What are the flaws in my Co-op property management company idea?

Question

I dislike PM companies or at least the ones in my area.  Due to that I have been mulling over the idea of forming a Property Management co-op.  Essentially, I would find 5-10 other investors who also don't like our PM options.  We would use our pool of properties to keep a group of contractors busy full time or near full time.  We would have our own PM company without the 7-10% fee, the advertising fee, the first month rent fee.  I recognize there will be costs but drastically less.

I currently manage my properties using a friend of the family that stays home with her kids but is interested in a little side work.  She handles, texts, emails, phone calls, and showing properties.  It costs me $1000 a year for her services.

Outside of that she passes all labor onto our maintenance guy that handles the actual work.

My challenge is if the friend of the family gets tired of it or doesn't need the money I will struggle to find a replacement and also, since I am sharing my maintenance guy with 30 other property owners there can be priority constraints.

With 5-6 owners and a pool of 100 properties, to begin with, my hope is we can create a heavily process driven company that is able to keep several contractors busy full time or almost full time.

We would focus on tenant communication, maintenance, filling vacant units.  We would not provide bookkeeping, reporting, legal work (although the actual details would be up to the co-op owners to decide).

So far I have 4 other owners who have expressed interest in the idea (we'll see how interested they really are when we actually try to form the LLC).  the 5 of us have a total of about 90 units

Thoughts?

Tracy Streich · Answer

@Jacob Sampson

So that is a PM company.  You will have to hire someone to do all of the work. Will they be leasing and showing for everyone in the group?   Yes coordination of maintenance is just a phone call but who handles the tenant complaints if it is. It done quick enough or not done right?   Are you pay a full time contractor to do everyone’s one work?  Who is paying for that person’s insurance?  What about holding deposits?  Each owner on their own?  Is you person doing showings and screenings licensed and are they familiar with all the ins and outs of Fair Housing?  Are they insured for this?  If they make a Fair Housing mistake on one property are all these owners on the hook?   Either hire it out to a PM or do it yourself.  Anything in between has the potential to bite you in the butt.

Nathan Gesner · Answer

This sounds like an awful lot of complexity.

You're pretty lucky with the friend helping you out for $1,000 a year. Creating a process-driven company with 5-10 owners in the mix is a mess and will probably take far more work than it's worth.

A better option would be for you to create your own property management company and then offer your services to 5-10 investors. Right?

Marc Winter · Answer

@Jacob Sampson

You don't like PM companies so you want to become one?  IDK, it kinda sounds like the story about wrestling with a pig.  You'll both get muddy, but the pig will like it.

You'll be taking Kumbaya to a whole other level if you think 4 or 5 'like-minded' investors can all agree on something, not to mention all the details involved with managing property.

I understand you don't care for PM, many others agree with you.  Not all PM's can satisfy every client.  I would suggest you continue to do it yourself.  Please reconsider Pooling your properties in a co-op self management--you may end up drowning in that pool, IMHO.

Marc Winter · Answer

@Jacob Sampson, you experience is not unique, and that's an unfortunate reflection on the industry.

On the other hand, many good property managers are sometimes treated like sanitation workers; no one wants to do that work, no one says "thanks garbage man."  But  miss a 'pick up' everybody will start screaming.  ;-)

Hubert Kim · Answer

I am not certain what real estate laws require in Kansas, but many states require property managers to be licensed. This requirement itself may make it very difficult to form a company with many different owners. And although it may be possible to find a licensed broker or property manager to be a part of this venture, what happens if that person quits or does not work out?

And as @Tracy Streich has stated, forming a real estate company can have significant unexpected costs that can include insurance for the business, payroll taxes if there are employees, attorneys fees for forming a partnership agreement, accounting fees, and so on.

Perhaps an alternative may be to pool your properties and shop for a good property management company who will take care of all of you. I realize this may not solve everyone's issues equally, though. Maybe someone else has input?

Peter Tverdov · Answer

@Hubert Kim pooling the properties together and shopping for a better PM sounds like a much better solution. Similar to corporations getting better healthcare rates than small business due to the larger number of employees.

Steve Rozenberg · Answer

@Jacob Sampson

I think at the end of the day you are creating a business. With a business you need to start with a Business plan next you need policies procedures structure and a clear vision of how you’re going to scale the company. Then you need to understand all the laws and regulations that come with real estate and managing properties as a third-party company

You’re going to have to set up relationships with vendors because as you grow your need to scale and leverage. For that you need to have a marketing plan, sales process etc

I know in theory what your thinking but the reality is at some point this goes from a hobby to a business and if you are managing for others. Friends or not, you have a business.

Make sure you treat it that way or you could be tied up in lawsuits and litigation and lose sight of why you even got involved in real estate

Jacob Sampson · Answer

@Marc Winter - I actually don't mind PM's I just struggle with the fact that there incentives are not aligned with their clients.  If there were some structure in place where the PM was able to take some percentage of the prophet combined with some measure of how the overall asset was being maintained, I would be more interested.

Something like, the longer a tenant stays and the better the property is maintained the more the PM takes.

My experience is more of a heads the PM wins, tails I lose.  Maybe my experience is unique, but it doesn't seem that way.

Andrew Cornstubble · Answer

@Marc Winter That's pretty funny!  I've never heard it before.

Jacob Sampson · Answer

This is all great feedback.  There is definitely more complexity than I had thought through.

What are the flaws in my Co-op property management company idea?

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