Volume is vanity

Whether it’s listing properties for sale or for lease, there is a continual discussion on fee discounting within the industry as the only way to appeal to new clients and while there are some agents who decry the practice, they’re being forced to compete with the discount merchants to bring new business in.

In my view, while we are all entitled to our business plans, fee discounting is the domain of the inexperienced agency staff who don’t have the belief in their value or that of the firm to produce the result for the client, and for the purposes of this discussion, I’m going to focus on the property management side of the industry – there are wiser heads than me who can speak to the sales aspects.

For some reason, the mantra of “bigger is better” is prevalent when discussing one’s rental division, rather than whether it’s profitable – in initial discussions, most directors I’ve consulted to didn’t consider profitability to be the measure of its success, just the numbers under management as if it were some reason for pride.

The astute business owners I’ve dealt with however, are aware that their property management division is a business unit and needs to run at a profit; each time I’ve conducted a profitability analysis in a business, the management fee required to just break even averages out at 5% or slightly over, so bringing in managements at this figure or less means that the agency is managing the property for free.

The arguments I’ve had put to me for accepting this as a business practice generally runs along 2 lines; either “the landlord is going to sell soon” or “I’m looking at the value of the rent roll rather than the income from it” and I’m going to call out both these arguments as self-deceptive.

Firstly, if we’re managing a property because we think that the owner “might sell one day” we’re chasing the wrong end of the business – if the focus is on the potential sales from the rent roll, our property management staff are not being well supported, resourced and trained – and I can almost guarantee that one of two things will happen; either we’ll sell the rent roll before the landlord sells the property, or the listing will go to another agency, as in my experience around 35% of rented properties do not sell through the managing agency.

If we’re allowing our staff to list management properties with cheap fees because we’re looking at the value of the rent roll – again, let me argue strongly against this view… I’ve been buying and selling rent rolls and advising clients on them for some years, and a rent roll with higher average fee percentage will attract a better offer in terms of both the multiplier and the retention period, so you see the discount mindset is badly flawed and will ultimately cost the business vendor money.

Now, let’s look at the profitability side of this discussion. The Property Management division within an agency is a profit centre; the major cost within an organisation is staff salaries, and property managers deserve to be remunerated well – even before March 2020, this was a high stress occupation and now it’s even more so; one of the biggest complaints that I hear from agency directors “I can’t find decent staff”.

Little wonder they can’t… Consider that if we were in funds management, a portfolio of similar value (say, $150-200 million) would be managed by a degree qualified individual drawing a minimum salary in the early $100,000’s, yet we’re employing people to manage a high-value portfolio and paying them about the average weekly wage and we find that our clients get upset with the standard of care and performance.

Granted, we can only pay higher salaries if business income allows it, and we’d rightly expect more from our teams in terms of service delivery, ability to withstand the stress of managing the people and situations they encounter, and provision of higher standards of service but which should come first?

Well, we’re not going to attract high standard talent for low standard income so there might be a bit of additional outlay from the business in the beginning, but the end-result is a more stable property management team and a more profitable rent roll.

Let’s look at the impact of lowering fees – If you charge 6% instead of 7% as a management fee, you’ve given away 14% of your income, if you go to 5% rather than 7%, then you’ve handed the client 28% – if you go to 4% you’ve let go of close to half of your income… see how this changes your profitability – and the value of the rent roll? 

So it’s not just 1% is it? Yet we still laud and remunerate our Business Development teams because they “won” the listing – frankly, I don’t see any “win” with a low fee, except to the client.

To illustrate, if the rental on the property is $2,000 a month, your management fee at 7% is $140.00, at 6% – $120.00, and at 5% it’s $100.00; your income from 250 managements at 7% will be the same as it would from 350 properties at 5%, but you need a bigger team to manage the 350 so your outgoings increase, and there’s no uplift in value of the larger rent roll just by its size.

To add to this, banks are now starting to assess the profitability of the division when lending against it; if your lenders want a good look under the bonnet of your management division before approving further capacity, having more properties under management if they’re at low fees isn’t going to cut it – larger management numbers doesn’t mean that you’ll be able to borrow more.

Lower fees means (in most cases but not all) a lower standard of service as property managers are forced to manage greater numbers of clients for the business unit to try to get into profit, and they get overwhelmed by the amount of work involved; decreasing the size of the portfolios will take pressure off your existing teams and ordinarily lead to increased levels of care being taken by them, which creates happier clients, which generates referrals which brings in more income which allows flexibility in expending and resourcing the team. See where the pattern starts to turn…?

Lower fee-paying clients also create drag on business growth, teams are so busy trying to bring in business to replace clients who have left due to poor management that they get caught in a vicious cycle of repeating the same poorer levels of service through lack of time to adequately service them, if there is an insistence from the client on a lower fee, the standard of their investment property can often be at a lower standard, and frankly, there are some clients who we don’t want – if they demand a lower fee or they’ll go to someone else, maybe we should let them; I was taught years ago that not all business is good business.

Your new client will only question fees when they can’t discern a difference in value.

So let’s start believing in our worth and demonstrating our value to the client.

Let’s quit the race to the bottom on fees and stop the self-defeating cycle of discounting to win the business regardless of the quality of both it and the owner.

Let’s flip the thinking around and aim for smaller portfolios with better fees, more satisfied clients, higher profitability and happier teams (and directors!).

That way you build a better business, and possibly still the biggest.

I headed this post “Volume is Vanity”, the rest of the saying is “Profit is Sanity, and Cashflow is King”. 

Next week, I’ll look at this from a different angle.