My Owner Building Portfolio, Asks Me for a 3% Discount off PM fee

28 Replies

We have worked hard to build our relationships over time, with owners and investors, and we are even expanding. We have done this by evaluating workload, and setting fair Property Management rates with our owners, on a case by case basis. We treat them all as equally as possible, but realize some are very high maintenance, and others, sadly, have taken advantage of us, asking low rates to begin with, as they build, and then we make them a lot of money, only to ask us to lower our rates, so they can earn more by saving on our cost, since we are to them, essentially, overhead. I have been working with a certain client for 5 years now. We started out leasing for them only, and he and his family self-managed. Then, tenant issues started arising where they were wanting maintenance done, it was promised and not completed, etc.. so we showed him the benefit of professional management. We set a very fair rate, and have managed 3 of his properties. Now, he is buying 3 more properties, and I already have 2 of them pre-leased at an excellent rental rate with qualified, impeccable tenants. Now, he has asked us to lower our rates by 3% so that he can save money, because it is tight for him, as he is buying up. He is a very well respected, very kind and thoughtful individual, so I was surprised at this. I felt that he did not value our services and asked if we had not provided them well enough. He was very pleased with us, but was strictly looking at savings, and said he and his wife and grown son could do the maintenance themselves, and save that money. He has also asked us for all the security deposits to be sent to him to put into a trust - which takes our compliance into a worrying level, so we are going to have him sign a statement that he is responsible for them.  I understand his perspective, but as a PM business, will the stance of "some money is better than zero money" going to diminish all the extra and above things we do for him, and devalue our business? Or should we remain solid in staying at our current rate. We have not raised rates on any owners in the past 3 years, in order to keep them. Thank you in advance for your thoughts. 

Sounds like you've found yourself in a race to the bottom, @Kristen Williams . If this owner (or any other owner) doesn't see the value in quality PM services, you're not doing yourself any favors trying to undercut the numbers. I would think about this from a few different angles, all of which assume you are currently competitive with other PMs in the area.

  1. What does it actually cost you to manage these properties? If you only spend an hour or two a month on 6 units, maybe a discounted rate still works. He's basically anchored himself to a price of "$0" and you'll never be able to satisfy that. You obviously can't manage these at a loss, but if they're easy and you think he's going to continue to grow, it may be worth staying on.
  2. Reducing your rate as an owner has you manage more units makes complete sense. I don't know about 3 percentage points to go from 3 to 6, though. For 1 or 2 SFRs, I'd expect 12%. For a few MFRs or small complex 10%. For larger complexes or larger portfolios THAT ARE NOT EXCESSIVELY BURDENSOME TO MANAGE, I could easily see 8% or even lower. Define for your business what those ranges are and then explain them to your owners. If they push back, stand your ground. If you provide a great service you deserve to be paid fairly. Don't undervalue yourself.
  3. Lastly, perhaps this is an opportunity to rethink how you charge your clients. I don't love the way most PMs charge (i.e. monthly percentage, plus placement fees). It does not align the PM's interests to the owner's. If rent is $1k and the PM gets 10%, plus 1-month fee for placing a new tenant, the PM is actually incentivized to have higher turnover, the exact opposite what the owner wants. @David Wolber and I spitballed a pricing plan a while back to address just this. The idea was that the PM gets a relatively low placement fee (say 25%), but progressively larger fees when a tenant renews a lease at new market rate (an important part). This was offset by a slightly higher monthly management fee. The idea is that the PM is incentivized to 1) get great tenants who are more likely to stay a long time and 2) provide great service to reduce vacancies. Hopefully, Dave can speak more the specifics and how successful it has been so far. IIRC, the break even point was ~30 months. If a tenant stayed less than that the owner ended up paying less in total fees than with a traditional contract. More than 30 months and the PM came out ahead. Again, aligning PM and owner to minimize turnover.

Excellent thought into your reply and greatly appreciated. We actually have 4 revenue streams; management, leasing, project management, and market analysis.  At present, we charge a flat % per portfolio and do not upcharge for maintenance handling at all, except for certain trip fees, which are very small. After onboarding a client, we use several checklists at every step, to get to know the owner, the property itself, etc. We begin with a maintenance checklist to inspect the property in all areas, and we take inventory and serials/models on all major assets as well, so we can be proactive. We also lend them our VIP discounts for HVAC, plumbing, etc.. as well as supply stores. Most PM's charge a 5% fee for arranging this, we do not. Our Project Management fee is a % of the cost of a large project, such as a patio, pool, deck or garage, etc. We use accepted supply chain practices and get RFQ's and vet each one, after securing a budget cap with our owners. We see the project all the way through and keep in communication with the owner to deal with snags, pricing issues or hidden problems.

For Leasing, we do not get paid until we get the lease. We use strong credit and criminal background screening, as well as income verifications, identity and work verification, as well as home care and character references. We use a checklist again, to follow all Landlord-Tenant Laws, federal housing, and more, so it's consistent and fair for each applicant. We get 1/2 of one month's rent. We handle all videography, photography, social media, and advertising over 80 different global platforms, as well as HR coordinators, military housing, and more. 

Market analysis is hourly, or most always waived. This is the biggie for our owners because we set the rate almost all the time. We use a global instead of a local scale because we economize the rental based on what the global market is willing to pay, versus what the local pool of renters is. We are not greedy, but every time we get a maximum rental rate, and we use checklists beforehand to make sure the tenant is getting what they are paying for, which is a deep-cleaned, landscaped, updated and well-maintained home. We make sure to protect the owner's property while making them more money, which naturally flows to us by our monthly rate. 

Today I contacted the owner to request a formal sitdown presentation as if we were brand new PM's being interviewed. Oftentimes we get owners by word of mouth from others, and they love us until they decide to grow their portfolios, and devalue PM for savings. We have a really good relationship, and I believe if he truly knew what we did behind the scenes, and what legal barrier we help provide to him, he'd be able to find other avenues of savings more significant than our fees. I am researching as we speak how he can capitalize on insurance, for example, by having these multiple, high dollar executive buys bundled.  The other conversation I may try, since he comes to me every time he buys a new house, and asks advice, one area is that he is loyal to his realtor - and although a great negotiator, is buying off the market directly, as opposed to other, less expensive ways to purchase great properties. 

I do hate to lose him, but I have had to part ways just this year with folks who have, in my opinion, ran us ragged for every little thing that has added up to lost time and value. I've had to learn how to walk away and trust God to supply the best relationships. Hoping this one can be talked through. Thank you again! Pretty neat formula you came up with. In our case, we never charge for renewals, and because we choose hard early, we tend to get long term rentals, with gradual, acceptable increases where needed. 


1) If he's willing to take repairs off your plate and shift them to the son, is it worth the discount? If so, be sure they agree to Service Level Agreements for the new repairman. Family can be really awesome and devoted, or entitled and awful. X hours to fix a major inconvenience, X2 hours to fix a minor thing, Y days to turn over a vacancy. Available 24 hours, or just before happy hour? 

2) If he's strapped for cash, does he have something else to give? Examples: Vehicle you needed anyhow. Access to a vacation home that your staff can use. Does he have a skill like lawyer or barber that you can barter for?

3) In the end, realize you are awesome. Remind him. If he's going to be a resentful whiner then fire him, and find someone worthy of you.

@Kristen Williams I tend to be the blunt ******* in the forums, but my thought is this. If an investor is purchasing real estate that is "too tight" to work with their property manager, that is their problem...not yours.

I would say "no", because you are running a business, not a charity. That being said, if you can afford to lower it by 1% that would be a nice gesture, and yet still a "no" to the 3% request. Either way, don't compromise more than you want to. Firing a client can be quite freeing.

@Kristen Williams

12% going to 9% and 7% going to 4% are very different situations. If you take all of your fixed and variable costs from last year and divide it by all the gross rents you collected, you'll have your costs expressed in the same format to compare to the discount he is asking from you. From there it's a personal decision that only you can make.

As to the some money better than zero money questions, that's a function of your current capacity and how much profit you are seeing from managing these properties. If you are running at max capacity in regards to workload and the discount will result in very little profit, I would say that it is not worth your time. However if you or employees aren't fully utilized then it would make sense to keep a portfolio with smaller profit margins until you grew to a point you were operating at full capacity and then you could go through and fire owners that had the smallest margins and free yourself to take on more profitable owners.

One thing you said really struck me in that your client is well respected and intelligent. So it sounds like he over extended himself and wants you to help alleviate him of that issue since he apparently only thinks of you as an expense. I had to dump 2 clients over the past year for that same scenario. These two sadly took up 80% of my time and was only 5% of my income. They were having us basically act as GC on MAJOR projects (like replumbing a 4 story building that has lead and asbestos which was a $1.2M project cost) and when I started putting my foot down and tell them I am stuck because they didnt want to pay for certain necessities like plans and permits and when I put my fee on their capital budget now all of a sudden i was too expensive. Some people just use and abuse management intentionally and get away with it until we decide to value ourselves. I had to start thinking of it like other professions, does my attorney discount his fee because cash is tight? No. What about the tax advisor? Nope. Not even the general contractor will reduce his fee! In fact a big part of his fee is to coordinate all of the subs - which is what we do on a daily basis! So when you think if it in the sense that they are paying for that time either through Mgmt or a GC the conversation is nonsensical. If you go down the line on each professional service company we come in contact with chances of you getting a reduction is slim. Hold yourself up to that professional tier and demand your worth. If you are like me I hate having any reduction in my clients but my life is sooo much better without them in my portfolio. 

are you licensed ?  if so there are very clear cut rules of what you do with Security deposits..  

I wouldn't take it personally, he is just trying to negotiate. If the business is worth keeping at a reduced level then negotiate down, if it isn't then decline and they may come back to you. If your service is good, and prices fair then you should stick to your pricing as it sometimes snowballs once you start discounting. 

Good Luck! Aaron

6 properties? I thought you were going to say 20. 3% is a hefty decrease. Don't let the door hit ya on the way out, Mr. Investor...

@Kristen Williams the biggest tell for what really is going on is that he wants to hold the security deposits now. Do not do this! What he really wants to do is use those security deposits to fund his investments or cover his losses.

You might have to kiss this client goodbye because they're too cheap and they think they're smarter than you.

@Kristen Williams , I have to emphasize what @Jay Hinrichs and @Drew Sygit commented on.  Why does your client all of sudden want to hold the security deposits.  That sounds extremely shady.  You say he is honest and well respected.  It might be worth asking why he wants to do that.  It sounds like he is more over-extended than he led you to believe.  

Second, a 3% discount for an additional two properties is steep.  I would set "policy" and stick to that.  If you discount every owner that has ten or more properties, than that is your policy.  If you discount every owner when they hit six properties, than that is your policy.  I recommend setting a policy and sticking with it, not handling every owner or situation individually.

Please let us know what you decide.  The follow-on decision is important learning for all of us, both investors and PMs.

THanks

Sort out the good customers from the bad.  The guy you describe sounds like a PITA.  He'll leave and bounce around to some more PMs.

Just count it as a lesson learned - Like tenants, you need to keep the good ones, they're a lot cheaper (= more profit) in the long run.

Unfortunately, when owners have little involvement besides the size of their check, the first time things go south, they'll blame you - Justified or not.

This is why (and I keep telling this to PMs) you need to have clients that are involved and understand what's going on, even if it means a phone call from/to them.

I was just getting ready to report back to each of you who took time to share experience and guidance regarding the client asking me to lower my fees by 3% and tell you how we were able to turn it around into success! 

Until today; anyone building a PM business should never do it lightly. You've got to have a strong finance background, excellent communication skills, an eagle eye, great marketing ability, technology and be able to listen. I've been asked before to lower, and just recently, won a multiple 4 plex community, but lowering just .5% to build trust. 

However, when you invest years into a client, develop a relationship, and go over and way beyond expectations, you often enjoy the benefits indirectly. Since my post, my client was buying full-priced higher-end homes, all on one street, and I was able to pre-lease using live videos and virtual tours, set the market rate, higher than the surrounding homes, help him get it made ready, any new additions, shared my resources in terms of contractors, get him everything he asked; copies of leases, deposits, etc. He personally called me at the end of this and said I was a great help to him, and we had done an excellent job getting everything ready. He said he appreciated us and how well we handled everything. In hindsight, it's like being cheated on. Truly. Giving you praise and then I learn from one of my valued contractors, that he was going to purchase one more house on the block, that he asked our advice on, and market-rate, just like the others. However, he didn't call me this time to pre-market. To video, tour or assess. I tried calling or texting and it got really cool. I finally was direct and asked him if we were going to manage this property. No answer, only other requests. Such as new larger copies of our monthly P & L's. Today I decide to check the address for the final sale. Not only did he purchase it a few weeks ago, but he has also hired someone else to lease it. We have one of the best reputations for leasing, not just PM. A million thoughts entered my head. Hindsight says he either wants to self-manage now, or he's trying the one house out with someone willing to take less since I wouldn't. Finding it online is like finding out your grandma died on Facebook!

This is where I shake my head. I have checked every area to evaluate our services. Do we communicate well? Did we disrespect him in any way? The list goes on, but I have done all but call and ask him what is happening. If he fires us, we have lost 5 years of making him a lot of money, but income for ourselves, and his affiliation. He is very well known in our community and extremely influential in many circuits. It's easy to say, sure, we'll get another one. But what is so very hard to swallow, is the amount of effort, belief, time, and talent put into the entire process, from pre-screening tenants, getting higher rates, exceptional make-readies, and cleaning, and catering to the personalities that want certain things once moved-in, all kept quiet and discreet in order to show a bit of class. All the hard work, to be turned over to someone who will simply collect a check and the benefits without any effort. Am I bitter? No, I don't know yet if we are done, but I suspect at least by year-end, he will go another route. I had offered to come down 1%, but this is the wrong direction for our business. Am I being a big baby? :)

@Kristen Williams when I read this all I can think of is "The tail that wagged the dog". 

Many years ago when I was pressed into Executive Management of a burgeoning company charged with growth and sales I found myself getting spun-out by trying to win and keep every client at a significant cost to business as a whole, I had this "ah-ha" moment and I got laser focused on knowing and defining who we were as a company, service, team and just obsessivly being that and letting where the chips fall where they may. 2 years later at a big industry meeting I was introduced as COO of the #3 company in our major national market and got asked about what we do about those clients we loose which was very simple for me; "if your not loosing ____% of clients, your doing something wrong. It's math, you can never be your best self and be the choice of literally everyone." Before we adopted that philosophy being top 10 in our market was so impossibly absurd of an idea, all we did was change literally that 1 thing, militantly being "us", unapologetically, and we skyrocketed.

Every major success has done it via the "Apple" principle, by unapologetically being who and what they are as a company. 

You desperately need your own identity, to be confident in that and just be that best "thing" you can be. That client can't harm the company but your lack of identity and confidence sure will. 

James, that is a great, encouraging share. I appreciate hearing this. I worked as an exec in aviation for over 20 years when I realized that just like high school, things change and people move on and it's about the big picture. I do like your comment about the percentage of loss. I did have to entertain the idea of some losses actually being good for us, as the clients were very inexperienced and demanding and some very toxic. But I have always been a glass half full girl. I do have great confidence in my business model - we are the only one in our area with the matching concept and our numbers show it. We have 98% occupancy on all of our portfolios, only 1 eviction in 5 years, and long-term tenants and clients. I am very thankful. 

Perhaps I have been too open here, but one of the things I have worked the hardest to do, is break the mold and behaviors of this industry. You have to love doing it to stay in it. I made more money at Learjet, but that's temporary. Residual income and relationship value and staying true to self will have to win out. This is why I believe I will have to take what may be coming, because I'm staying true. 

     I am not a PM but I have run a business. When I started out as a HVAC contractor my thought was that I would set my rates lower than the competitors, and in this way I would score more work. So I set my rates lower than XYZ Heating and Air, and what I quickly discovered was that I was getting all of the customers that XYZ didn't want, because of no pay or slow pay or they were just jerks. To make matters worse the good customers read my reduction in rates as my company is not as good as XYZ so we charge less. So I end up working more for less, for less desirable customers, and thought less of by potential customers. 

     The answer to this problem was to raise my rates to stay right with my competition, while adding value by small gestures that customers appreciate, and always be the most timely and dependable in my market.

     I would never reduce my rates it is an affront to my reputation, but always add whatever I can in value. If a customer does not see the value I probably don't want their business anyway.

Hey Kristen, I'm reading through these thoughtful replies. There are some great insights here. One thing that comes to mind (and I **try** to set this boundary) is that I'm not for everyone. Consider the 80/20 rule - 80% of your income is from 20% of your clients. On the other side of this - 80% of your headache comes from 20% of your clients too. Imagine if you were able to take the energy you're using to keep this guy's business and focus it on the 20% of people in your portfolio who love your work! Easier said than done but your questions indicates that there are people who are HAPPY to pay for your service. If you're scrapping for percentage points on your paycheck from someone who will never appreciate your talent you're losing other opportunities (and sleep). 

Also, when this client gets burned out from doing all the work himself you can have the clients who love you buy the properties from him. HA!

@Kristen Williams

All of us in the property management business know where you're coming from because we are all trying to build.  After a while, we realize the value we bring and we can pick and choose who we want to work with.  If this owner doesn't appreciate the value you and your team bring to the table then you should fire them.  Let them take care of it, I'm confident they will be calling you back and thats the best feeling when an owner calls you back after telling you they can handle it themselves.  Good luck and keep us posted.

I know this is 2 months' old, but tell him you cutting your rate by 3% means a X% cut.  Ie if you charge 9%, a drop of 3% in your rate is a 34% cut.  I do know some PM who give a discount for multiple properties, but you'd be talking going from 9% to 8.5%.

@Kristen Williams

Just say NO and let him walk away.

Highly likely that he already has every intention of switching out to another PM, which would explain why he kept you out of the new purchase and why he wants to take control of the security deposits. He is already in the process of transitioning out to another PM. Or he might just be using it as a subtle tactic to pressure you into lowering rates by "showing that he can simply switch PM's if you don't give in to his demands". Either way, in such situations, if you compromise, who is going to be coming back soon, expecting more compromise and concessions? It will never end. You cannot control him or the outcome of this situation, only your own actions. Saying no puts you back in the driver's seat and you can negotiate further with him from there, from a position of strength.

An excellent book on this subject and negotiation in general would be Jim Camp's book - Start with NO

@Marty I.K. Mills Thank you for your excellent post just now. I do see it. I didn’t see it when working with him to assist in the purchases and extra efforts. I did feel it a little when he mentioned his financial stretch. He’s never been that plain. I actually worried he was ill, suddenly setting up the trust and wanting everything to flow that way. Is advised him of the laws regarding security deposits and their use, but to no avail. 

Last night he repeated a text asking for his Sep and Oct financials, which I had sent at their proper intervals. It was then I felt perhaps he was weakly finding a way out of our agreement. 

So it is time to recognize he clearly is in over his head and doesn’t see our value but the cost only. Typical.

I do enjoy the teamwork and partnership of growing portfolios or the thrill of learning from a seasoned long-term investor, so this thread has been a healthy feedback forum to see the forest for the trees! I’ll take a peek at the read as well! I have an amazing mentor, Brian Rawson from My Alma Mater who teaches an amazing course on negotiations and I’ve taken it and any new course I can to stay relevant. Have a fabulous day!