Many times the asset manager of an investment group will realize that the management company is
under performing and it is time to make a change. The question is how do we make this change and
prevent legal issues?
Let’s first discuss the issues related to the under performing problems: The overall performance of the
property is key to the lack of control the management company has on your investment. Let’s go into the details that reveal you have the wrong management company in control. We will then deal with how to release the management company without dealing with legal problems.
1. The Variance to Actuals related to the budget is completely out of line.
2. Market Rent vs. Concession Rent-how much are they giving away.
3. Utility controls-paying attention to the usage and any peaks possibly reveal a lack of control.
4. Occupancy is not stabilized-move in and move outs are skyrocketing
5. Collections and Evictions are revealing rental criteria that are not being observed.
6. Move in Service Request reveal the apartments are not made ready as per scope of work.
7. Marketing Dollars are not delivering the traffic
8. Response to occupancy, collection or maintenance items lack a positive resolution
1. BUDGET – ACTUAL VARIANCES
One of the key ingredients of maintaining a positive cash flow is to be very observant with how the budget that is in place is being maintained. It is very important that you as the Asset Manager are keyed into the budget and expect an explanation for any line item that is over $1. Hopefully you receive reports on a weekly basis but surely monthly you will be in a position to analyze the spending of your management company and can view the overages immediately. A word to the wise, if you have a management company that has sent you passwords to a read only software program so that you can view daily it will be of no surprise how your expenses are in relations to the budget. Always place a cap on how much the management company can spend without approval so you are not looking at unexpected financial problems. You should never be in a position where you are surprised by the budget overages.
2. MARKET RENT VS. CONCESSION RENT
Every investment property has a goal to achieve a market rent for their property and usually concessions (loss to lease) is the norm with the current rental rate set by a combination of Market Survey, income guidelines etc. It is very important that you have input in how the management company came up with the rental rates. I have seen numerous times where rental rates are set and they are just too low. You want to be proactive instead of reactive and it is very important that you are not playing follow the leader. Every location has one property that stands alone as the one to beat. Competition is eminent and the key ingredient to making sure your property reaches top billing. So you may ask how to get to this position and it is simple economics. The reputation of your property is important. Keep a slogan that if you would not move your family into one of your vacant units then it should never be rented to anyone. Soap and water is very inexpensive and when a property gets that type of reputation that the apartments and common areas are not clean it actually infects your investment like it has the plague. Paint your vacant units, clean them and make them fresh maybe set them up as a mini mode so it presents a visual to all customers. Never give away more than you can afford. Concessions are the plague to most properties.
My recommendation is to set one or two possible apartments that are in a negative rental situation such as overseeing the parking lot or near the dumpsters etc. Never offer a concession on a full floor plan it will hurt you more than one or two of this type. I always view one apartment where we put the bells and whistles into it and make this our premium apartment and shoot for the market rent. Maybe it is located with a perfect view it is made ready and possibly an accent wall and maybe an inexpensive lighting fixture as well as a single lever faucet to increase the value. Always tour your customers to the best apartment first the one that you are shooting for the market rent and then show them the reduced apartment. You see many people will come in for Price but will pay for Quality. Treat every customer that walks in the door as if they are the true value of your investment. They may not rent but they may refer someone who else will because they were treated with full importance.
3. UTILITY CONSERVATION
Unless you have an “All Bills Paid” property, it is very important that your residents take ownership of the utilities that they are responsible for and that the management company is monitoring the transfer of said utilities upon move in. Normally the utility specifically electricity must be on to get the apartment ready and this is where it becomes tricky to make sure that the power should be shut off prior to a new resident moving in but again this is where it is of great management to make sure that if the power has not been turned over that the resident is billed for the usage when they first move in. Many times I have seen where the resident is still using the property name for their usage and no one seems to be paying attention.
Make sure that someone is contacting the utility company on a monthly basis to assure that the utilities are correctly being billed. A good practice is for the onsite team to require prior to giving the keys to a new resident that they get the account number from the new resident that they have transferred the utilities. Hint: you must make sure that they verify that the account number is actually for this address as I have seen some pretty smart residents who will give an account number but it is their old address. Always pay attention to these tricks as they can be costly.
4. STABILIZED OCCUPANCY
There is only one way to stabilize occupancy and that is to “close the back door” in essence make residents sense that they feel value. If residents feel their importance then they are more likely to remain in your community. The word community is something that has to be created. You buy a property and create a community. How you create a sense of community is simple, treat people as the key ingredient to the complete importance that they are and how you do this is to introduce a program that is quite simple. Every investment regardless of budget restraints can create this simple program and that is having functions for your residents. Such functions that cost very little, candy bar bingo for the kids, drive by bingo for adults, decorate a balcony, photography contest, guess the candy in the jar, breakfast to go, calendar of events, a few functions during the year with the theme “Resident Appreciation Party”. Another situation that worked terrific for me was having a referral party once a year. The ticket was that you had to refer one customer that qualified to move in and they met all our criteria and the prize was that anyone who would refer a new resident would be invited to a year-end party in their honor and only resident who referred a new resident could attend. We catered the affair and it was a terrific hit a helped to meet the occupancy with people who were rewarded plus it was advertised and the following year we were able to increase referrals based on the party that celebrated their hard work. Do you see how this not only helped our bottom line but it turned a rental property into a community of people who wanted to live here and it met all their expectations.
5. COLLECTIONS AND EVICTIONS
Now one of the most important areas to consider is the resident criteria that should be enforced and when you start having collections issues it usually means that the management company employees have not followed the guidelines. Every rental criteria should have an income requirement, a rental history, employment history and criminal background history requirement in order to meet certain qualifications including credit. Now we need to look at the application and should always attaché a copy of the criteria where the applicant signs the document that they meet the standards and then the application is filled out and remember the reason a line is on an application is to get a response. Many times I see an application with many spaces with no response always insist that either a N/A or a slash is placed on every area that is not applicable. Now if the onsite team is following the directives of the criteria no one will get in but pressure from supervisors, occupancy goals are being missed etc . . . . Makes it almost easy to overlook certain smudges that can actually reflect on collections issues later on.
My recommendation is to perform a file audit every quarter to see if the policies are being followed. Every time you have an eviction asks to see the file and check the approval process. Most times you will see that the policies are not being followed thus you have legal processes in place. If you see many collection problems and evictions are constant they are marketing to the wrong area and need to change the resident profile to prevent such problems. You are better off making sure that you have the right resident moving in vs. settling for the wrong person because of pressure. Hold out and get the candidate that meets the standards and never allow someone to move in that has a history of constant rental problems.
6. MAKE READY VS. SERVICE REQUEST
As I have stated previously is it very important to make sure that your apartments are perfect for move in and that the new resident is happy with their new home. One of the most important aspects is to realize that this is their new home and on the day of move-in a staff member and a maintenance person should accompany the new resident to do the move in inspection. This is where you are able to show them how to operate a thermostat, how to handle shut offs and do an overall inspection where the resident signs a new move in set of papers in order to hold them responsible for future damages.
Now the key to a good move in is that you monitor when you will receive the first work order after move in. If it is within a few days then you know there are items that have been overlooked and this is where your program is not successful. Please understand that when someone moves in you want to meet their expectations first of all but most important realize that this is the beginning of the renewal process. If your new resident is satisfied and your onsite team is contacting them say within 72 hours, then 30 days, then 60 days and so on to make sure that they are still happy then when it comes time to renew this resident it is a sure thing because they have been treated with the importance that they should feel.
7. MARKETING DOLLARS MISSING TRAFFIC
Sometimes the marketing dollars are not spent correctly thus missing traffic that will help with occupancy. I have seen many times where flyers are made up and onsite staff is out there passing them out and I must tell you that you have to include your wages for staff that are marketing as part of your dollars spent. Onsite marketing is key in this day and age and I can tell you that many times that they are not updated enough times during the month. Once someone looks at the advertising they will not look again. Take Craig’s List and know that you can advertise many ads for each apartment or for each floor plan and you can change it regularly. You can add cartoon characters to attract attention and I can tell you that keeping them up to date is the key to obtaining traffic. Now let’s look at ways to get qualified traffic: One of the easiest ways to get traffic that I know are qualified is to go to the Chamber of Commerce online in your area and go to the membership list. It usually list by occupation but it gives you a perfect way to find the companies in your area and say for example you pick insurance companies, click on the category and you will get a list of all the company’s in this area. Believe me it works and it works well to getting that qualified traffic and your marketing dollars are at a minimum.
Resident Referrals again are an inexpensive marketing tool and I can tell you that many companies are struggling to offer their employees perk and this is a very important area that you can be a great asset. Design a flyer for that specific company and put a 5% discount for any employee of the specific company that allows us to make them a preferred employer. This program really works and I find it works great at hospitals, banks or any company that has over 100 employees is a great way to offer this incentive. Marketing dollars must have an impact and get results do not waste them.
8. MANAGEMENT COMPANY-POSITIVE RESOLUTIONS
Okay so now we have a list of items that are a real concern and what is your Property Management Company going to do about your concerns. This is when you have to look at the signals and know that their time is running out. If they are just complacent about your concerns or you feel that they are just allowing you to vent but see no change then you are caught in a situation that cannot continue to allow things to go just as they are but must take action.
A good Property Management Company will bring problems to your attention vs. you having to bring the problems to them. Do not wait until the problems get out of control. Study your reports, ask questions make sure you are getting accurate answers and that they are making sense. If you do not understand say it and have them explain until you do feel comfortable with the response. The number one behavior you want your management company to come across with is a positive solution to whatever the source is and that you do not get the constant response of we shall have to check it out. They should know the answers this is their job and to say they have to check it out means they are not on top of your investment.
SO HOW DO YOU RELEASE AN UNDER PERFORMING MANAGEMENT COMPANY:
Releasing an under performing management company starts with the initial contract signing. My recommendation is that you have a clause that states a certain notice either 30 days or 60 days that you can release the company with or without cause by either party. This is the simple and easiest way to get out of a contract. (Actually this should be a standard policy that you do not sign a contract that does not have this clause regardless of who you are involved with and for what reasons). Almost every contract should have a performance clause in it and if you are keeping track of the negative records of your investment property and you prepare a perfect profile of this projection and the lack of achievement that your Property Management Company has made then you are in a wonderful position of negotiating a termination of this relationship. Never take no for an answer and although you do not want to get into a legal battle you cannot afford to allow this management company to run your investment that can cause damages that are going to be beyond repair.
I have had the opportunity of working with clients who have had to do just that release the management company of their contract because of the lack of performance. Let me tell you once you present the inept work and provide the back-up that are easily accessible then it is almost a guarantee that the Property Management Company will walk before being pressured into a legal and liable lawsuit. Pay attention, know your property, understand the reports and keep track of the many areas listed above and this will protect you from allowing a poor performing management company to take advantage of your hard earned money. Good luck and stay focused.
