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The Reality of US Property Management...Part 3

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GreaterKCHomes | 23 Feb 2012, 09:29 PM Agree 0
As promised, here is part 3 of my investigations into PM and the problems that alot of investors are facing today.

As noted before, 95% of this research came from the Kansas City market, with the remaining, being comprised of 2 other markets. I will not name them, as the data retrieved was really insignificant to compile accurate results.

I do want to thank those of you that not only replied to my previous 2 posts, but also emailed me directly.

This Part will focus on the companies themselves, now needless to say I will not be naming those companies. But I will tell you this, this portion of the investigations was derived from those "LARGE" PM companies. My definition of LARGE, is any company claiming to have over 300 properties/doors.

First and foremost, I feel it to be responsible posting, if I disclose exactly how I chose the companies to investigate for this portion of my research. I selected those companies that managed all over the Greater KC area, and not those companies that only managed in the suburbs. I also did NOT include those companies, that refused to manage in the inner city. The reasoning behind this is simple, alot of out of state and out of country investors, own properties in our inner city. The difference between these investors, and those that only invested in our suburbs, is not even close.

I will be 100% honest, I have disclosed this information locally, and have been absolutely hammered with some really creative emails, threatened to be sued, and so much more. So you can imagine, this is NOT the information that companies want to be seen.

First and foremost, the most shocking thing I found with these large companies, is they, without question had the largest percentage of vacancy than us SMALLER companies. Now I know the argument here, they have more properties so it's easy to see why. But I STRONGLY disagree with that, and to be honest, ITS A COP OUT!

I actually, at the time of investigation, found 3 companies that were above 15% vacancy and that is totally unacceptable in Kansas City. This market is KNOWN for it's rental base, it's what drives 1000s of investors from all over the globe.

Again the facts....KC has approx. 2.2MM residents, and over 40% are renters, it has one of the most aggressive Section 8 programs in the country, and is often in a handful of cities that test new HUD programs designed around Section 8.

They should have the resources to market these properties very heavily, and maintain a 3-6% vacancy rate, as is more acceptable in this market. They should know how to attract tenants and keep them. They should have the appropriate sized staff to properly manage themselves, RIGHT?

Please read on!!

Most of these large companies operate on a 1:75 or 1:100 ratio, which simply means, for every 75 properties, they had 1 leasing agent. This is no surprise, as it is pretty much an industry standard, but it did cause me to raise an eyebrow, for those that operated on 1 to 100. The problem is the roles that were defined for the leasing agent. This is where the process breaks down.

What was uncovered was the leasing agent was asked to do EVERYTHING, as it portrayed to his/her properties. This included the following:
1. Show Properties
2. Sign Documents
3. Section 8 Inspections
4. Marketing
5. Rent Collection (for those that don't use the post office, and you have to drive and pick it up)
6. Maintenance Requests ( Are you kidding me?)
7. Other (not sure what this was, but I just wrote it down, cause it seemed funny)

Now here is where the whole process just implodes! For my data, I chose the 1:75 ratio, as this seemed the most popular option.

This data is derived from real numbers, dealing with very conservative estimates, this is not manufactured in any way, or made to seem like something it's not. All of this data is 100% verifiable!

So your a leasing agent with 75 properties, and your asked to perform all of the above tasks, during a normal 5 day work week! FINE!
Okay, you have 75 properties with a 15% vacancy rate, so that is 11 properties, VACANT! If you are marketing correctly, you should have 4-5 showings a week on these properties, (not each, just a total of 4 or 5). I'm presuming you are not rushing out showing every property to every caller, without some sort of pre-screening.

The average drive time in KC, is around 20-25 minutes on a good day. This is taking into consideration the fact, that most LARGE PM companies, are based in our suburbs, which essentially wrap around our inner city. So 5 trips per week, at 20 minutes one way, equals 40 minutes round trip per property, for a total of 3.5 hours.

I did not calculate the numbers for Job #2, as it's really not needed.

#3 - Section 8 Inspections: This one is fun, when the Housing Authority calls and tells you they are ready to inspect your property, you get a morning appointment or an afternoon appointment. The trick is you have to be able to get there within 30 minutes, or they leave and it's counted as a failed inspection, get 2 of those, you lose the tenant! They will do a 3rd inspection, but it better be for a better reason than I couldn’t make the appointment. So how do you pull this off, well it's easy you go to an area that guarantees you to be there on time. If you are 20-25 minutes away from the property on a good day, then stay at the office and pray there is no accidents or road construction. The smart move is to be within 10-15 minutes of that property, to eliminate those variables. What this means is you could burn 1-4 hours of your day, waiting on the inspector. For the sake of argument, let's split this number in half, and say you will lose 2 hours of that day.

#4 - Ah yes, Marketing! This one is the time eating task! If you want to rent your properties, here is the exact formula for success, it's what I use, and bottom line, my properties are NEVER on the market for more than 3 weeks ( that is of course, if they are in fact market ready)

Step 1 - Craigslist! There is no point in using CL, if you ARE NOT posting 3 ads per property, every DAY! You might get lucky every now and then, but the numbers don't lie, if you are not hammering CL, the results just are not there. The reasoning behind this is pretty clear, the very reason you use CL, is the very reason it’s hard to be consistent with it.
Step 2 - Print Ads - You must be in at least 3 print ads, and more if you have specific papers that run in certain area's only. WHY? Over 60% of tenants, do not have consistent internet access.
Step 3 - Internet - You must be on no less than 3 websites, not including your own. Why? It links your website to their website, which draws more traffic to your website, making your website important to the almighty GOOGLE!
Okay, so let's say you market as shown, but if you don't, could explain why the vacancy rate is so high, just saying!
If you have ever posted on CL, you know, unless it's automated :), you will spend 3-4 minutes per post. So that is 3 minutes times 11 properties X 3, for a grand total of 1.5 hours per day x 5 (normal work week) for a total of 8.25 hours!
Print ads, are easy it's a one time shot for at least a week. But it still takes time to draft those ads, so I will used my time as a calculation, it takes me around 10 minutes to draft an intelligent ad for print. So that's 10 minutes x 11 vacant properties for a total of 1.8 hours, but we will call it 1.5 hours.
Internet Ads - Again this is usually a one time setup, but you will spend time adjusting the properties from vacant to rented, things of this nature. So let's say you have to spend 30 minutes a day for adjustments to the properties on the website. I am being fair and not calculating the time it would take to actually setup the ads.

Recap time! Thru 4 steps of your job, you are looking at a total of almost 16 hours of your 40 hour work week.

Better calculate lunch in there, as almost all leasing agents are on commission with a base salary, so there is no HOURLY pay. That's an additional 5 hours a week! So thru 4 steps of your job, we are now at basically half your work week.

#5 - Rent Collection - This one can absolutely destroy your week, if you have not trained your tenants to utilize what we have had in place for over 200 years, this step and this step alone will explain why there is so much vacancy. If you have 75 properties, with 11 vacant, this means you have 64 properties occupied. My research showed, that leasing agents are literally picking up rent, on around 30 properties! This means 30 trips at 20 minutes each way, cause the likely hood of you being able to schedule all 30 pickups on the same day in some kind of thought out plan is not likely. But for the sake of argument, I only counted round trips on half of them. That is almost another 15 hours of your work week.

#6 - Maintenance - This one is time consuming as well. With 64 rented properties, it's not a stretch to see a minimum of 30 maintenance calls per week, and that is probably being very very generous. And from experience I can tell you, I am on the phone an average of 5 minutes per call talking to the tenants, and at least 10 minutes explaining the problems to your maintenance men, this is of course, you get them on the 1st call. This is a total of 7.5 hours of your work week.
Okay another recap! We are thru 6 tasks, and unless my math is weird or something, I'm seeing 43.5 hours of work time, to pull off in a 40 hour week. HMMM?

#7 - Other? I honestly had no idea what this was, so i had no way of accurately tracking this time, but for the sake of argument I will say you spend 30 minutes a day doing OTHER. For another 2.5 hours a week!!
Grand Total >>> 45-50 hours a week for a 40 hour a week job! Okay, I will be the 1st to admit, I know there are All-Star employees that when the time is needed they will give you 50 hours a week, but can you honestly say that this does NOT affect employee moral if they have to do it week in and week out?

Here is the reality! An effective leasing agent will not be able to spend alot of time in an office to do these other tasks, he/she will be out showing properties and such. If he/she is away from the office, who's responsibility is it to complete these other tasks? If there is no employee assigned to do marketing, rent collection or any other task, then it doesn't get done! So in order for him/her to keep her job, they will make decisions on what is important on a daily basis. This almost always leads to marketing taking a back seat to every other task, they have assigned to them. The very thing that defines PM, is the very thing getting left out of the picture, thus resulting in a huge and completely absurd vacancy rate.

Please keep in mind, this defines a PERFECT work week, with no bumps in the road, how many times can you say that has happened?

Again, I want to thank all of you, and I sincerely hope this will help you with any future investment purchases, or the ones you currently own. Investing in any market in the US, does NOT have to be filled with ripoff artists, and bad performing properties. There are excellent property managers in every major market in the US, you can be sure of that. If you learn anything from these posts, I hope it would be to ask them tough questions, make them back it up with real numbers, and you will find that professional PM, and start earning the numbers you thought you would.
I can assure you the numbers are as advertised in alot of cases, but they are only made realistic by finding that professional PM company, that truly has your best interest at heart.
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