When it comes to lease renewals, things are a bit different than setting rent when a property is vacant and listed for new tenants. With a tenant in place already who is being offered a lease renewal, we need to be cognizant of fair housing issues and the potential risk of discrimination claims.
For that reason, we have to have a set written policy for how we calculate rent increases on existing leases, and we can't leave it up to individual property owners to decide how much to increase the rent. We have to ensure that we treat all tenants fairly and equally, and that we use an objective measure to determine rent increases rather than subjective criteria.
Let's go over an example of why this is important: Tenant John Doe has been living in a rental house for ten months. His renewal is coming up, and he's expressed a desire to renew. The landlord increases John's rent by 10%. John is a Muslim, and he feels that his rent is being increased by this much only because the landlord doesn't like Muslims. He files a discrimination lawsuit under the fair housing laws. When the case gets to court, John's lawyer shows the judge that the landlord has only raised the rent on his other tenants by 3% a year for several years. The landlord argues that the market rents have been increasing around John's house more rapidly than the areas where the other tenants reside. Of course, this prompts John's lawyer to ask the landlord to present evidence to the court that shows that the landlord used some sort of hard data to arrive at this conclusion. The landlord is unable to do so, and isn't able to present any evidence at all of objective criteria that were used to determine John's new rent.
Now, is the landlord definitely going to lose this lawsuit? Not necessarily. A judge who is very sympathetic to landlords may rule in the landlord's favor. But many judges would not. And if the judge did, it is likely that John's attorney would file an appeal. This all gets very expensive for the landlord, so he's likely to offer a settlement, possibly in the five figure range, to make the whole thing go away. In the meantime, he's probably already spent five figures on attorneys' fees. This is a very expensive lesson that the landlord has learned about how to go about raising rents.
This is just one example of how things can go south if we don't stick to our objective criteria and process for setting lease renewal rent increases. For that reason, we always follow the following procedure, and we are not able to take property owner requests on rent increases:
- Three months before the lease expires, we send a notice to the tenant reminding them of the two month notice requirement if they don't want to renew. Included in this notice is a discussion of how we'll calculate their new rent if they do renew, and we tell them that rent increases will never exceed 10% in a year. We also tell them that the average increase is about 3% per year. This gives the tenant an expectation that they can use to make their decision on renewal.
- Two months before the lease expires, if the tenant hasn't given notice to vacate, our licensed real estate agent who is responsible for your property undertakes a Comparative Market Analysis (CMA). The CMA looks at comparable properties nearby your house that have rented in approximately the last 12 months. The rents of these properties are factored in, and adjustments are made as necessary based on any unusual characteristics of your home that may differ from the other comparables.
- The adjusted comparable rents are averaged to arrive at a suggested rent amount.
- We then compare that new suggested rent amount to the tenant's existing rent amount. If the suggested rent is 10% or less of an increase over the current rent, then we will renew the tenant's rent at that new suggested amount. If the suggested amount exceeds 10%, then we cap it at 10%. Company policy is that we will not raise an existing tenant's rent more than 10% in a single year. This reduces vacancies, which is good for the landlord.
This process is done the same way for every property and every tenant. Because it is a completely objective process, for which we can always provide evidence to a court of law or the Department of Housing & Urban Development (HUD), it essentially eliminates to the greatest extent possible any worries of discrimination claims. This protects not only our brokerage, but also you the landlord, as you would be the primary party to be sued in any discrimination claim.
So, while you may have a "gut feeling" that the rent could be raised by a certain amount, or you may want to raise the rent more than usual because of a recent big repair, or because your property taxes went up, or whatever the reason may be, that is a very bad way to determine rent increases, and we unfortunately are not able to do that. However, rest assured that we will always try to get you the maximum rent that the market will bear. After all, we're paid based on commission, so our interests are always aligned with yours in trying to get the best rent we can for you.