Tenant Referrals Part Four: Soliciting Good Referrals
This is the final part in a four part series on referrals. If you haven’t already, read part one where I explain the importance and benefits of referrals. Read part two where I show how to identify the sources of good referrals. And in part three I talk about what you can do to encourage good referrals. Here, I’ll cover how to solicit good referrals from the sources you identified.
Really there are two types of referrals, which I will classify as passive and active.
We talked about passive referrals last time. Passive is when you tenant refers someone to your properties when they find out that person is looking for a place to rent.
What is good and bad about active referrals
Active referrals are when you provide an incentive to your tenants to actively look for people to refer to your properties. Active referrals make it easy to track how many people are being referred to you. They are likely to drive many more referrals to your property when compared with passive referrals. Some of the downsides are:
- It may require more work for you tracking referrals and incentives
- The qualities of the referrals may suffer
- Providing incentives will cost you more when compared with passive referrals.
Due to the downsides of active referrals, I’d only recommend instituting a program for them if you envision having enough vacant units to make it worthwhile.
However, the ideas for soliciting active referrals can also be used to reward tenants who provide exceptional passive referrals, so consider the following ideas even if you aren’t ready to begin a referral incentive program. So, let’s look at a few ways to incentivize tenants to provide good referrals:
Incentives for tenants
Here are a few ideas. The key is to offer something your tenants would see as valuable.
The first thing that probably pops into your mind, and the idea I like the most, is to offer a discount on rent.
If you want to go that route, you may find it easier to chose an amount if you offer a percentage of the monthly or annual rent. Using a percentage allows you to provide an equally perceived value if you have a range of properties that cover tenants of differing levels of wealth. It also allows you to have only one document (or clause in the lease, depending on how you want to introduce the program) that covers all your properties.
Are gift cards a good idea?
You may be tempted to offer gift cards in stead of cash, but let me try to discourage you from doing so. After all, gift cards can only be used in one place, making them much less useful than cash or discounts on rent. You may also find the need to offer different denominations of gift cards based on the level of rent for each property.
A $20 gift card will be a lot less motivating to someone who pays $1000 in rent than it would be to someone who spends $500. You run into similar problems with other incentives, such as event tickets or actual merchandise. However, if you do have access to such things at a cost significantly under retail, it may be worth the risk to offer them. Better yet, you could offer them as an option alongside cash or a discount, giving your tenant a choice that could end up benefiting you both.
Incentives for the referred tenant
Of course, offering an incentive to the person referred to you can also be a great idea.
First of all, it just seems “fair.”The referrer is getting something, so the prospective tenant will probably wonder if there’s anything in it for them. It may also help make the final decision for someone who is on the fence; not only are they helping their friend out, they’re getting something for themselves as well. Once again, I’d recommend the incentive be a discount on rent, and I’ll hit on additional reasons why below.
Structuring incentives for better quality referrals
The next thing to consider is how the incentive will be paid out.
My recommendation is to structure the deal so that the incentive is paid out as late as possible. You’re giving out an incentive based on receiving a good referral. If the tenant ends up being evicted a few months later, you do not want to have paid an immediate reward.
Ideally, this is how I would structure the referral program:
For the person being referred, I’d have the incentive discount a percentage of either the final month’s rent (or second to last month if they pay the final rent up front) or a smaller percentage of each month’s rent.
For example, if rent is $500 per month and the new tenant pays both the first and last months rent up front, I would discount either $50 off the second-to-last month’s rent or $5 from each of the ten months of rent left to be paid. In the first instance, you’ll have paid no incentive if the new tenant doesn’t make it all the way through his or her first year.
In the second instance, you’ll only be out a percentage of the incentive if they are evicted in the future. Structuring the incentive for the tenant providing the referral can be done in the same way. However make sure to somehow tie it to the performance of the referred tenant. Doing so not only motivates the referrer to provide quality referrals in the first place. Also it motivates them to make sure their friend remains a good tenant.
Putting the program in writing
Make sure the program is written down. Get it signed by all parties, and give them a copy of the terms.
Your two main options are to either have the program spelled out in the lease. Or, provided outside the lease as a secondary contract. Put it in the lease if you plan on making the referral program available to all your properties.
We have written about reasons why you may want to only accept referrals from good tenants you’ve already identified. I recommend having the program offered outside of the lease.
Summary: Tenant referral programs benefits outweigh landlord time to do them
Sure, providing a referral program could mean more work for you as a landlord. The benefits though could easily outweigh any additional time that’s required of you. Remember, if you follow the suggestions I’ve made in this series, you should receive mostly highly vetted referrals from your best tenants. In a way, you’re cloning your best tenants and using them to populate your vacant properties at little to no cost to you. What landlord wouldn’t want to do that?
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