If I had a nickel for every time some skeptical property manager referred to ancillary fees as “nickel and diming,” well, you know the rest. But this is such a simplistic way of thinking, and we really need to push passed this and think more operationally about fees. Fees aren’t just revenue generators, they’re behavior modifiers. And if you can modify owner and tenant behavior, you can make your operation more efficient and make their experience working with you a better one for everyone.
Reframing Fees
The traditional view of ancillary fees is that they are meant to generate additional revenue. And this is certainly true of some fees. But it’s not at all the case with others. When I implement some fees, my sincere hope is that I don’t make a dime off of that fee. Because the real purpose of the fee is to provide an incentive to the owner or resident to make the right decision.
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A fee can basically be used as a cudgel to encourage a desired outcome while still giving people choices. I am a big advocate of not making things mandatory, but instead giving people choices, and simply assigning a cost to the choices that you would prefer that they not make.
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For example, we don’t want owners doing their own rent-ready repairs. It’s bad for us (wildly inefficient), and it’s bad for the owner (it almost always costs them more in the end because of delays). So, we allow owners to get their own rent-ready repairs done, but if they do, we charge them an extra fee for us to inspect the property after their repairs are done. When we tell owners this, some of them change their mind and just have us do the repairs. The fee encourages the right behavior, while still allowing the alternative.
Many large businesses have been doing this for years. For example, many airlines charge extra if you want to book a ticket over the phone with a live agent. The airline wants to encourage efficiency with online booking, but they still want to offer the more personal option for those who want it. It’s just going to cost you more. This helps to pay for the live agent and compensate the airline for the extra cost and lost efficiencies.
A Little Taste
We teach an entire course on Behavioral Fees as part of our Founders Club subscription to this newsletter. That course includes 41 different behavioral fees. But let’s take a look at a few examples so you can see the point I’m trying to make here.
Cure Notice Fees - this fee is charged any time you have to send or post a notice to the tenant for a lease violation, whether it’s for non-payment, for a lease rule violation, or an HOA rule violation. The first time a tenant not only has to pay the HOA fine, but also has to pay you for the notice about it, they’ll get the picture and start following the rules. Plus, you get paid for having to spend the time dealing with the violation.
Home Warranty Fees - home warranties suck. We all know it. It’s bad for you, it’s bad for the tenant, it’s bad for the owner. They need to die an ugly death. But some owners really just want them as a safety blanket. So why not allow them, but charge extra for dealing with them? We’ve been doing this for years. Most owners get the picture and ditch the warranty, but for the ones who need it for comfort, the option is available to them.
Paper Payment Fees - it’s the 21st century and has been for some time now. There is really no excuse for people to still be mailing paper checks and money orders to you, and if you still take cash at the office, you really need to think twice about that. But if we’re going to allow paper forms of payment, it shouldn’t be free. Make the ACH payment, the desired method, free, and charge extra for every other form of payment. If they don’t want to make life easy for you, then it should cost them.
These are just three examples of 41 that we teach. But this should give you the basic idea. If a specific behavior is undesirable, then “tax” it.
Why This Matters
Influencing behavior helps you on a number of different fronts. First, this behavior is undesirable usually because it’s less efficient and costs you more money to deal with. Whether it’s processing paper checks or dealing with home warranties, these things are not the way you want to do business, because they just take more work for you and your staff, and sometimes they even cost extra money directly (some banks charge for a check scanner, for example). By charging extra for the bad behavior, we cover our extra costs in labor and direct out of pocket expenses. Of course, I recommend charging enough to not only cover those costs, but to profit also.
Second, this just leads to a better experience for the client or resident. This may seem counterintuitive because people don’t want to pay more, but you’re missing the point: we don’t want them to pay more, we want them to not engage in the undesirable behavior. So if all goes as planned, they won’t be paying more. They’ll just behave the way you want them to. In the long run, this improved behavior is better for both landlord and resident, which makes their experience better. For example, a landlord who doesn’t use a home warranty is going to have less tenant turnover, and we all know that turnover is what makes for unhappy clients who churn.
Finally, your team will be much happier. When owners and residents are behaving in the desired way, your team has less work to do and less frustrations in their roles. Happier employees do a better job and stay in those jobs longer.
Shift Your Mindset (and Fee Schedule)
You need to change how you think of fees. Get rid of the “nickel and dime” mentality and look at the reality that literally hundreds of other industries have been using fees to influence behavior for decades to great effect.
Now, that’s not to say that you can’t go too far. Las Vegas is currently experiencing one of the worst downturns in its history, and all signs seem to indicate that it’s because they took things too far with ancillary fees. Parking charges, even for locals, seem to have been the final straw that broke that camel’s back. On top of resort fees that sometimes exceeded the cost of the room that tourists have been complaining about forever, as well as changes to the games themselves such as 6:5 blackjack odds as opposed to traditional 3:2, Vegas has been trying to squeeze blood out of a turnip for years now. The casino resorts are now realizing that they’ve pushed the envelope too far, especially in this economy. So there is always a limit.
But we are a long way from the limit in this industry. If you don’t believe me, I encourage you to drive around to a few apartment complexes managed by large multifamily management companies in your area. Ask for copies of their lease and/or fee schedule. You will be shocked at what MF residents are paying. And that’s been going on for decades now in MF. You are just out of touch and behind the times. SFR isn’t doing anything new by introducing behavioral fees, we’re just getting caught up with the rest of the industry.
The important thing is to not charge fees just for the sake of charging fees. You want them to be based on incentivizing good behavior and discouraging bad behavior; alternatively, you can always charge more for additional services that provide real value. But as long as your fees are fitting into one of those two buckets, you should feel confident that you are not “nickel and diming.”
Greed is Good
Okay, not really, that’s just a provocative headline. Being greedy is a bad thing. But while everyone remembers that line from the movie, they tend to forget the context of that quote (and if you haven’t already seen “Wall Street,” go and watch it now, because it’s a masterpiece).
In context, that quote was actually a public speech from antagonist Gordon Gekko to shareholders of a company he was trying to inspire to look at things differently. His point was that humans are influenced by a desire for money, and that desire can lead to positive outcomes. In his speech, he was talking about how his desire to make money would lead him to improve the business, which was good for shareholders in both the short and long-term. Of course, Gekko was a conman in the film, and his speech was a lie. He was based on the corporate raiders of the 80s like Michael Milken, Carl Icahn, and Frank Lorenzo who gutted companies and stole the money for themselves. But the text of the speech itself was actually sound. He just didn’t actually believe it and practice it. But for those who practice what they preach, the speech made a lot of sense.
People covet money, and that means that you can influence their behavior with money. Because people want to keep more of their money, you can discourage undesirable behavior by appealing to that “greed.” It’s no different than encouraging employees with bonus compensation.
At the same time, remember that actual greed is what destroyed Gekko in the film (sort of a spoiler, but I’m sure you don’t assume the villain turns out winning). You don’t want to be like the Vegas casino owners who have taken things too far. There is always a balance. Don’t be greedy. But use greed to your advantage to influence behavior.
MX Summit
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Doctor Deb’s First Substack
“Doctor” Deb Newell has released her first Substack! Deb is my consultant for my own businesses (yes, even consultants need consultants), so I obviously recommend reading and following her.
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Debate Me
Disagree with my take here? Have a different perspective? There’s nothing I love more than a good debate or even just an intelligent conversation. If you’d like to jump on a podcast recording with me to discuss this topic, please let me know!
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