How to fairly compensate leasing agent

Question

Neal Collins · Answer

@Joel Owens

Great feedback. I agree the property management business model isn't a great one. It is time intensive and the margins are slim. At the end of the day though my main objective is to get in front of property owners and establish rapport with them. If I can't buy someone's property, I want to be able to manage it or sell it. Right now we are very exclusive with our clients but are starting to grow and now have a new 12 plex that we are pre-leasing. As long as I'm not throwing money away to subsidize a business I think property management is a great way to create an avenue to have property owners come to you.

Joel Owens · Answer

Hi Neal,

Yes some companies do that in commercial as well. They hope to do PM as a loss leader to get deals down the road.

That isn't my business model and never will be but I understand those who do it. I had a REIT the other day that owns a big shopping center here and other buildings across the street.

They contacted me wanting to lease up a small retail center. I looked at the center as it is 2 minutes from my house. It has gone through a bunch of management companies and the REIT isn't local to the property. I explained this strip center was down in a hole and you couldn't even see it from the road. It was also buried  behind buildings and forest was behind it so couldn't see it from the cross road either.

Just very poor design. The REIT was getting 28 sq ft in their center across the street but Publix anchored with amazing sightlines. This property couldn't stay more than 50% full for retail at 15 sq ft.

I told them I couldn't help them and office might be better for it given the poor locations and other negative factors.

The REIT manager agreed with me but said they are bound to rent at a certain per sq ft due to shareholder agreements and operating guidelines.

I asked if they would sell to me for less and he wished he could but all under one loan and they didn't want to bifurcate to sell off.

They asked me if I wanted to try and lease it up and I politely declined. That type of property you are just spinning wheels and wasting time. The commission to lease up might be 22,000 all in but for time involved I could close many transactions and make 20 times over that amount.

Transacting is just a higher dollar per hour activity and I enjoy it more.

Joel Owens · Answer

Property management on the residential side is very tough to make any substantial money with.

I know friends who have hundreds of properties they manage with employees and they eek out 60k a year after costs.

Hopefully you can build a better mouse trap but I have seen many on this forum over the years try to same thing.

The costs are simply the costs. The differentiator needs to be SERVICE and not the COST. Cost there will always be someone trying to be cheaper but service a lot of businesses suck at it so room to charge premium rates when you perform.

A lot of PM companies would rather go down in price then require more of themselves. In the beginning you might be cheaper but will have growing pains as you expand and will not be able to scale and maintain that little profit margin model.

Personally I think many buyers overpay for investment properties and then blame the PM when they did not properly account for that expense going in. The investor has a broken expectation of what they should get for what they pay as a fee. This is why people tend to hear horror stories of PM's they used. It eventually comes out they negotiated a deal for reduced fees blah, blah, blah.

Some places do not need PM as much but they tend to be in affluent residential areas with very little cash flow but stronger tenants.

As a PM company you will have to GRADE the type of area and tenant your client wants you to manage. Example the first property they give you in in a B area with B tenants and you take it as an example for 8%. Then they call with another property they own in a rougher area and want the 8% again. The rougher areas the fees need to be higher. Your PM will likely have much more time evicting, damage to the unit, travel  to collect rents multiple times, additional bookkeeping costs, etc.

I have seen PM companies in rougher areas charge 12% average before. Decent area 10%. Great area 8%. Number of units matters as well.

I focus on the commercial transactional side and my own investments by choice. I analyzed PM business over 10 years ago and for time and return it's not even close to being worth my time for ROI and headache. It's not something I remotely enjoy either. I love the art of the deal transacting.

Neal Collins · Answer

@Curt Davis We do need an office person as well. We have a lady now that is a great sales person and wants to come onboard. My goal is to keep our property management fee structure easy to understand without breaking the bank for property owners. We've been charging $375 per unit for a one-time sign up fee that covers advertising, account setup and leasing.

Let's say a broker refers me to a client that has a duplex that wants property management and I pay $100 for the referral. I'll assume we have another $75 in advertising fees, and then $350-450 per lease to our leasing agent. We're up to $975 for the two units in costs, offset by only $750 in revenue, leaving us in the hole $225 from the get go. Would you eat this knowing that breakeven will be down the road in a month or two, or would you rethink your fee structure?

Curt Davis · Answer

Most leasing agents just make a flat amount per lease up.  Sounds like you need an office person as well.  Leasing agents usually make $350-$450 per successful lease.