Mistakes Made Acquiring Property Management

Mistakes Made Acquiring Property Management

Phil Puccio

Chrysztyna Rowek is the owner of Lighthouse Cove Property Management in Washington State and an active member of NARPM. She has gone from cleaning houses to buying/acquiring property management companies, and she joined us on The Property Management Show to share her experiences and the lessons she has learned along the way.

Background: Buying Lighthouse Cove Property Management

Chrysztyna likes to tell clients that she’s supposed to teach their kids how to speak Spanish. That’s what she went to school for, and it was her planned career when she moved from Canada to Greece to the U.S. But, her Canadian degree wasn’t enough to get the job she wanted, and instead of spending more money in pursuit of a master’s degree as an international graduate student, she got married, had a child, and began cleaning houses for extra money.

Soon, a property management company hired her to clean their rental properties. Then, she started working in the office, and then she got her real estate license in 2007.

Then, she bought the company.

Chrysztyna admits she had no idea how to buy a company or how to run one. But, she dove right in. After considering a loan from the Small Business Administration, she borrowed the money from her father instead and bought Lighthouse Cove Property Management.

On July 17, 2007, after having a license for two months, she owned the company. It had 190 doors which were mostly single-family homes and multi-plexes.

When Sellers are Difficult

Perhaps the seller didn’t think Chrysztyna would actually buy. Perhaps she had second thoughts about selling. Whatever the issues, there were difficulties almost immediately. She wasn’t much help, even though Chrysztyna was very new to this. There was no advice on how to run the business or how to run this particular business. There was a lot of pushback, and two days after the non-compete agreement expired, the seller opened up a new property management company in the same market and went after many of Lighthouse Cove’s clients.

It was disappointing.

The Importance of Transition Plans

The plan was for the seller to stay on as managing broker at least until Chrysztyna earned her managing broker’s license. In Washington, a broker has to be licensed for two years before taking the managing broker exam. The seller was unresponsive and unavailable, so Chrysztyna had to find another managing broker and completely cut all ties with the seller.

In an ideal situation, the buyer will have access to the seller for at least 90 days. That’s a minimum – 120 days would be better. Put that paperwork in place when you buy or sell.

Then, build relationships with the clients right away. The clients you’re buying trust the person who is selling. So, the seller has to help ease the transition so that the clients trust you too. If the seller trusts the buyer, the clients will trust the buyer.

People are loyal, and it’s a shock when companies are sold. Make sure that as a buyer you have access to your seller for at least three months.

Building and Preserving a Team

When Chrysztyna bought Lighthouse Cove, there were only three employees; the owner, the accounting manager, and another staff member who did everything involved in property management. She kept the staff on and then eventually moved to a new office and hired some new people.

During this time, Chrysztyna also kept cleaning. But she learned she had to take better care of herself and be more protective of her time.

If you’re leading a company, you have to take care of yourself. If you’re not feeling 100 percent, how can you give top-notice service and provide high quality work to your clients?

Losing Properties and Acquiring another Company

When Lighthouse Cove’s seller opened up a new company, she took a chunk of Chrysztyna’s clients, but the company was growing. She added 50 new doors, and then she bought another property management company. It was a book of business that she bought from a local real estate office in 2009. So, by growing Lighthouse Cove and taking on the new company, she grew to over 500 properties.

While Chrysztyna had learned a lot during her first acquisition, there were still mistakes to be made with her second one. The big mistake she said she made with this purchase was that she didn’t adequately check out the properties that were coming with the business.

It’s hard to drive by all the properties you’re taking on when you buy a property management company, but it’s a good rule to look at a third of them. Just drive by the outside and see what they look like. You’ll probably know if there’s any deferred maintenance. If they need new paint, or they have failing roofs, be wary of that trend. You may be picking up owners who don’t want to invest in work on their properties.

Chrysztyna always says she will pick up C class properties if they have A class owners. What you want to avoid is C class properties with C class owners.

So how do you distinguish A owners with C properties from C owners with C properties?

An A owner makes sure a C property is safe, habitable, and clean. Not all will be perfect properties. But everybody needs a place to live, so a property can be old or dated, but it has to be safe, clean, and up to code. You want owners who realize money needs to be spent on their home. Make sure they’re willing to make updates and improvements over the next two to five years.

When you’re buying companies, remember that the number of doors you’re acquiring is not nearly as important as the quality of owners you’re working with.

It could be a deal breaker if you’re getting too many C owners. Think about what you want to deal with and what you want to put your staff through. They are the ones who will onboard tenants who are unhappy because they don’t like change. They will have to deal with owners who resist spending money on properties they have ignored.

Growing through Acquiring Property Management Companies versus Marketing

Chrysztyna admits that after buying three companies in the last 12 years, she knows that she could have taken all the money she paid for those companies and grown twice as much with just organic growth.

Does she regret growing through acquisitions?

No, but she has spent $600,000 on acquiring properties. What kind of growth do you think a $600,000 marketing budget would have delivered for her?

Growing organically takes more time but you can be choosey with the properties you take on, and you can encourage the owners you love to buy more properties for you to manage.

Chrysztyna acknowledges that buying a business will give you more properties right away, but you have tenants to onboard and you don’t know if they’d meet your own screening criteria. You don’t know what the property looked like when they moved in. You don’t know the owners, either, and you may have to make concessions.

There are a lot of successful business owners who believe acquisitions are the best way to grow. That’s the right path for some people. But, organic growth is less stressful and has its own benefits.

Defining Organic Growth

There are lots of ways to market a property management company and its services. So, what do we mean by organic growth?

If you are educating people on something and you are a professional in the field, you’ll become a go-to person, and that’s organic growth. If you have 1,400 friends on Facebook like Chrysztyna does, and they all know exactly what you do – growing won’t be difficult. People will look for you.

When you grow through acquiring property management companies, you’ll also have to factor in the properties that you’ll lose. Consider this before you buy. The industry standard is about 10 percent. You’ll lose 10 percent of your business any time you make a change; whether it’s a new owner or a new property management agreement.

Some people don’t like change, or they wait for a big change to make the decision that moves them on. Keep that 10 percent number in mind.

Change and Integration: Move Slowly

When acquiring property management companies, you don’t want to immediately begin raising prices and tearing up leases.

Wait for about a year and then roll out a new property management agreement and if necessary, updated fees. Take a look at the competition in your market and at the industry standards. If you’re the only one charging a certain amount and everyone else is charging less, you’ll need to explain what you’re offering that justifies the increase.

Sometimes, owners who want a lease-only contract will not understand that once the tenant is placed and the lease is signed, they are responsible for managing the property going forward.

Chrysztyna got a great piece of advice about lease-only leases. She puts her company name all over the lease. Usually, owners will have questions along the way and when they want to know what to charge for a renewal fee or how to handle maintenance emergencies, they call her and she ends up manage the property.

According to Chrysztyna, it takes about six months to a year before she decides she cannot work with an owner. Lots of clients will show their challenging sides quickly. When an owner insists that his cousin install a new water heater or an owner wants to pick his own tenant, Chrysztyna will likely have to fire that owner. She believes she doesn’t do it enough.

Acquiring Property Management Companies and Lawsuits

So with two purchases under her belt and lessons learned, Chrysztyna felt pretty comfortable going into her latest acquisition. She was buying a company from someone she knew for years. She did her due diligence and the books looked fine. The numbers looked good. The seller was a member of NARPM and a colleague.

She should have done some deeper digging.

A month after the sale was completed, the company’s accounting manager noticed that the check the seller gave them for the security deposit trust account didn’t match what was reflected in the accounting software.

Security deposit money was missing.

Forensic accountants were called in and old school spreadsheets were created to figure out what tenants paid at the beginning of the lease, and where that money went. Sometimes rent was coded as deposits. Pet fees were counted as pet deposits. It was a tedious year that resulted in a lawsuit.

The bigger problem is that the security deposit trust hit zero dollars, but tenants were still moving out and needing those deposits back. It’s been a rough few months and has cost a lot of money.

The lesson here is to hire a third party auditor to look at the books and make sure everything adds up.

It takes courage to talk about things that you do wrong. The experts fail a lot before they figure out how to do it right. Chrysztyna teaches a class on her mistakes and how to avoid them. It’s humbling, she says, to stand in front of hundreds of people and tell them how you screwed up.

But, it has helped a lot of people who might have made bad purchases.

Chrysztyna isn’t sure if she’ll buy again. It’s a great feeling, but it’s a lot of work.

The three biggest tips for someone acquiring property management companies are these:

  1. Trust your gut. Your gut is hardly ever wrong. There were red flags but Chrysztyna was too busy and excited to get into another market. So she didn’t listen to her gut. That ended up biting her in the end.
  2. Hire someone if accounting is not what you’re the best out. Spend the money to have someone else look at the books. This is worth every penny.
  3. Make sure how the seller does business is how you’re willing to do business. Culture and operations have to match.

Finally, go with the seller during a property management interview. See how they are selling their services and get an idea of why they are doing what they’re doing. If that aligns, you can work with the deal.

If you have any questions about the information Chrysztyna has shared, or about acquiring property management, please contact us at Fourandhalf. We’d be happy to tell you more and share some additional resources.

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