July 27, 2018

JF1424: 5 Tips For Parting Ways With Your Property Management Company #FollowAlongFriday with Joe and Theo

If you’ve been wondering why you would fire a property management company, we’ll answer that here. More importantly, you’ll know how to make it as smooth as a process as possible. Joe is telling us these tips from experience, which are definitely tips we can apply to our own investing businesses. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s  longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

Today we’ve got Follow Along Friday with Theo Hicks, and we’re talking about how to approach firing your property management company, and specifically we’re talking about apartment communities management company… So we are not talking about a single-family home management company, although I’m sure some of these principles could be applied to a single-family home… But this is specific to apartment community.

We will talk about five things you should keep in mind whenever you’re transitioning, and then some soft skills that I recommend that you practice while you’re transitioning from one to another.

With that being said, we’ll go ahead and get right into it.

Theo Hicks: Before we get into the five things, let’s start off by discussing when we should be parting ways with our property management company… So what are the types of things that a property manager would do that would warrant you firing them. Maybe we can talk about how long they’d have to be doing those things; maybe one time and they’re gone, for each of the ways.

Joe Fairless: There are two things that a property management company could or should be fired for; well, three really, now that I say that… The third that I just thought of is any criminal or fraudulent activity, but we’ll leave that aside. Let’s assume they’re not criminals, although I’ve interviewed guests who have had criminals or people doing criminal activity as a property management company… But let’s put that aside.

One is execution and two is communication. If they are not executing properly or they are not communicating with you along the way, then those are both fireable offences… Because even if they’re executing very well, if they’re not communicating with you or are responsive when you have your questions, then you’re not gonna know what’s going on with your investment, and you’re flying blind… And even if they are executing effectively, perhaps they won’t in the future and you won’t know about it because they’re not communicating with you. So those are the two categories for why I would fire a property management company.

My company has let go a property management company, so this isn’t conceptual; this is real stuff that we’ve gone through as a company, and these are some tips that we’ll get into for when you come across a time when you need to fire a company that’s managing your apartment building… These are some things that will help you make that transition as smooth as possible.

There will be rough patches… You’re removing one management company that is overseeing an apartment building or community, and is deeply integrated into the process of that, and you’re putting in a new one, so there’s gonna be some rough patches, but after listening to our conversation today, you’ll be able to make it a much smoother process than if you hadn’t.

Theo Hicks: Okay. So for the communication and the execution aspect, how long — because I could imagine you’d have your property management company and they would maybe not be doing exactly what you want them to do, but you’re in your mind thinking “Well, do I fire them or do I just wait a little bit longer to see if they get their act together?” So from your perspective, would you recommend giving them one warning and then after that it’s over, or would you recommend just the first time they make a mistake, finding someone else? How would you approach that?

Joe Fairless: I don’t have a direct answer. The reason why I don’t have a direct answer is because it depends on your length of relationship and your knowledge about them to begin with… Because perhaps they’ve performed on previous properties, and you have a seven-year relationship with them, and now for whatever reason they’re just not performing or not communicating with you properly on this property. In that scenario, I would give them a longer leash. What that longer leash is, I don’t exactly know.

Let’s talk about execution. If they’re not executing, so the expenses are higher, the property is not at the right occupancy, but the comps – and that’s the key, you wanna make sure it’s not the market… You wanna make sure it actually is the management company, because you need to be aware of what the market comps are doing… So is the occupancy similar to your property, or is your property performing below the market?

If it’s performing below the market, then there’s your red flag. You can find out by talking to brokers in the area, you can find out by talking to other property management companies; if you have a pre-existing relationship with them, you wanna be careful there, because if you’re talking to other property management companies and you have a current property management company, and those two talk to each other, which they probably know each other already, then you might be putting yourself in hot water unnecessarily if you’re simply trying to find information. So I recommend talking to a broker first, versus other property managers.

But find out if it truly is an execution problem or if it is a market problem. You don’t wanna put blame unnecessarily to a property management company if it’s not their problem… But then if it is an execution problem and you’re seeing your numbers go down, then also make sure it’s not a seasonality problem, or something that is wrong with your property… Because perhaps your property doesn’t have an amenity or isn’t in a particular location – even though you’ve got market comps, but maybe the market comps are on a main [unintelligible [00:06:41].15] with a lot of traffic, whereas yours is tucked away a little bit on a side-street… So you really want to identify that it is their problem, not a market– or even the place where the property is located, or certain components of it.

But once you’ve narrowed all that down, you limited those variables, then I would give it a quarter – one quarter, three months is my assessment… And again, I don’t have a direct answer, because it depends on many variables, but three months’ time where they’re just not cutting it and you’ve had conversations along the way, and the market and other competing properties are passing you by on rent premiums and occupancy and/or your expenses are higher than normal, then you need to make the switch.

From a communication standpoint, same thing… You’ll know pretty quickly if the communication just isn’t there, unless there is a new person who is your point person, because a lot of times there can be turnover in the management business, and when you have turnover, different people have different communication styles… So make sure it’s not that individual, but rather the process, because if it’s the individual, then perhaps you can have that individual replaced with a different individual that will be your point person.

Theo Hicks: Solid advice. Basically, make sure that it actually is the property management company and not another factor, and then give it about a quarter before moving on.

So that’s the reasons why you would fire a property management company. Once you’ve made that decision, obviously you need to find another property management company first, which we’re not gonna talk about right now, because we have an ultimate guide — it’s called “The Ultimate Guide to Finding a Property Management Company”, on TheBestEverBlog.com. So if you just google “Joe Fairless how to find a property management company”, that article should come up. We go in-depth on how to find them, how to interview them and how to win them over to your side.

So once you’ve made the decision, you find a new property management company, these are the five things that you need to do in order to ensure a smooth transition. The first one is to address the staffing. Do you wanna talk about the staffing, Joe.

Joe Fairless: Yeah. That’s important, because as I mentioned earlier, you’re replacing a management company and you’re putting in a new company – that’s a  big deal, and if you can smooth out that transition by looking at the staffing at that property, and perhaps you want to keep some of those staff members… That’s also a tricky proposition, because they would be switching companies, but that happens fairly frequently within the management world, where one property manager, one actual community manager changes companies as the ownership changes, and their property management company that employs them changes, whereas they might stay with that property. That happens fairly regularly in the industry. Or maybe there’s a leasing agent, or maybe there’s a maintenance person or people who you want to keep… So look to see if the new management company can vet the current staff and decide who stays and who goes; that way, if you have anyone worth keeping, you can attempt to keep them, which would smooth out that transition exponentially.

Think about a maintenance person who’s already got experience with the property, how much valuable intel he/she can provide to the new maintenance team or other maintenance members, versus if you’re going in from scratch, because there’s all sorts of nuances with every apartment community and different things that go wrong from a maintenance standpoint that it’s very helpful to be aware of. So that’s the first thing – you wanna see if you can keep any of the staff members, or if any of them are worth keeping, and have you new management company do that vetting process.

Theo Hicks: Okay. Second after staffing is the financials of the property.

Joe Fairless: That’s important, obviously. Numbers are kind of important with what we do. Your new management company should request everything that they need, and some specific documents… There’s the historical profit and loss statement, and then also the chart of accounts. That’s the list of income and expense items, plus bad debt and delinquency. So make sure that they are first asking for it, and if they’re not asking for those documents, that’s a big red flag for your new management company; you might be in the same place three months from now… So make sure that they are asking for the proper documents, which they should be, and then make sure that they’re actually getting access to those financial documents, because they’ve got to pick up where the other one left off.

The challenge with financial statements in our business is that different companies label the same thing differently. You’ve come across this many times when you were underwriting – some line items that a company calls something, they’ll call it something different. What are some examples that you’ve seen?

Theo Hicks: Most of the time I see it with the contract services and turnkey expenses. Some property managers will have a category for turnkey, a category for repairs, a category for contract services, but then other companies will just have maintenance or repairs, and everything [unintelligible [00:12:15].22] is there.

One person might call something supplies, the other person might have it split up between pool supplies, painting supplies, carpet supplies… So most of them I see it through there, and then also sometimes they’ll have administrative expenses kind of scattered throughout the T-12. Sometimes there’ll just be a line item just floating by itself that’s supposed to be added in expense, like eviction costs, or something like that… So those are the main ones that I’ve seen, but most of the time you’ll have trouble pulling out the turnkey and contract services costs if they have them all lumped into maintenance or repairs.

Joe Fairless: We’ve gotta get those defined the same way and labeled the same way, so that when the new management company transitions, there’s not a “What the heck are these financial statements that I’m looking at?” reaction. You’ll know exactly what goes into what category.

Theo Hicks: And then for the rent rolls – do they need to get their hands on the rent rolls, or will that be something that’s available as a hard copy in the office?

Joe Fairless: Yes to both. There should be hard copies of the leases in the office, and then they need to also have the version of the rent roll.

Theo Hicks: Okay. Number three – this probably would apply to value-add properties that you’re doing renovations to. You need to address the renovations at the property with the new property management company.

Joe Fairless: Exactly. You’ll need a list of what was and wasn’t renovated, and it gets pretty darn confusing, usually. It’s not a simple list of two columns, “Was Renovated/Wasn’t Renovated.” There’s usually “Was it partially renovated? If so, what did this partial renovation entail? Was it countertops and appliances? Was it just light fixtures? Was it just carpet in the living room and hardwood flooring?”

There’s all sorts of different permutations of what a renovation might entail, and sometimes, if you’re lucky – you really notice this when you’re buying properties from people who are renovating, because then there’s always sort of different types of renovations that they do… But you also notice it when you transition, because maybe your team has partially renovated a unit, because you have a current resident and they just wanted to do the partial renovation because of whatever reason, but you got the same rent premiums or similar rent premiums relative to what you would have spent… So you need to make note of that, that way you know on the next turn what you need to do to that unit.

So getting the list of what was and wasn’t renovated and also making sure that if they just give you that list of “Hey, we renovated this”, make sure that you know exactly what they did to renovate that unit, and if that was the same as all the renovations, or if not, what did they do to that or those particular units that they didn’t do to the other renovated units, in order to determine where you’re at and where you’re standing across the whole property.

Theo Hicks: Okay. Number four is kind of related to renovations, and that’s getting the list of vendors in the hands of your new property management company.

Joe Fairless: Yeah, you need the list of vendors because if you take over the property and you don’t know who to call for certain things, then you’re gonna be in trouble, and even if you have relationships – which a property management company will have – with other vendors, it’s gonna be a lot easier at least in the near-term to work with some of those same vendors that the previous management company is working with, just to get things done the first month of operation… Otherwise you’re introducing a lot of new variables into the equation at once, and it’s better to have a smoother transition, and how you do that is you introduce fewer new variables into the equation immediately, and then over time you introduce the new variables, and one of the new variables could be new vendors.

Theo Hicks: Yeah, that’s very important, because you’ve gotta remember, this is after you’ve owned the property for a while – you’re not taking it over and then going through that transition one time; you’re doing it a second time… The less variables there, the less that could go wrong.

Joe Fairless: Yeah.

Theo Hicks: So the fifth thing that you need to do to ensure a smooth transition is to get the list of service contracts into the hands of the new property management company.

Joe Fairless: The list of them, and then also the actual contracts. That includes pest control, the pool repair person, landscape, the security company and the point person… And not only, as you said, have a list of contracts, but then the actual contracts, so that you can then make sure that you know what you’re adhering to… And you should know this already as the asset manager, it shouldn’t be a surprise, in terms of you’re in a 10-year agreement with Time Warner — wait, Spectrum now… Spectrum. They changed their name, but they’ve still got the same service, or lack thereof.

So maybe you’re in a 10-year contract with Spectrum – you should know that already, because you should have already signed off on it, or a laundry company, washing machine, dryers company… But you need the actual contract, too.

Theo Hicks: Okay, so those are the five things that you need to do to ensure a smooth transition. You said there were a couple other things you wanted to talk about on how to approach the situation?

Joe Fairless: Yeah, here’s the soft skills I was gonna mention… One is relationship management. So we just gave you five tips for when you are firing  a management company, what you need to take into account and to make sure you’ve got addressed… But the soft skill is relationship management, and it is making sure that when you’re telling the property management company that you’re firing that they are fired, that you don’t say it the way I just say it. You don’t say “You’re fired.” Instead, you say something like “Hey, this probably isn’t a surprise to you, but we’re just not performing based on the way that we all agreed that we could perform on the property. I’ve been talking to my investors and my other business partners and they’re pressuring me to make a move, and I don’t really want to, but at this point the numbers speak for themselves and I’ve gotta make the move because of all the pressure from these other people… So we need to transition from you to another group. Again, it’s them… I wish I could have more of a say here, but I’m sure you understand.”

Then what I did there – now I’m taking a step back outside of that role-play thing – is I blamed it on other people. I didn’t put me at the forefront of saying “You’re fired and I want you out”, and the reason why is because it doesn’t hurt the person’s ego as much, and it also doesn’t make me the point person they can come back to and make an argument for why they should stay.

The other thing that we’ll do is when you’re getting all those documents and the different things – the vendor list, the service contracts, the renovation list etc., your management point person should be doing that, not you. They should be getting that information – “they” meaning your new management company point person should be getting it from someone else on the old person’s team who’s not the president… Because what happens is feelings get hurt when the president of the company or your original contact is being told they’re fired, and then told to give all this information to the new kid in town.

So instead, have a regional manager contact another regional manager… And those regional managers – they’re just doing their job. It’s just business as usual; there are not the emotions involved as there would be if you’re working with the president of the company who just lost the account because their company is terrible on this property. So you’re not dealing with the emotions.

Those two tips help your transition be as smooth as possible. It will not be smooth, but I said “As smooth as possible.” One is blame other people for the change; don’t be the person saying “It was my decision, and you’re out, buddy.” Then the second is have one regional manager talk to another regional manager to get all the information we listed in steps one through five, because emotions will likely be out of the equation, feelings won’t be hurt, and it’ll just be “Hey, this is the business stuff we need to take care of”, and then they can do that in the background.

Theo Hicks: How long do you think those five things take to do after you’ve told them they’re fired, buddy, in the soft way?

Joe Fairless: It depends, but two weeks to four weeks

Theo Hicks: Yeah, that’s what I was thinking. Okay, so to summarize what we’ve talked about – the two main reasons why you’d ever fire a property management company is the lack of communication and the lack of execution…

Joe Fairless: Or fraud, or something like that.

Theo Hicks: Or if they’re criminals…

Joe Fairless: Criminal activity, yeah.

Theo Hicks: …and once you’ve come to that decision, Joe said waiting a quarter is probably a  good idea before making the decision, and making sure that the property management company is at fault, and not some other factor, like the markets, but more the property itself. Once you’ve made the decision, you need to find a new property management company first, and you can do that by reading that blog I mentioned, “The Ultimate Guide to Finding a Property Management Company.”

The five things that you need to make sure that you address to ensure a smooth transition is the staffing, getting the financials, getting the list of renovations, getting the list of vendors, and getting the list of contractors and the actual service contracts that they have.

And then the two additional things are to make sure that when you are actually talking to that property management company, don’t just tell them that they’re fired; do it in a soft way. And also, when you try to address these five things, make sure that you have a representative of the new property management company doing it and not you do it, and make sure that they’re talking to a regional manager and not the president of the company.

Joe Fairless: I’m gonna put one more thing in at the front-end, and that is make sure, before you have any conversation with any property management company, you read your contract with that property management company. There might be a clause in there that you overlooked that it’s 90 days notice, or something; there might be a clause that’s 30 days, or there might be a clause that says that regardless of if they’re fired, they represent you when you sell the deal, and there’s really nothing you can do about that. That should be marked out prior to the contract.

But you wanna be aware of what the contract says you can and can’t do, and have your attorney look at it before you start making the waves about firing them and telling them that they’re fired… Otherwise it would be very awkward at minimum, and at most, you could torpedo your investment… Because you could tell them “You’re fired”, they could say, “Um, actually I’m not. The contract gives us 90 days notice, and okay, if you’re giving me notice now, fine… But now  we’ve got three months.” How is that property gonna perform for the next three months…? [laughs] Yeah, so you wanna look at that first.

Theo Hicks: That’s good advice. So moving to the next topics – some updates and observations… I’ve got one update. I think it was maybe two podcasts ago where we talked about all the different resident appreciation even ideas, and I was thinking of it more abstractly of “Oh, you know, some apartment investor could do it”, but you said “Theo, you should do it.” So I’m gonna [00:24:15].10] It’s not gonna be anything special, it’s just gonna be like a barbecue… So we’re gonna cater Eli’s Barbecue – I’m sure you know what that is, Joe; I love Eli’s. And I’m gonna host it once… Because I think there’s still a couple of residents that we’re kind of finalizing a new lease for. So once that’s done, everything’s set in stone – we either got the new residents in, or we’ve got the new leases signed – we’re going to throw like an end of summer barbecue bash, and we’ll have free Eli’s Barbecue for everyone to enjoy.

My property management is gonna do that, so I won’t be coming back to Cincinnati to do that… But I’m looking forward to it; I think they’re really gonna enjoy it. It’s very helpful that all the properties are right next to each other, so we can just do it in one of the nicer parking lots in the back… And I’m thinking just maybe an hour, and — because after I reached out to him, I was doing some more research on it, and a very popular thing to add to your event is to have some sort of competition or a raffle, where something that’s more than food is given away… So I’m still brainstorming ways to incorporate — it might just be something as simple as a raffle, and someone gets a $50 gift card to Eli’s Barbecue, or something…

But that’s something I wanna incorporate at my property, and maybe every quarter or every six months host some sort of event there, just to — again, the whole idea is I want them to stay, because I’ve realized that when they stay, it’s better for me than when they leave… So the hosting of these events are great ways to foster a sense of community, so that people know each other and are less likely to leave… And they also like you, because they know that “Oh, in a couple of months we’re gonna have another barbecue. If I go somewhere else, I’m not gonna have a barbecue, or have a chance to get a gift card.”

Joe Fairless: I’m gonna suggest one change to your approach, and you can decide if you wanna do it or not, but it’s based on just psychology and how we think as human beings… And that is instead of making it an end-of-summer bash, make it a barbecue to show your appreciation and gratitude for them being residents of your property. Do not set expectations for doing it every couple months; instead, just have it happen when it happens. Because when we as human beings expect something to happen, then there’s a higher degree of expectation, and then we feel like it’s something that we should receive; and if you don’t do it, then it’s taken away from us… Whereas if you do it randomly, even though (wink-wink) randomly is every six months for you, but you just don’t say it’s every six months or every two months, then it will be a wonderful surprise that their landlord does for them, and it will be something that they’re not entitled to from their perspective, but rather something that is an added benefit and is something pretty cool that their landlord does.

Theo Hicks: I think I remember us talking about this before too, the expectation versus just random giving…

Joe Fairless: Yeah, I read a book and it was in there, plus it’s clearly human nature, just through life experiences… If you just randomly give someone something, it can be much less, and equal the same amount of pleasure for that person, than if you tell them “I’m gonna give you something” and then you give them it; they won’t be as pleased, even though that might be much more in value as the one that was surprising.

Theo Hicks: Yeah, I’m definitely gonna use that approach. I thought you were gonna say that I shouldn’t call it the end of summer bash, because that’s kind of like depressing, because now it’s the end of the summer and they’re going back to school… We are changing the name for sure, but that’s not the reason why.

Joe Fairless: Yeah.

Theo Hicks: Alright, I appreciate that advice. It’s good advice. So just a couple things to wrap up… Question of the week for the Best Ever Community – this is where we post a question and everyone in the BestEverCommunity.com on Facebook gets to respond. Last week we had a question about how long it took people from initially becoming aware of real estate to actually finding their first deal, and we got a lot of great stories… On a similar note, we’re asking a question this week, which is “What is the longest time you’ve taken to go from initially finding a deal to placing it under contract? Why did it take that long?” and then of course, if you just instantaneously put that deal under contract and it’s never happened to you before, what are some of the things that can be done to avoid that?

I’m looking forward to hearing people’s stories on that. I’m definitely looking forward to hearing some developers talking about how long it takes from finding a deal to putting it under contract, because I remember when I talked to Evan Holladay on the podcast – I think he said that the longest time it’s taken him to go from finding a deal to contract might have been three years for a development deal. So I’m looking forward to hearing your guys’ and girls’ story on that.

Joe Fairless: Developers earn every penny that they make. That is such a stressful business… I don’t want any part of that, ever… EVER.

Theo Hicks: There’s never gonna be a Fairless Tower in Cincinnati?

Joe Fairless: Unless it already exists and we buy it… We absolutely will never do ground-up development.

Theo Hicks: And then lastly, please subscribe to the podcast on iTunes and leave a review. It’s very helpful to get feedback on how the podcast is doing. If you leave a review, we’re gonna read it on the podcast as the review of the week. This week the review of the week was from Rob W. (and a bunch of numbers afterwards).

Joe Fairless: What are the numbers?

Theo Hicks: 00332288.

Joe Fairless: If anyone can crack that code for why those numbers exist other than Rob, then we’ll get you a gift. Just e-mail info@joefairless.com. You can’t know him though.

Theo Hicks: Do you know what they mean?

Joe Fairless: No, I have no clue.

Theo Hicks: Okay. [laughs] Rob said:

“The number of great guests that Joe gets on a daily basis is amazing. Combine that with his direct and great questions, and this is by far the best podcast on real estate. Joe asks the questions that I want to know when listening, which usually gets into the numbers around the deals his guests do. Absolutely amazing.”

And I will say, that is one thing that I do really like about your podcast – you always ask about a deal, and then they explain their deal, and then you always go into the actual numbers on it – how much did it cost, how much did they put into it, how much did they sell it for, how much does it rent for? That’s very helpful, because you can’t really get that if you’ve never done a deal before, and the only way to get that is to hear someone else talk about it. I’m not sure how many podcasts actually do that, so… I agree with Rob.

Joe Fairless: Well, thank you Theo, and thank you Rob… And the reason why I do that is because whenever I’m talking to someone and they tell me “I got a good deal”, that’s not helpful for me or anyone listening. What is helpful is if they dissect the deal or dissect certain aspects of whatever we’re talking about, and then we can start learning how they got to the point where they got that good deal, or they made a lot of money or lost money. That way, we can learn from those experiences. So ultimately it’s just about dissecting stuff to learn from it, so that everyone listening can learn from it, I can learn from it, and we all grow together.

Please write a review if you haven’t already, and that will be helpful to — well, it’ll just make us smile, and it’ll help with the podcast, too.

Thanks everyone for hanging out with us. I hope you got a lot of value from this episode, and we will talk to you tomorrow.

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