July 10, 2017
You want a landlord to lower your rental rates but can't get him to budge. Well, perhaps you are handling the negotiations all wrong. A quick lesson in behavior economics might help.
Behavioral economics blends psychology with economics. According to Ray Massey, University of Missouri Extension economist, farmers should consider how social and emotional factors affect a landlord's economic decision.
Massey gives the example of a tenant who wants to reduce rent by $25 per acre. Here are a few tips to use when negotiating this type of land-rent reduction.
1. Understand the landowner perspective. Lowering rent by $25 per acre feels like a loss to the landowner. The landlord feels like the tenant just made $25 per acre, Massey says. "As a landlord, I feel the loss worse than you do," he explains. "Losses cause more pain than pleasure." You cannot change feelings. You will receive pushback. Handle the first rejection with empathy.
2. Find the landlord's rent-rate reference point. In rent negotiations there are often two different rate values — existing and market. The landowner focuses on the existing rental rate. The farmer wants the going rental rate. From a landlord perspective, the taxes on the property continue to rise, so it is not fair that rental charges go down. The farmer sees input costs up and commodity prices down, so the high rents are not justifiable. "The tenant must communicate his or her reference point," Massey says. "They must be able to show losses to their operation with the existing rate." Then, he says, is the time to negotiate a rate move.
3. Consider time of payment adjustments. It is common for cash-rent payment to be half in the spring and half in the fall. If a renter wants to lower the rate by $25 an acre and the landowner doesn't like that, Massey says the tenant could come up with a compromise, such as if the landlord agrees to lower the rate by $25 an acre, the tenant will pay it all in the spring. "If a tenant pays it all in the spring, the landowner has a little more confidence he's going to get it all," he says. "The landlord is gaining something."
4. Offer perks. Can you add an activity such as woodland management? If you rent ground that has 20 acres of woods, the woods may have value. In rate discussions, bring up the trees and ask if the landowner considered harvesting some of the trees. Many landlords don't know the value of their trees, Massey says. "You are a farmer and businessman; you know how to find the necessary people and equipment to get the job done," he adds. "It just takes up some of your time." All of the income goes to the landowner. Then, in exchange for the $25-per-acre reduction, the landlord has gained something. Massey says renters should look for services that are viewed as incentives for landlords. They may help sweeten the negotiations.
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