Purchasing a Property Management company

Andrew Belz · 2024-02-13T14:48:21-08:00

Hi all,I am residential real estate agent currently in the process of purchasing a property management company (mainly the contracts held). I am working both with the owner of the company and an attorney who is a family friend to make the transition over the next few months to adequately learn the business and processes. The owner is getting out of the business due to age, (76 yrs old) and in the last 7 years he has gone from managing 135 rentals down to 45 because he can't keep up. Our last step is running a forensic audit of the company (S - Corp) and then we will write up the contract to purchase. The company makes +-80k gross and +-50K net. I am looking to begin building the company back up and begin growing/hiring when it makes sense. I am also potentially looking to expand into managing mid-term and short-term rentals. Last I am looking to to move my real estate brokers license to an affiliated business or connect them in some way. Long term I would like the property management company to have +-200 units including our mid/short term and a team of 3-5 agents working alongside. I am trying to create a roadmap to get here and I am struggling. Any advice on finances, purchasing a company, who I can get to help/hire, how to structure this, or any advice in general would be greatly appreciated.. Thanks!!

Greg WeikBusiness Member

Property Manager · Denver, CO · Member since 2020 · 264 posts · 327 votes

2y

Hey @Andrew Belz, I started my company back in 2008 but in the intervening years we have sold one of our satellite offices and nearly purchased a few other PMCs. We pumped the brakes before buying any other PMCs at this point because most of them had a reason to sell, which we found out through due diligence (this guy is 76, so that's a pretty good reason).

To your specific questions -
"Any advice on finances, purchasing a company, who I can get to help/hire, how to structure this, or any advice in general would be greatly appreciated."

I would start by determining the ratio of owners to doors. If there are 45 doors, you need as close to 45 owners as possible to determine the valuation. More doors per owner equals a lower valuation.

Make sure the property management agreements are assignable.

Find out how many of the units are on month to month leases vs. long term leases.

The quality of doors/quality of tenants should largely drive the purchase price. SFRs with long-term tenants who pay on time are worth a LOT, but multi-family, subsidized housing units are worth less than $0 in my experience. The portfolio you are buying is everything.

Reconcile the leases with the actual security deposit escrow account to ensure everything is as it should be. Audits are often triggered with the sale of a PMC.

As kind of a general point: the last PMC branch I sold had about 150 doors and the buyer didn't know what they were doing. They reached out to me weekly for the first couple of years with issues based on their incompetence (I was happy to help, to a point, but it got old), and the purchasing company lost close to all the doors in the first 5 years due to poor service, poor systems, and not really understanding how to add value to the client.

Bottom line: most people are not cut out for PM (I'm including existing PMCs in this), and most people don't make much money doing it.

It's an amazing business and it's like printing money if it's done right, but you have to have systems and processes that are airtight all the way through the property life cycle.

Hope this helps point you in the right direction, feel free to DM me with any other questions!

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Ben Russell

Member since 2023 · 50 posts · 41 votes

2y

If you don't have any PM experience, the learning curve is going to be very steep steping into an existing business. Plus, it doesn't sound there will be many usable systems in place so it will be double the work and problems. There is a very good chance you loose many of the existing contracts that probably aren't happy to begin with. Greg had good advice about ensuring the trust and escrow books are accurate as well.

Although we know vey little about the business or the price your going to pay, it may be more successful (and cheaper) for you in the long run to start your own company from scratch?

Then you learn as you grow, you aren't being thrown into a sea of unknown problems, you can build your own brand (very important in PM BTW) and focus on acquiring the kind of owners, properties and tenants you want to work with.

With some basic advertising, you should be able to hit 45 doors in a year.

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Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

2y

Quote from @Andrew Belz:

First and foremost, you have to determine the value. As Greg pointed out, the strength of the contracts and the number of individual owners will be a big determination. The seller is tired, which means there's a very good chance the contracts aren't that great, the properties are not well managed, a percentage of the tenants may be problematic, etc.

The income per door, per month is probably low considering your location and average rents. The good news is that you have a lot of room for growth once you figure things out.

I would consider joining NARPM and networking with other managers in your area. I'm sure they have regular meetings you could attend to start educating yourself on the basics.

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Michael SmytheBusiness Member

Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes

2y

@Andrew Belz agree with everything others have written so far!

Will add the following as we bought a competitor 3 years ago, 150 doors:

1) Check the PM contracts CLOSELY for income opportunities. Previous PMC owners didn't charge for anything! So, even though we got all the owners to sign our contract, they weren't happy with our fees any many terminated.

2) Understand that the PMC contracts are hard to enforce if an owner wants to terminate you. Usually not worth the legal costs. What you can do, is put a clause in your PMC allowing you to put a lien against properties as some protection from owners leaving you with outstanding balances. Of course, it will only matter when they try to refinance or sell.

3) Understand the owner's EXPECTATIONS! The mom & pop shop we bought gave out their cell phones and were available 24/7/365. Our company has reasonable limits on all that. You may need to reset owner expectations.

4) You should NOT pay the purchase price upfront. There should be a minimum 12 months for the 2nd/final payment with clawback parameters.

5) Seller Noncompete: make sure it includes that the seller cannot conduct ANY real estate related business with the owners you are buying for X years. Should also tie any violation penalties into the final payment.

Hope you know you typically need at least 100 doors to make a living at this business - and that's with only having a part-time assistant.

200 units with 3-5 agents won't generate much profit for you. Each agent should have 75-125 doors.

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Andrew Belz

OP

Real Estate Agent · Olympia, WA · Member since 2023 · 20 posts · 5 votes

2y

Quote from @Greg Weik: