Shooting the War

You should have a pretty good understanding of the amount of work and effort that is involved in managing a property and whether it is for you. We’ve discussed the qualities you must have or develop—most importantly, assertiveness. You have analyzed your working situation and determined whether managing your own property is a reasonable and cost-effective use of your time.
If you decide that managing your own property is not for you, you now know the attributes you should look for when hiring a property management company. You’re now equipped with the tools to scrutinize another property and compare management companies’ systems. In this chapter, I will show another invaluable method for researching potential property management companies,
In that section, I showed you my own personal method of researching, which I group into three easy-to-define and easily understood categories:
Level 1 Research
Level 2 Research
Level 3 Research
Preliminary research that you can do from your own home. This would include Internet and publication research.
If Level I research leads you to like what you see, Level 2 research will be needed. This is the stage where you meet face-to-face with people in the know. Level 2 research is invaluable in verifying the information you gathered in Level 1. Level 3 research involves utilizing the experts you have already assembled on your team. Call them and run your information past them. They will give you valuable insights. This will allow you to remain objective and keep perspective.
Our intent in Portland was to purchase an apartment building and operate it through third-party management. Knowing my goal for my company to be the best property management company in the Southwest informed my decision to hire a company to manage the property in Portland.
If I spent so much time and energy in researching the property itself, why wouldn’t I spend the same amount of energy in researching who I would choose to manage my valuable asset? That is exactly what I did, and I used the three levels of research in my investigations.
Level 1 Research Finding the Players
Level I research is the preliminary stage of your process. By now you have profiled your property and determined its needs. You are ready to begin searching for property management companies that will be the best fit.
When I was first looking for a property management company for our Portland property, I started with the Internet. I love the Internet. I can’t imagine how I functioned without it. At the tip of my fingers is access to incredible amounts of useful information that would have taken weeks to assemble a few years ago.
I started my online search with the local apartment association, the Rental Housing Association of Greater Portland (RHAGP). Just by going to their Web site I was able to access the contact information of over fifteen local property management companies. I printed out the page listing them and put it in my file.
Also on the RHAGP Web site I was able to read through the local newsletter and get a feel for the players in the local property management market. I printed out back copies of the newsletter and put those in my file too, to read on the plane. I used those for my Level 2 research in order to help me narrow down my list of whom to meet when I visited the city.
Not wanting to be limited to just local property management companies, I also visited the Web sites of some regional and national companies, such as Equity and HSC. Through browsing their Web sites, I was able to determine that each one of these companies had branch offices in Portland staffed with account representatives that I could meet with. I was also able to get a general history of each company, an idea of its business philosophy, and a listing of the properties that it managed in the Portland area. I took down the contact information and addresses of these apartments so that I could tour them while I was in Portland and contact their owners.
Contacting a property owner is an invaluable tool in your search for a property management company. It’s a safe bet that someone who is entrusting the value of their investment to a property management company will shoot straight with you when you ask them about the performance of that company In this case, one of the owners informed me that he was looking to make a change and was not happy with a company’s performance. I was able to confirm this feeling with a few different owners and used that valuable information to scratch that company off my list. Remember the old saying, “You have not because you ask not”? When it comes to real estate, asking an expert a simple question can save you millions of dollars.
Now that I had a good handle on the players involved in the Portland rental market, it was time to focus my list and decide who I wanted to meet when I traveled to the city for my Level 2 research. Again, I accomplished most of this from the comfortable confines of my office chair through the magic of the Internet and my phone.
The local property management companies that I had found online all either had a Web site or a phone number. By calling or browsing their Web sites I was able to determine which companies may be a good fit for my property and which would not. Once I had my list of companies that I was interested in, I called each of them and set up an appointment with one of their account representatives, letting them know I would like to meet them at their office.
Level 2 Research—Meeting the Players
The first thing I did when I arrived in Portland was … grab one of the famed local beers. Level 2 research is a blast. You get to travel to awesome cities and meet incredible people, and it can all be written off as a business expense. To me there is nothing more exhilarating than being able to travel to a new area, meet new people who will help me achieve my business goals, and either confirm or realign my thinking about a certain market,
As I mentioned, I had set up appointments to meet with property management companies before I even left for Portland. I had three companies in mind to manage the property and planned on spending a day with each in order to observe and to really sink my teeth into their operations. I had very clear objectives in mind and very specific things that I wanted to observe.
THE OFFICE VISIT
When looking to hire a company you should always visit its offices. This isn’t about cosmetics. Who cares if it has green carpet and you prefer gray. Visiting an office is all about observing the way in which the business operates. It is also an opportunity to review some documentation that will be vital in your decision-making process.
Keep your eyes open, and observe the office staff. Does it seem organized or chaotic? Is there an air of professionalism, and are the employees dressed neatly? Check to make sure there is a clean and efficient filing system. One company I visited had files stacked on tables. Needless to say I was not impressed. If a company can’t keep their paperwork in order, they definitely won’t be able to keep your investment in order. All of these small visual clues will give you insight as to how the company will manage your property.
Ask to use a conference room and sit yourself down with the employee manual and the property policies and procedures, Read them thoroughly and ask any questions that you might have about what, and what might not, be included in the material. Don’t be afraid to ask the tough questions. This is not a time to be timid. This company may be managing your valuable asset and you should investigate and learn as much about it as possible.
Meet with the manager and asset manager that will be assigned to your property should you hire the company. Remember what I said earlier, even more than the company itself, you will be hiring the people that will be physically working on your property. Ask them about their certifications and their experience in the industry, and ask to see proof and a list of references.
Inquire into the education systems that the company has in place and determine whether they are current in their involvement with the local trade association. Have them explain their philosophy when it comes to training. Oftentimes, when employees take training or an educational course they will receive a certificate of completion. Ask to see those certificates for the people who would be working on your property. You would be surprised, but a lot of times a company will say they are actively training their employees even when they aren’t. Don’t just take a company’s word. Trust but verify
Of course you’ll want to review the company’s accounting systems. These should be spotless. Don’t get involved with a company that doesn’t have a solid accounting staff. Determine what software the company is s using. An added benefit of hiring a management company is that they should have sophisticated financial software in order to provide you the owner with a high level of financial service. If they are running reports only through a rudimentary Excel spreadsheet you might want to think twice.
Talk with the accounting manager. Ask them what types of reports you will see on a monthly and annual basis, and get a feeling for their experience level and education, as well as that of their staff.
Find out what kind of financial services the company provides. Do they pay your mortgage for you? Do they handle the insurance and tax impounds? The more sophisticated the accounting systems the more likely you will be able to enjoy your investment hands-free, and that will allow you to follow Clubhouse
Staff
• On larger properties there will be a clubhouse that generally contains common areas for residents to use and houses the staff offices.
• Ask yourself what kind of first impression you get by walking into the clubhouse. Is it clean and free of clutter?
• Is it clear where the rental offices are, or do you have to hunt around hoping to find someone? Nothing is worse than a potential resident who has been touring apartments all day becoming frustrated because they can’t find a leasing agent.
• Observe whether there is rental material out for potential residents to review such items as floor plans, brochures, and rental pricing.
• When you walk into a rental office, someone should approach you immediately.
• Observe the staff, taking note of their appearance and demeanor. A good company will have employees who are professionally dressed, energetic, and give the impression that they are genuinely excited to show you the property.
• If you have a chance, observe the way in which the staff interacts with residents when they come into the office. A good way to do this is by shopping a property on the first of the month. Everyone will be coming in to pay rent.
• Ask lots of questions. Make sure the employees are well versed in not only the property but also the company’s policies and procedures. Unless they are newly hired, if a leasing agent can’t even tell the rent on the property floor plans without referring to a cheat sheet, or tell you how many units the property has, that may be a troubling sign, Collateral/ • On larger properties there will generally be
Marketing Materials marketing materials such as brochures, flyers, and business cards.
• Make sure these material are professional-looking, and not poor copies that appear in-house, Collateral is a huge factor in making a solid first impression. Never forget that people are not just renting an apartment, but a lifestyle.
• The marketing materials should be placed in an open and readily accessible place.
• Verify the accuracy of the marketing materials. Nothing makes a worse impression than having a leasing agent tell you that a rental amount or lease special is different from what is printed. Not updating printed materials is a serious sign of laziness.
Tours/Models • The most important factor for a prospective resident in determining whether to rent or not will be the model walk or touring of units.
• Make sure that the person who will be touring you gets all your information and fills out a guest card.
• Ask to see the models or the units for rent and Observe the sales presentation.
• Observe the condition of the models or units. Are they clean and stylish? Do they get you excited about living at the community, or are they forgettable?
• Is the person touring you commanding the tour, or do they seem uncomfortable?
• Again, ask lots of questions. Don’t interrogate them, but do pay attention to whether the employee remains attentive to your questions or whether they seem to be getting impatient.
• After the tour, the leasing agent should have immediately tried to get you to lease. The hard close.
Office
• While you don’t need to apply for an apartment, you should show interest and sit down with the leasing agent.
• Observe the condition of their offices. Are there files stacked everywhere, cups of half-finished coffee, and papers littering the desk? Do they have to make a space for you? Any signs of disorganization are bad.
Once you have visited the property management offices, talked to the staff, received advice from other owners, reviewed the policies and procedures, and shopped or visited sample properties, you will have a pretty good idea of who will be a good fit to manage your property. Now you should grab one more of the local brews or visit one more local attraction and head back home to begin the third level of research.
Level 3 Research —Picking Your Player
You can think of picking your management company like the NBA draft.
NBA players are valuable commodities. Think about all the work and preparation that goes into scouting an NBA player. Some teams follow a basketball player from the time they are in high school all the way through college—if they go to college. In some rare cases, players are scouted from junior high and on.
Teams will send scouts all over the country, paying them high salaries, keeping them in fancy hotels, and feeding them steak dinners. All this is done so that they can determine which player the team will eventually draft in order to pay even higher salaries, provide stays at even fancier hotels, and pony up on even steak-ier dinners. NBA teams will spend a lot of money in research just to try to pick the one player that will take them to the next level.
Why all the fuss? The NBA is a billion-dollar business, and the stakes are high when they get to the draft table and it’s their turn to pick a player. You may think that the player salaries are out of control, and you might be right. The fact of the matter is that the players make the owners insane amounts of money—if they play well. All the money a team invests in researching players comes back many times over if they make the right pick. Unfortunately, the odds aren’t that great.
Thankfully the odds are much better when you are picking a property management company, but the stakes are just as high. If you don’t do your research correctly or neglect to do it at all, then the results could be staggering. Remember the property in West Phoenix that my company took over because of our business relationship with the owner? That property was just 100 units, yet it cost them millions of dollars. They didn’t draft the right player, and the property failed because of it.
When hiring a third-party property management company I cannot stress enough how imperative it is that you make a wise, well-informed decision. That is why it is vitally important that you consult your team. Don’t just go by your observations. You need another set of eyes. That is just a sound business principle. Even in writing this book, I had a dozen close friends read the drafts and give me their honest opinions. If I had just finished a first draft and said, “This is as good as it can be,” I wouldn’t have felt good about the final draft.
Level 3 research is the time when you will be able to run your findings by your team of experts. Talk to your property management expert and show them your thought process on the companies that you will be picking. They may have some valuable insights that you might have missed. Have a lawyer review contracts. They will be able to help you avoid any hidden traps. Call and talk to industry players in the market where your property is located. They will have a good knowledge of the local companies and will be able to confirm or modify your findings. just by doing this, I guarantee you will be able to remove some companies from your list, and feel just that much more confident that you can make the right choice for the new player on your investment team.
And thank goodness that the cost for your research is a minor fraction of the cost an NBA team spends in their scouting. The biggest costs are the plane ticket and the hotel. These are a small investment for how many returns a solid property management company will afford. I love the process of researching, and I think you will too.
The Management Contract
Once you have completed your three levels of research and settled on the management company for your property, you will come to the hiring stage. This will involve negotiating the management contract.
First off, you should always have an attorney review any contract that you are going to sign. An attorney will be able to tell straightaway whether a company is trying to fleece you with hidden clauses or trick fee structures.
That said, there a few things that you should definitely keep an eye out for when evaluating a property management agreement.
FEE STRUCTURE
Be sure never to sign an agreement with just a flat fee structure. If a management company is not willing to put a stake in the financial success of your property, chances are they simply aren’t worth the paper their contract is written on. A company that charges a percentage fee of the income collected will be motivated to collect as much income as possible. That will mean more money in their pocket—and yours. That’s what I like to call a symbiotic relationship.
Also, it’s important to remember that the percentages will vary depending on the market your property is located in. If all the property management companies in a market are charging around 6 percent for a 100-unit building, it will do you no good to try to negotiate the fee down to 4 percent. It is your responsibility to know the market your property is in and determine what a fair percentage is.
ACCOUNTING SYSTEMS
Be sure the contract is clear on when rent will be collected, when it will be deposited, and where. It is important to make sure that your money will not be commingled with any other property’s money in the management portfolio.
Determine if the agreement is clear that you will have financial control over the property, and that you can set the guidelines on spending habits for the property. Most likely according to the approved budget, there should also be clear expectations for when and how the management company will report to you on a monthly and annual basis with financials. Dates should be clear as to when all financial reports are due, and it should be no later than the 15th of each month for the previous month’s operations. Be clear on the fees that should be collected and the dates on which they should be collected.
RESPONSIBILITIES
The management agreement should spell out clearly the responsibilities of the management company, and should have legal language for you as the owner if those responsibilities are not met. Remember the importance of getting everything in writing. Don’t settle for generalizations. It will be much better for both you and the company you are hiring if the expectations are detailed in the management agreement.
EXPIRATION
Finally, it is important to have a clear timeline set in the management agreement. Don’t sign multiyear agreements that lock you into a contract with penalties for early cancellation. The term of the agreement should be comfortable for you and match the needs of your property Make sure to note whether the management agreement has an automatic renewal clause. These are not necessarily bad in themselves, but you as the owner should remember the date so that you can review the performance of the company throughout the year before the contract renewal goes into effect.
Owner and Management Company: A Symbiotic Relationship
In the end, remember that you are responsible for your property and how it operates. A good management company will go a long way in taking the burden off you, but don’t think you can disappear from the picture and blame the management company if something goes wrong.
Part of the beauty of having a professional management company run your property for you is that you don’t have to sweat the details. Rather, you can focus on the few things that interest you such as financial review Make sure to meet frequently with your management team, and have them give you property updates so that you can address any concerns about the way in which your property is being managed.
If you follow these steps and do your homework, you will be able to enjoy the symbiotic relationship of owner and management company. Your investment will grow in value, and you will become freer to follow your passions while your wealth multiplies. I can’t think of anything better than that.