Need some business advice, property management company purchase

[John Calcaterra]

Thank you in advance for your advice. I am not new to rental property ownership or running a business. So I have ample experience to take on this new adventure. The question becomes what is this business worth? Property management company with 165 current lease contracts under management. Avg income hovers around $100 per unit managed per month. Expenses are pretty minimal, and since I already run a real estate brokerage, I feel like I have the back end support in place. I have purchased businesses before and looked at industry specific multipliers. Anyone out there with experience in the property management arena that can guide me with evaluation?

[Nathan Gesner]

There are a lot of factors to consider. I assume you mean the management fee income is $100 per door for a total of $10,000 a month. 

1. What quality of homes are they? If they are B Class properties then it's enticing. If they are D Class properties then you may want to walk away.

2. How strong are the management agreements? Were they written by a professional with strong systems in place or are they 2-page documents written by an amateur? Can the owners walk away right after you purchase the contract or will they have to pay a penalty so you can recoup your purchase price?

3. How strong are the leases? Are half the tenants on verbal agreements? Are the written agreements strong or are they something someone just found on the internet? 

4. What percentage of tenants are paying on time? How many evictions or collections in the past year? How many work orders were there and how does that compare to your current rentals?

5. Are these quality owners that understand the importance of maintaining their properties or are they cheap-skates that won't let you plunge a toilet or replace broken glass?

There are a ton of questions to ask but it essentially comes down to this: would you be buying a strong business or a mess? Not all businesses are equal so you have to investigate - at least a little - before you can determine a value and make an offer.

You also have to consider anything else that goes with the purchase. Is there any real property like furniture, key storage, software, files and cabinets, computers, etc. Are you buying a web site, a name, signage, or anything else?

With all things being equal, I would start with an offer of one year's gross and work my way down based on condition of properties, tenants, and management contracts. I would also consider his motivation for selling. He may be so tired of it that he's happy to just walk away. Or maybe he's proud of what he built and wants top dollar.

You'll need a staff of 3-4 people to properly run 165 units so keep that in mind when you calculate the income vs. expenses.