Why So Many Property Managers Go Out of Business

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Part of our strategy for growth in the past 10 years was to acquire other management companies. With lots of managers going out of business in the Atlanta market we have learned a lot about how not to manage rentals from these acquisitions. The things we have learned, and the things we have seen, give us a unique perspective as to why property managers go out of business. Our experience should make the prospective landlord smarter as they investigate managers to lease and/or manage their property.

Here are our findings after buying out 12 other property management companies:

First, the most common error of these 12 companies was that they got into the business by accident and never intended to develop a property management business. Most realtors list and sell for a living and when they manage they often do it as a sideline to their primary business and don’t do it very well. In a slow sales market, lots of them hear their clients ask, “if is doesn’t sell can you rent it?” Most realtors don’t know how to say no, so off they go starting a new and very different business. Most agents think “if I can sell a house I certainly can lease one, what is the big deal?” not realizing they are getting into something they have never trained for and don’t know much about.

Most brokerage firms in the Atlanta market know they don’t do management well and refuse to have a rental department. They have learned that it is a wormy business and wisely choose to stay out of it. Many try it for a year or two and then sell out to folks like us who do it for a living. We manage for many brokers in Atlanta who have figured out that property management is very different than listing and selling. They have also learned that sales people don’t make good managers and property management shouldn’t be done by their sales agents.

I got into the business making the same mistake. I sold several hundred houses to investors and caved in when I heard them say “I’ll buy it if you’ll manage it.” It took me several years to figure out what I was doing and my learning curves cost me, and my clients, way too much. Nine out of the 12 companies got out of management because they never really intended to get into it. They just fell into it and discovered that it was harder than it looked.

Secondly, these companies patch-worked their operational systems together. They used Quicken to manage the owner’s money; their current escrow accounts to manage the rent; their sales agents to do the leasing (a very bad idea); their sales manager to oversee their rental department and their local MLS system to do their advertising. They just didn’t understand that the tools they developed to support their brokerage operation were not designed to manage rentals. Professional property managers adopt specific tools that were designed for the rental business and don’t try to adapt the existing systems for the job. Ten out of the 12 companies we acquired were plagued with this error.

Thirdly, they build the wrong model. New managers take on whatever comes their way. They manage the gated community, the condo, the government subsidized housing, the multi tenant home, the high-rise town home, the ragged duplex community, the $600 a month triplex and the $4,000 a month mansion, not realizing that each of these is managed very differently. We down-sized 10 years ago from 750 houses to 350 because we developed a bad model. Now we’re over 1,000 with the right model. If the property manager you’re interviewing can’t articulate their management model, you should keep looking. They may become the next statistic of the why managers go out of business.
Nine out of the 12 we acquired struggled with this aspect of management.

Fourthly, they give away their services. Or, they discounted their fees to compete. The start-up manager naturally finds it difficult to compete with the seasoned professional so they are forced to compete by lowering their fees. Beware of the discount fee manager. To properly advertise, staff, answer phones, keep the books, attend court, oversee maintenance, and operate a management business it takes lots of money and smaller operators will find it hard to function on a reduced budget. There are many services the client needs from their manager and lowering fees will choke off their ability to get the job done and stay in business. Property management is a nickel-dime business and every nickel and dime counts. Discounting fees is a short term formula that sinks many new managers.

Eleven of the 12 companies we acquired offered discount fees that greatly added to their inability to stay in business.

Lastly, they failed to adhere to strict property management protocols.
Property managers wear many hats and when they can’t afford good staff to track important management details things start falling through the cracks. The companies we acquired shared this common malady — they let important things go. Things like letting leases go month-to-month instead of renewing them for another year; taking partial rent and losing the ability to evict over unpaid balances; failing to do a proper move-in inspection; approving weak applicants; enforcing a no pet policy, and doing regular property visits. These little things mount up and undermine the productivity of the property. There are a thousand moving parts to the property management business and missing them regularly drives good people out of the business. Twelve out of 12 were inundated with this problem and it was one of the primary things that drove them out of the business.

Conclusion: Property managers have a high mortality rate. I can name 18 in the Atlanta market that have folded, or been bought out in the last 10 years. It’s a nickel-dime business with high labor costs, high liability, and lots of stress. Find a manager who has been in it for a while and be sure they do property management as a business, not as a sideline to something else. Ask lots of questions and choose carefully.

Final Note: there is a large trade organization that supports the property management business where you can find managers that are in the business by choice and not by accident. Go to http://www.NARPM.org for more information.