Let’s talk about growth and acquiring property management companies and all the mistakes that can be made.
Chrysztyna Rowek is the owner of Lighthouse Cove Property Management and is one of the best experts to share her advice.
Background: Buying Lighthouse Cove Property Management
Chrysztyna started out cleaning houses and cleaning rental properties. The property management company that hired her to clean their properties invited her to work directly for them in the office, which was a job she enjoyed.
Then, she got her real estate license in 2007.
Next? She bought the company.
Chrysztyna freely acknowledges she didn’t really know how to buy or run a property management company. She borrowed the money she needed and bought Lighthouse Cove Property Management.
The company had 190 doors which were mostly single-family homes and multi-plexes.
Dealing with Difficult Sellers
It was not a smooth transition. Perhaps the seller didn’t think Chrysztyna would actually buy, or had second thoughts about selling. Two days after the non-compete agreement expired, the seller opened up a new property management company in the same market and went after many of Lighthouse Cove’s clients.
You Need a Transition Plan
The plan was for the seller to stay on as managing broker until Chrysztyna earned her managing broker’s license. But the seller was consistently unavailable and difficult, so Chrysztyna had to find another managing broker and completely cut all ties with the seller.
In an ideal situation, the buyer will have access to the seller for at least 90 days. That’s a minimum – 120 days would be better. Put that paperwork in place when you buy or sell.
Then, build relationships with the clients right away. The clients you’re buying trust the person who is selling. So, the seller has to help ease the transition so that the clients trust you too. If the seller trusts the buyer, the clients will trust the buyer.
Building and Preserving a Team
When Chrysztyna bought Lighthouse Cove, there were three employees, and all of them remained in place. The accounting manager is still with the company today. The staff grew quickly and the company moved into a new building.
Losing Properties and Acquiring another Company
When Lighthouse Cove’s seller opened up a new company, she took a chunk of Chrysztyna’s clients, but the company continued to grow. She added 50 new doors, and then she bought another property management company from a local real estate office in 2009. So, by growing Lighthouse Cove and taking on the new company, she grew to over 500 properties.
While Chrysztyna had learned a lot during her first acquisition, there were still mistakes to be made with her second one. The big mistake she said she made with this purchase was that she didn’t adequately check out the properties that were coming with the business.
Now, she knows it’s important to drive by the outside of these properties – not all of them, but at least a third of them. You’ll notice if there’s a pattern of deferred maintenance. Be careful of owners who don’t want to invest in their properties.
Chrysztyna always says she will pick up C class properties if they have A class owners. What you want to avoid is C class properties with C class owners.
An A class owner makes sure a C class property is safe, habitable, and clean. You want owners who realize money needs to be spent on their home. Make sure they’re willing to make updates and improvements over the next two to five years.
When you’re buying companies, remember that the number of doors you’re acquiring is not nearly as important as the quality of owners you’re working with.
Growing through Acquiring Property Management Companies versus Marketing
Chrysztyna admits that after buying three companies in the last 12 years, she knows that she could have taken all the money she paid for those companies and grown twice as much with just organic growth.
She does not regret the acquisitions, but she often thinks about what she spent. If she had directed those dollars towards a marketing budget instead, her results might have been better.
Growing organically takes more time but can sometimes deliver larger benefits.
Buying a business will give you more properties right away, but you have a lot of integration to worry about. There are tenants to onboard and you don’t know if they’d meet your own screening criteria. You don’t know what the property looked like when they moved in. You don’t know the owners, either, and you may have to make concessions.
There are a lot of successful business owners who believe acquisitions are the best way to grow. That’s the right path for some people. But, organic growth is less stressful and has its own benefits.
Defining Organic Growth
There are lots of ways to market a property management company and its services. So, what do we mean by organic growth?
It means education and information. It means establishing yourself as a leader.
If you are educating people on something and you are a professional in the field, you’ll become a go-to person, and that’s organic growth. If you have 1,400 friends on Facebook like Chrysztyna does, and they all know exactly what you do – growing won’t be difficult. People will look for you.
When you grow through acquiring property management companies, you’ll also have to factor in the properties that you’ll lose. Consider this before you buy. The industry standard is about 10 percent. You’ll lose 10 percent of your business any time you make a change; whether it’s a new owner or a new property management agreement.
Some people don’t like change, or they wait for a big change to make the decision that moves them on. Keep that 10 percent number in mind.
Change and Integration: Move Slowly
When acquiring property management companies, you don’t want to immediately begin raising prices and tearing up leases.
It’s a good practice to wait for about a year and then roll out a new property management agreement and if necessary, updated fees. Make sure your fees match your services.
Sometimes, owners who want a lease-only contract will not understand that once the tenant is placed and the lease is signed, they are responsible for managing the property going forward.
Chrysztyna got a great piece of advice about lease-only leases. She puts her company name all over the lease. Usually, owners will have questions along the way and when they want to know what to charge for a renewal fee or how to handle maintenance emergencies, they call her and she ends up manage the property.
Acquiring Property Management Companies and Lawsuits
With lessons learned from buying two companies, there was still one big mistake left to make. Chrysztyna decided to buy a company from someone she knew for years. She did her due diligence and the books looked fine. The numbers looked good. The seller was someone she considered a colleague.
She should have done some deeper digging because about a month after the sale, security deposit money was missing or coded wrong.
Forensic accountants were called in and old school spreadsheets were created to figure out what tenants paid at the beginning of the lease, and where that money went. Sometimes rent was coded as deposits. Pet fees were counted as pet deposits. It was a tedious year that resulted in a lawsuit.
The bigger problem is that the security deposit trust hit zero dollars, but tenants were still moving out and needing those deposits back. It’s been a rough few months and has cost a lot of money.
The lesson here is to hire a third party auditor to look at the books and make sure everything adds up.
It takes courage to talk about things that you do wrong. But, Chrysztyna’s willingness to teach others has helped a lot of people who might have made bad purchases.
Chrysztyna isn’t sure if she’ll buy again. It’s a great feeling, but it’s a lot of work.
The three biggest tips for someone acquiring property management companies are these:
- Trust your gut. Your gut is hardly ever wrong. There were red flags but Chrysztyna was too busy and excited to get into another market. So she didn’t listen to her gut. That ended up biting her in the end.
- Hire someone if accounting is not what you’re the best out. Spend the money to have someone else look at the books. This is worth every penny.
- Make sure how the seller does business is how you’re willing to do business. Culture and operations have to match.
Finally, it’s always a good idea to go with the seller during a property management interview. See how they are selling their services and get an idea of why they are doing what they’re doing. If that aligns, you can work with the deal.
If you have any questions about the information Chrysztyna has shared, or about acquiring property management, please contact us at Fourandhalf. We’d be happy to tell you more and share some additional resources.