New Business

My company is currently searching for some new business, as we have decided to expand our residential management. Is it true that some people are charging as low as 3% for management fees?! How do you even get people to entertain your proposal with those rates out there? Is it necessary to sink that low? I hope it's all just false information I'm getting!

Crystal,
Where are you located?

Joe Bulfamante

Crystal,

Hate to burst your ballon but that is a pretty valid # for companies than manage communities of 200+ units. Obviously management rates do change based on the amount of services provided by the management company, # of communities, etc. -- but this is a good rule of thumb.

Good luck!

Leigh

Joe,
I am located in Seattle.

Leigh,
*sigh* I guess that we better find LOTS of new business then

You all are tempting me to go into my yearly "3% model makes no sense" rant!

Of course it doesn't make sense -- but that's the norm for the industry (very loud sigh).

Brent, I would like to hear your rant. It's always great to get everybody's opinions.

So maybe 3% is OK for 200+ units, but what about smaller communities of less than 50 units? Should you get a higher % since income would be significantly lower, or still 3% because the owner isn't making much either?

Hey Crystal,

You are exactly correct. Generally the smaller the property, the more you can charge for a management fee. As a matter of fact I have heard 10% is quite common to manage a single family house. Don't give up hope!

Leigh

Can you tie your periodic fee to meeting/exceeding the goals and objectives of the owner? Say, for example; you step into a property that has a number of problems (delinquencies >10%, vacancies >5%, evictions, maintenance).

Let's say you step in and start to peel the onion and actually evict those that are habitually late paying and 3 months later, your delinquencies (both income and expense)are now at 1% or less; you increase the occupancy to 98% or better, and are able to get the owner to invest the $$ it needs to correct some long standing maintenance issues. Because you took the time to 'weed out the rif raf' that cannot pay on time; your eviction rate saw a short term increase, but you have replaced those residents with those that are better qualified (if you needed to revise your criteria or not). This actually results in a eviction rate that is LOWER in the long run than what you walked into.

I would establish the fee schedule that would build in a fee increase if problems not limited to ones mentioned above are resolved within the first 3 months; because these improvements will have a significant impact on NOI; which the owners will be pleased with (hopefully); even IF some of the problems resolved required some investment to do so.

Hi Crystal,
So I'll try to make my rant short. In essence, a purely percentage fee initially sounds good because it is supposed to tie the success of the property management company with the payout to the PM company. However, that's not necessarily how it works out. Let's say that you have a company that is interested in... putting up advertising in your laundry rooms as an ancillary source of revenue for the community. The owner would definitely be interested in something like that because that's extra money for them. But from the PM company standpoint, they get a measly $3 for every $100 of income, so why bother? In other words, there are no incentives to go above and beyond. Once they have "picked the low hanging fruit", the costs to generate more income often goes up, but the percentage payout remains at 3%, which creates a disincentive to really drive every last dollar of income.

On the flip side, however, there are concerns that changing this concept could/would result in "fly-by-night" PM companies abusing the payout system. For example, they could pump up the profit for one year by deferring maintenance, which means a much higher bonus but the community falls apart.

In the end, it all comes down to incentives. The payout schedule must make sure there are positive incentives to maximize revenue, while reducing negative incentives to manipulate short term profits at the expense of long-term community health. I don't know what the ultimate answer is, but I guarantee you that 3% is not getting it done.

Brent,

You bring up a great point about the ancillary income play -- who wants to do all the work involved in running good ancillary revenue programs if you only make a measly 3% of the total take -- yet managers who don't pursue these programs are literally leaving tens, if not hundreds of thousands of $$'s on the table.

I think the word here is "conumdrum".

Leigh

Hi Crystal,

Sounds like your role is very similar to mine at Apogee. In fact, I’m in charge of all business development and negotiation for our company, and believe it if or not, the 3% management fee is the most compatible figure in our industry currently. However, every asset and/or client is different, so it really depends on the deal. For example, anything under 50 units, I use the old single-unit management fee structure, which is between 8-10% or an agreed flat rate. Anything above 50 units would be the 3-5% fee depending on the asset. Of course, on Affordable Housing deals in need of compliance, we charge between 3.5% to 4.5% depending on the asset. However, there are few clients we charge as low as a2% management fee, because we manage a large portfolio for them. So like I said, it’s all about the asset and client. Good luck with growing your business!

Reading the responses so far; I would need to tweak mine just a little bit...


If I am being considered to take over the management for a distressed property; I would ask the owner(s) for the investment capital to resolve maintenance issues that have been overlooked. As these issues are being resolved, I would insist that the owner(s) give me the latitude in decision making to remove the residency problems (those that are consistently delinquent, committing criminal acts on the property, and/or causing damage to the property). I would create a time table based on the size of the property and the percentage of 'problem' residents. Once the maintenance and residency problems are resolved, I would create a time table to reach occupancy goals. I would build in a bonus/fee increase as follows:

1) Residency problems solved before target date.
2) Occupancy goals reached before target date.
3) Significant decreases in delinquency (both in income and expense).
4) Increase in NOI (for each 5% increase, build in a 1% increase in your fee; reviewed quarterly for the first year, then every 6 months). Make sure your agreement is for at least 5 years, then renegotiate.