they are leaving anyways. If timing is going to hurt you that bad, put them on a month to month and increase the rent to make it up. Doubt they are going anywhere if they are already planning on moving once in the next year.

Jon Kelly · Answer

@Maria G. I'd offer $150-200 more per month for a 6-month lease (assuming they will not take this offer) or $50 off for 11 or 12-month lease.

Good for them for doing their homework and checking what other tenants are paying. I'm sure you could make the argument that there are other units paying 10% more. It's nice to be accommodating, especially throughout COVID, but don't let the tenants dictate how you manage your property.

Brian Garlington · Answer

Absolutely not.

You are literally letting your tenants dictate the terms of the lease in an asset you own. You say they are great tenants but.........I..........don't...................think..................so.

Not sure what area of the bay area you are in but I have NEVER had a problem re-renting my rentals out here. If they sense you are that scared of losing them as tenants this will slowly get worse for you.

Chad Hale · Answer

@Maria G. Lots of great advice here.  Assuming your property is in the bay area, rents are down 14-16% from a year ago.  The properties best holding their rent values are homes with 4+ bedrooms as there is a shortage of them on the rental market.  I have several properties I manage that have all experienced rent reductions in order to get qualified tenants in.  $3000 2/1 apartments/duplexes are now closer $2600.  I have a few owners that did not want to reduce rents because they were used to certain numbers, they stayed vacant until the rent was reduced.  The market is getting better but it is very different than the multiple great applicants in less than a week of the past 8 years.

Nathan Gesner · Answer

@Maria G. it's hard to answer this for you. Keeping them has value. If you lose them and have to find another renter, the unit is likely to have 1-2 weeks of vacancy. It's better to offer a small reduction - or no increase - and keep your current renters. I will sometimes skip an increase if I have a really, really good tenant. That means they pay on time, no lease violations, the rental is in excellent condition, and they are easy to communicate with.

That's my advice for a one-year lease. For a short-term lease, you are opening yourself to the risk of a turnover during a slow season, which means in increased risk of loss if turnover takes longer. I charge extra for a short-term lease. If their lease is going to end in December, the most difficult month for finding a replacement tenant, I can anticipate sitting vacant for 3-4 weeks. So I only sign a shorter lease if the tenant pays a higher rate that will cover that potential vacancy during turnover. On a $3,000 rental, I would spread that loss over six months, which means I would charge $500 extra over that six-month period. I sometimes charge as much as 25% extra.

Aaron W. · Answer

@Maria G. Typically, you can charge a premium for shorter leases since the risk and frequency of turnover is higher. You'll want to verify the validity of the units with lower rents and their condition.  You can explain to them the difficulty a 6 month lease puts you in, therefore, a premium is typical. If they are good, logical tenants, then they should understand.

This is a difficult and sticky situation to be in, so you'll want to approach with an attitude of caring and understanding of their situation. If you feel you can lower the rent a bit to keep a good tenant, then it is better than a vacancy. With the current housing situation leading to inflated prices, my guess is your tenant may be renting for a while.

Best of luck!

Maria G. · Answer

Thank you very much for all the advice.

Quick update: I wrote to them after seeing your feedback and I offered them an 11-month lease for the $50 discount and a 12-month lease for a $125 discount. They said they would have liked more flexibility (I will respond that they can understand I am not an apartment complex) and asked for the weekend to think of options.

What do you do if your tenants ask for a shorter lease?

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