Why your current property management system needs to change
02/23/2015 | Author: Jeremy J. Conaway, guest author
A key question for the real estate industry emerged in 2012: Would millenials, the largest demographic in American history, take up homeownership as a part of their life’s experience? Or, would they remain in their early lifestyle rental environment?
It's now apparent that millennials will join the ranks of homeowners but that, due to a number of issues, such as debt and mortgage complications, their migration will take a bit longer than that experienced by their cultural predecessor, Baby Boomers. A key message here is that rental lifestyles will have to expand to meet the needs of this very sophisticated and demanding demographic. Today’s lifestyle-driven real estate consumer is going to rent for a while, but he or she is not willing to view the rental experience as a punishment that one must endure while waiting to ascend to homeownership.
Property management impacts
The takeway of this message from the broker perspective is three-fold. First, existing property management operations will not be sufficient to meet this enhanced status. Second, major players are moving to bring their property management operations up to new standards. And third, the property management function will move far beyond investor accommodation through core services, and will become a primary portal and/or gateway through which brokerages will create positive relationships. These relationships will ultimately transition into classic real estate transactions enriched by substantial lifestyle offerings.
Property management may be the ultimate "customer for life" generator.
A wake-up call
But, you say, you've been in the property management field for decades and are doing just fine. These comments are not to suggest that traditional brokerage-based property management efforts haven’t performed an important function; they have. It is to suggest that, like every other element of the residential real estate, property management is about to experience a significant transition in operations, objectives, and purpose.
Consider the following regarding the traditional real estate brokerage-based property management program:
- The primary function of traditional property management was not to drive profits but to drive commission revenues from clients who said, “I will buy if you agree to manage.”
- The procedures and practices that evolved through this course were not intended to optimize relationships but to facilitate the above accommodation and maintain a connection that might generate a commission when the investor was ready to move on.
- This arrangement is what created the traditional real estate brokerage-based property management program.
- Many of the primary competencies and skill sets of a great property manager are antithetical to the common skill sets of a great agent. This was not a match made in heaven.
- Property management was not looked upon as a distinguished function but rather a necessary task.
- While property management revenue might have occasionally functioned as a revenue stabilizer, it was never seen as a primary revenue source. Nor did it ever reach the level of a qualified core service, even though if operated properly it has the potential to outperform those classic offerings
- Even in its traditional format, property management has always been and continues to be a highly challenging business activity that has a high liability profile. This fact is often not addressed.
Moving forward, as the contemporary property management system begins to make an impact, brokerages will discover the following:
- Common sense will dictate that operating a traditional property management operation will no longer make any sense. It is simply not relevant to today’s industry environment. It is not making an appropriate contribution to revenues; it is not sustaining relationships; and it isn't in anyone’s benefit.
- Even the financial equation of the traditional property management business model continues to blur. Costs have increased. Investor demands for operational metrics have increased. Without increasing revenues to meet these increased expenses, property management will quickly become a loss proposition. It is fast becoming a business not worth owning.
- The current property management environment is poised for digital disruption, as major players announce plans to take a position in the property management field backed by substantial financial resources and motivated by a vastly expanded vision of the competitive advantages of a combat tactical property management.
- The message to brokers is either come up to speed with your property management, or you will be a victim of this unique form of digital disruption.
How does property management have to transition?
If you find the above arguments compelling, here are the functions that must be incorporated into a contemporary property management program:
- The program must be focused on profitability and revenue per unit. The property manager must focus on maximizing profitability and investor relationships while being aware of the lifestyle movements of their tenants.
- It must incorporate a wide range of service-related revenue generators. To do this, it must identify each service task and equip each with a companion revenue factor.
- The program must have a highly effective process that will rent the property quickly. Vacant properties all too frequently reflect property management deficiencies rather than market shortfalls.
- Fast and effective tenant qualification is critical. The investor is looking for a quality tenant who pays the rent on time, lives in accordance with the lease, and cares for the property. Credit, criminal background, and past rental checks are part of the new property management standard.
- Regular and detailed property inspections and condition reports are an integral part of the new property management.
- The program must work in continuous collaboration with a real-time, managed network. Property management is now about what you are learning today, not what you learned five years ago. Best practices are no longer aspirational but expected. Critical knowledge and data have become essential factors of success. The cost, competitive, mass buying, and comparative benefits of such a network are now essential to property management effectiveness and profitability. Surprise is no longer acceptable to the real estate investor. Investment has become a much more specific data- and metric-driven activity. Investor communications must be complete, comprehensive and compelling. Only a tactical network can provide this information.
- Property management must prioritize the creation and nurture of tenant and investor relationships that will evolve into real estate service delivery opportunities moving forward.
- Each of the functionalities outlined above must be self-supporting financially, and each must contribute to the overall profitability of the program.
- The property management function and network must incorporate finely detailed operational data and metrics that address each of the hundreds of tasks that constitute contemporary property management. Which paint to buy, what response protocol to maintain, and what actions to take. Each of these tasks must be backed up by management, cost accounting, and communications resources. Highly profitable property management is a game of minute attention to detail; the pennies and the minutes must be counted!
- Today’s investors are willing to make enlightened decisions regarding the level of property management service and support they are willing to pay for if it is properly presented. Such service must include real-time information regarding property condition and rental metrics that can be compared with like properties in like environments.
A new standard of performance, one that is significantly more detailed and sophisticated than its predecessor, has emerged and is heading into the property management space. Within the next 18 months, this new standard will become an investor expectation.
Don Lawby, president of Real Property Management, headquartered in Salt Lake City, summed it up when he said, “The property management industry is now facing real and significant digital disruption. Through innovation and advanced technologies, the industry can make digital disruption an opportunity rather than a threat. All of the pieces are in place. This is the opportunity of a lifetime. We can do this.”
This article originally appears in the February 2015 issue of the REAL Trends Newsletter and is reprinted with permission of REAL Trends Inc., © 2015.
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