Properly measuring overall performance not just management cost is crucial

The Weak Property Management Company’s Sleight of Hand: Focusing on Cost to Distract From Poor Performance

In the world of property management, there is one surefire way mediocre firms attempt to distract owners and investors: by incessantly highlighting the costs of their services. This tactic represents a classic “look over here” sleight of hand to draw your attention away from their subpar management results and inability to quantify value creation.

The Cost Smokescreen

For underperforming property managers, harping on costs serves as a convenient smokescreen to obscure their operational shortcomings. By continually steering the conversation towards pennies on the dollar pricing for management fees and leasing fees, they can avoid scrutiny on the factors that actually matter:

  • Rental income maximization through sophisticated marketing and revenue management
  • Expense optimization through bulk purchasing economies and job order management
  • Asset preservation and tort avoidance via preventative maintenance and risk mitigation
  • Superior customer service and retention of high-quality tenants and residents

The best operators leverage technology, process efficiencies, and economies of scale to maximize performance across all of these drivers of net operating income and asset value. For them, the management fee percentage is largely inconsequential and more than justifies itself through superior returns.

In contrast, mediocre firms have no substantive metrics or performance case studies to stand on, so they inevitably attempt to reorient the conversation to the costs they charge. It’s an easy pitch: “Why pay more when we only charge X%?” However this simplistic cost focus causes owners to miss the much larger operational picture.

Property Management Results Makeup 90 of bottom line

But where do we measure overall performance?

The Hard Truth About Property Management Costs

The hard truth is that for a top-quartile multifamily property, the difference between an exceptional property manager and a poor one can equate to millions of dollars in underperformance over the asset’s hold period. Compared to those figures, a couple percent difference in pricing is immaterial.
To illustrate, consider two companies:

  • Firm A: 8% management fees, delivers $10M in asset value creation over 5 years
  • Firm B: 6% management fees, but underperforms by $2M over that same timeframe

In this example, Firm A is providing a meaningfully better net investor outcome despite the higher sticker pricing. Their performance more than justifies their fee level.

Yet too many unsophisticated owners still fall victim to the cost conversation trap. They opt for Firm B based on lower fees, failing to dig deeper into the underlying performance data and evaluate which firm is truly creating better investor returns.

Demanding Performance Data Transparency

The onus is on asset owners and investors to remain focused on management performance outcomes rather than just costs. This involves:

  • Requiring detailed performance data and case studies as part of the RFP process
  • Analyzing metrics like rental income growth, expense ratio, tenant ratings, etc.
  • Reviewing proprietary technology capabilities for revenue management, procurement, marketing, etc.
  • Understanding value-add execution capabilities for renovations and repositionings
  • Scrutinizing performance data streams from firms’ accounting and property management systems

By taking this data-intensive approach, the true high performers quickly distinguish themselves. Their superior results easily justify whatever nominal cost premiums they may charge.

At the end of the day, the costs of poor property management through operational underperformance, missed opportunities, and asset devaluation massively outweigh whatever fee percentage you may pay. Savvy investors ignore the sleight of hand on costs and make decisions based on comprehensive performance data instead.

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