JF1287: How To Properly Screen A Property Management Company With Sean Morrissey
Sean got his start in 2007, obviously not the greatest time to start in real estate. He created a property management company out of necessity and manages 180+ units today. Besides going above and beyond with his property management, he also owns units of his own, and is the owner of a full service brokerage in Chicago. Today he tells us what landlords need to ask to properly screen a PM company, land-lording tips, and how he manages time with so many different things going on. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Sean Morrissey Real Estate Background:
-Owner/Broker at Chicagoland Realty Group Partners
-Current landlord, property manager, and real estate broker/owner of a real estate brokerage
-Performed real estate related activity for 14 years
-Portfolio of 22 rental properties and manager of 180+ units
-He also assists landlords in building and maintaining their portfolio
-Say hi to him at http://chicago-realty-group.com/
-Based in Aurora, Illinois
-Best Ever Book: What Would the Rockefeller’s Do?
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Sean Morrissey. How are you doing, Sean?
Sean Morrissey: Good, good. Thanks for having me on, Joe.
Joe Fairless: My pleasure, nice to have you on the show. A little bit about Sean – he is the owner/broker at Chicagoland Realty Group Partners. He’ a current landlord, he’s a property manager, and he is a real estate broker/owner of a real estate brokerage. He’s performed real estate related activity for almost 15 years (14, to be exact) and he has a portfolio of 22 rental properties and he’s a manager of 180+ units. He is based in Aurora, Illinois, and you can say hi to him at his website, which is in the show notes page.
With that being said, Sean, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Sean Morrissey: Yeah, absolutely. I’ve been a landlord since 2003, and survived the bubble and all that good stuff of 2008. I got my broker license back in late 2006 and I started practicing in early 2007, which was probably the first time ever. But having said all that, ultimately, my niche back when I got my broker license, due to the fact that the market kind of tanked, was to target folks that needed to relocate for their job, and ultimately couldn’t sell. So we would assistant them in renting their property, because I’d been a landlord for a few years at that point, I was involved in some different real estate investment clubs, so that was something I was comfortable with.
That basically evolved into a property management company right around 2010, and then I opened up my own brokerage in 2011. So we’ve been open for about six years now, a little over six years. I’ve got a portfolio of, like you said, 22 properties, and we manage another 180 for folks in the Western suburbs of the Chicagoland area.
Joe Fairless: With your property management company, it sounds like it was something that evolved out of necessity, rather than you thinking “Okay, I wanna create a property management company”, and then going to do it. Is that accurate?
Sean Morrissey: Yeah, I’ll tell you what it really evolved from – it was just listening to the marketplace. Homes weren’t selling, renting was far easier than buying a home or selling a home, so I realized my specialty kind of basically lied there, and it just evolved out of that. In some respect it was a blessing, but at the same time, it took a little bit of persistence and understanding what would suit a third-party owner best. To this day, we’ve built a pretty good system, I think.
Joe Fairless: With property management companies, the stereotype – or the myth – is that they don’t really make money until you get to a large scale of properties that you manage… I’m just plucking a number out of the air, but say maybe 250 or 500 properties. Is that the case?
Sean Morrissey: Not in my opinion. The reason I say that – and I’m feeling it to this day – is that really from 2008 on, there’s been so many great developments when it comes to technology or ways to streamline your management business that we’ve been able to profit quite well with 180 units. But to your point, there is certainly a benefit in the economy of scale, of having more units, and then it becomes less expense per unit, and the profit becomes greater. So at the end of the day, while that factor certainly holds true, I believe there’s been a lot of changes in the industry at least from the local level to make it a profitable venture.
Joe Fairless: And what technology do you use in your company that helps you make it more profitable?
Sean Morrissey: Well, what we like to use is really online products that have been made available. A lot of these have come up the last couple years. For instance, there’s an application website we like to send tenants to, and it’s called RentApplication.net. They’re basically a one-stop shop, $40/tenant, and you can add your own fee if you want to, but at the end of the day that’s very streamlined.
We use a management software. Now, you’ve gotta reach a certain scale before you can afford a management software, or in our case we also use an inspection software we pay for… But what I’ve come to find is that those particular software industries, as becoming more competitive, the price of those items is becoming less and less and less as the years go by. So your ability to manage a property as an individual landlord, like the property manager, is becoming closer and closer to that goal, I suppose… But even from a property management perspective like us, it’s given us the ability to have systems in place that are affordable, and we pass those cost savings along to the client via the landlord and run an effective operation.
Joe Fairless: What management software would you recommend?
Sean Morrissey: Well, we currently use Appfolio. They’re one of the big boys out there. And I should take a step back and say we used to use Buildium. Buildium is another big product, and I love Buildium as well – affordable product, real-time rapports, they do great things, but probably the two principal differences between Buildium and Appfolio or why we went with Appfolio when we did was that number one, tenants can pay their rents online for free. That’s huge; pushing online rental payments simplifies everything for everybody.
The second thing is that Appfolio offers a 24-hour call center that we could provide to the tenants that we utilize that’s very inexpensive and has proven to be very effective. So yes, that’s why we stuck with them over this course of time.
Joe Fairless: That’s beautiful. That is incredibly helpful. You’ve got 24/7 assistance via call center, and that helps your staff, for sure.
Sean Morrissey: Yeah, it keeps expenses low on our end… And again, it’s always finding a way to streamline the business, look for those efficiencies.
Joe Fairless: And what inspection software would you recommend?
Sean Morrissey: We currently use Happy Inspector. Now, Happy Inspector… What’s kind of funny with them – they’ve been around for 5-6 years now, but they’ve branched off in all sorts of different industries where they’re basically doing inspections, be it for safety reasons, or operational systems reasons… But they initially got started in the landlording business as a form of backing any move in/move out inspections, quarterly inspections…
The great thing with them is that ultimately you’re integrating your photos into your rapport. It can be done over a cellular connection or Wi-Fi, and the user experience is fantastic. I’ve tried some different software outside of that, haven’t been as [unintelligible [00:07:55].15] as we’ve been with Happy Inspector.
Joe Fairless: Now let’s turn the table a little bit and let’s put ourselves in the owner’s shoes. As an owner, we’re looking for a property manager. What should we look for?
Sean Morrissey: I’ll tell you what, this is something I’ve tried to focus a lot of my energy on over the last year, because I think it’s one of those things that myself and our team can really provide value in, and that we’ve ultimately evolved from a landlord to a property management company, and it’s really all been based on the fact that it’s come from my landlording experiences.
So having said all that, there’s five major points I tend to cover, the first of which, with any landlord looking into a property manager is “What’s their fee structure gonna be?” Now, this can be a percentage of monthly rent, or it could be a flat fee, it could be a-la-carte or it could be all-inclusive, and then ultimately, what does the fee not include? That could be court filing paperwork, or a legal fee, or actually handling the eviction. The more specific you can get on those questions, the better. So fee structure is a huge part. It’s usually the first question every landlord asks, so that’s always huge.
Joe Fairless: Should it be the first question every landlord asks, or should they be asking something differently first?
Sean Morrissey: In my professional opinion, no, it should not be the first question they ask. But as with everything else in our society, we become price-sensitive, and while price is a huge component, in the property management business you’ve gotta focus on service, from a landlord perspective and a property management perspective. I’ve seen all sorts of management companies pop up here in the Chicagoland area over the last 24 months, that will manage your property for a dime, but the service you receive is gonna blow up in your face, so you’re gonna wanna focus on that service-oriented business first.
Joe Fairless: How do you ask a question that qualifies a service? And if you’re about to get to it in your five things, then just say “Let me just keep rolling.”
Sean Morrissey: Yeah, I’ll tell you what – if it’s alright with you, Joe, I’ll just keep going.
Joe Fairless: Keep on going.
Sean Morrissey: Yeah, alright. Here we go. So number two is what is their repair and maintenance system and how does that function? Like I had mentioned, we utilize a call center that’s 24/7, right? You can call an emergency call-in, we’ll issue out [unintelligible [00:10:05].21] right away to handle that for you, or you can set it up through a website. There’s a lot of management companies that do that this day and age, but you certainly wanna make sure that a 24/7 service is involved.
Secondly, does that management company perform services in-house, or do they contract out? And if they do contract out, what are those fees gonna be? It’s always tough, in my opinion, for a manager to say “Hey, to [unintelligible [00:10:29].05] your toilet it’s gonna be $50.” Usually they’ll say “We’ll send someone out to [unintelligible [00:10:33].10] toilet, but it’s gonna be anywhere from $30 to $80.” Well, those general terms are nice, but you really wanna get as specific as you can with any question you ask a property manager, so that you can really drill in on what you’re getting involved with, and repair expense is just one of those.
The other things we tend to recommend a landlord to ask property management companies is “How is the yard maintenance handled?” Typically, in a single-family home when we get under a quarter of an acre, we recommend that the tenant be responsible for yard maintenance, but if it’s not maintained, how is that handled? If it’s more than a quarter acre, do you wanna roll that expense into the rent and just have a professional service come out? And then how is invoicing handled? Does the manager actually up-charge any repair fee that comes in? So while they may send out a third-party plumber to repair something at $100, if you get a bill for $130, why is that $30 so important to that manager and why do they up-charge? And there’s a variety of folks out there that will or will not up-charge. I feel like that’s a critical piece when it comes to the repair and maintenance side of things.
Joe Fairless: Okay.
Sean Morrissey: Alright, so rolling right along – rent collection.
Joe Fairless: This is number three?
Sean Morrissey: This is number three, rent collection. When it comes to rent collection, you’re gonna wanna ask that property management company when is rent due and when is it considered late? For instance, with our office, rent’s always due the first, considered late after the fifth. If it’s not paid by the fifth, well then there’s a late fee involved, and depending on the state you live in, that late fee and the legal terms of what can be done will come into play. That could be, in our case, a 5% a month rent late fee, or it could be a daily late fee if the state permits that.
Once that late fee is paid, who does that late fee go to? Does it go to you as the landlord, or does it go to the property management company for actually having to collect that rent? So that’s always important. That can be a rude awakening for some folks if they do have tenants that pay late on a consistent basis.
Joe Fairless: That just seems so ridiculous to have the property management company collect the late fees… That to me is the worst backwards type of structure to have possible with a management company, because then they’re incentivized to have the resident pay late, so that they can get compensated. I believe in the back of my mind I’ve heard of that, but I think — because I was seeing red once I heard of it, I blocked it out. Have you seen that? And you don’t do that, do you?
Sean Morrissey: No, we don’t do that.
Joe Fairless: Okay. [laughs]
Sean Morrissey: You hit the nail on the head. If the management company selects to keep that late fee, they have absolutely no incentive to have that tenant pay on time, so you’ve gotta run for the hills in that type of scenario.
Joe Fairless: Yeah, that’s ridiculous.
Sean Morrissey: And the same thing goes with the whole repair up-charge thing. We don’t do that; I know management companies that do do it, and either their clients are totally blinded by the fact that these up-charges are happening, or they’re okay with it and I don’t really understand the logic behind that either. So with either scenario, you really wanna make sure you find a management company that’s not gonna keep that late fee, that’s not gonna up-charge on those repairs… Because at the end of the day that’s not necessary. It should all be part of the management.
Joe Fairless: Yeah, and at the end of the day, in addition to that, it’s not alignment of interest, and then you two are going in different directions as soon as you sign the contract, because if they are collecting a fee on top of the maintenance, then they want more maintenance requests because then they’ll be able to charge more fees.
Sean Morrissey: Exactly, yeah. So in either scenario there’s not much incentive for the management company to do what’s right.
Joe Fairless: Number four.
Sean Morrissey: Number four is inspections. Now, if the inspections are included as part of the management fee, you’re gonna wanna find out how often are inspections performed. Now, I’ve seen this all over the board. Some management companies will say “Hey, we’re gonna come out within the first 30 days of move-in and we’re gonna make sure the tenant is maintaining the property, and then after that just let us know if you want another inspection”, and they may charge for that.
Our office – we just charge per inspection per request. We used to set it up on like a quarterly inspection basis, but quite frankly, when we’ve done that over the course of the first year, the tenant gets tired of having us walk in their door, the owner stopped checking the inspection reports, and it becomes kind of a wasted fee. So we’ll do move-in inspections, move-out inspections and recommend 1-2 inspections a year depending on the comfort level of the landlord.
With that in mind, some management companies will include the inspection fee as part of the management fee. Now, the drawback behind all that is that in my personal experience, the inspections themselves are the most expensive part of managing a property, because it actually involves someone from your team driving to that property, spending anywhere from 30 minutes to an hour with that tenant, getting into the house – actually, trying to get into the house, setting up that appointment with the tenant… So it drives a lot of cost, these inspections. However, they’re critical for the landlord.
So understanding how that’s structured as part of the management fee is gonna be critical to any management system working long-term, and you’ll want to do your due diligence there.
Joe Fairless: Why wouldn’t I want it built into the fee then, as an owner?
Sean Morrissey: So we charge as a flat fee per request for owners. The reason we do that is twofold, and I guess this is kind of answering the opposite of what you’ve just asked. But at the end of the day, we’re not being too abrasive to the tenants’ privacy. We used to have it set up on that quarterly basis, but at the end of the day we had all sorts of issues getting into the property that third or fourth time because we just came by too much, and then at the same time we’d have landlords that wouldn’t check the report. So we just found it to be a waste of money based on the number of inspections.
If you were to do the flipside and actually include it in the fee, there won’t be any issue there so long as the landlord and the manager have an expectation of how often is that property gonna be inspected, are you actually getting into the property and are you not copying the previous notes from the previous report? You wanna make sure the photos that are taken are actually accurate and true to life for that particular time of the year, and the notes that are provided are up to date… Because we’ve seen reports where it may say “Kitchen sink leaks”, but that leak was fixed two months ago, and it just rolls over into the next report. So it’s all gonna be depending on the inspection software you use and the management company you use, and again, it will be just part of the due diligence.
Joe Fairless: Got it. And number five?
Sean Morrissey: Okay, number five is insurance. When it comes to insurance, you’re gonna wanna be sensitive on the property management side of things as to what insurance policy do they have in place, what are the specific coverages and what are the dollar amounts of those coverages? For instance, if they’re gonna have their own in-house crew do repairs, do they have the appropriate liability insurance in place to protect you as the landlord, as well as their company, should somebody slip and falls? Do they have the appropriate errors and omissions insurance in place, if they’re handling the lease, and things of that nature?
At the same time, does the management company require that the tenant have a renter’s insurance policy in place? Some management companies will force push a renter insurance policy, meaning that if the tenant doesn’t show proof of a renter insurance policy, that it will actually be rolled into the rent as part of a monthly fee, which is kind of hard to believe, but it can happen.
Then some property management companies won’t do that at all. They’ll just say “Hey listen, no insurance policy is required from the tenant, which can create a chaotic scenario if for some reason that tenant creates some kind of damage to the property and there’s nothing in place. So that’s always something you’re gonna wanna be sensitive to.
The second thing – or I should say the third thing, I’m sorry – when it comes to insurance is does the property management company require that the landlord add the property management company as an additional insured on the policy itself? Now, our company actually does that. We will say “Hey listen, if you want to have our office manage your property, you need to add us as an additional insured.” So at the end of the day, if we send our inspector to the property to check things out, he’ll be cared for under the terms of that insurance policy. And making sure that that homeowner actually changed their policy over from let’s say an owner-occupied to a non-owner-occupied will be critical as well, especially if they’ve lived in the property and they’re just moving out.
Joe Fairless: Great points. With insurance, when I was starting out, I didn’t know all the different types of policies that my management company should have in place, like the errors and omissions policy, and me having appropriate liability insurance… So who should we talk to in order to make sure that our property management company has the right stuff? Because they’re probably going to say whatever they’re doing currently is fine… So who can we talk to to make sure that that is the case?
Sean Morrissey: My recommendation would be to stick to a commercial insurance broker. Somebody who sees a variety of policies, somebody who’s handling business policies will be critical. So to pick up the phone and call your home insurance or auto insurance agent – I don’t think they’re gonna have the knowledge base or the experience base to answer some of those questions appropriately.
At the same time too, there’s organizations out there like the National Association of Residential Property Managers (NARPM). It’s a useful organization for any property manager to be a part of, but as a landlord it wouldn’t hurt to pick up the phone and say “Hey, who would you recommend when it comes to ensuring my home as a landlord properly? What should I look for when it comes to a property manager and their insurance?” They’ve got some resources that will help as well.
Joe Fairless: What is your best real estate investing advice ever?
Sean Morrissey: Well, I’ll tell you what – I would say to any listener out there that is aspiring to be a real estate investor, which I always think [unintelligible[00:20:19].04] to this podcast. I think number one you’ve gotta have that breaking point where at the end of the day you’re gonna buy your first property.
At the same time, you’ve gotta get involved with individuals that are doing this type of activity on a regular basis. That could include joining a local REIA club, listening to podcasts like your own, Joe, or at the end of the day picking up a few books and getting involved.
It could also involve interviewing your local property managers. I hear all the time, property managers are a wealth of information when it comes to local activity, and if you’re someone that’s just starting out, at the end of the day they could provide you that wealth of knowledge as well. So yeah, specifically to our podcast today, I would go with that.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Sean Morrissey: Let’s do it!
Joe Fairless: Let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, Sean, best ever book you’ve read?
Sean Morrissey: My favorite book these days is one I read this past summer, it’s called “What Would the Rockefellers Do?” It’s by a gentleman by the name of Garrett Gunderson. A lot of it comes down to cashflow efficiency; for those of your listeners that have studied up on cashflow banking, there’s a good portion on cashflow banking. I recommend you pick that one up, or download it for your Kindle.
Joe Fairless: Best ever deal you’ve done?
Sean Morrissey: Best ever deal I’ve done was my first portfolio purchase a few years back. It was purchasing nine condominiums from one individual. The reason I say it’s my best – I guess there’s a few reasons, the first of which is that it was the first time I’ve used commercial finance. Once you enter that realm, there’s no going back, right? I mean, it’s just the best.
The second reason is just the performance those properties have had, and we’ve had roughly a 10% increase in rents over the last 18 months. We’ve seen an appreciation of those properties of right around 40% over the last 18 months, so I was fortunate enough to buy it right and be able to find the opportunities to raise those rents and stabilize those properties. It’s been a good day.
Joe Fairless: You’re gonna be doing a cash-out refinance, since you’ve got such great appreciation?
Sean Morrissey: Yeah, that’s the gameplan. I’m actually doing a cash-out refi right now on some other properties I have, but those nine I’ll probably line up for probably a refi around 2019 and see what opportunities are out there at that point.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Sean Morrissey: Well, like so many folks, actually buying in 2007 [unintelligible [00:23:28].17] Ultimately, what I did back then was I bought a single-family home here locally for a family. I basically set it up as a lease option where I bought it for a family that had fantastic income, they had poor credit, but it was all due to things they couldn’t control, like medical bills, things of that nature. So they were good lease option candidates back then. Unfortunately, I bought it at the top of the market, and it kind of backfired on me just based on what happened at that time. But at the end of the day, the way I set up that lease option was with a $10,000 option fee. Looking back, I would have gotten more like $30,000, made it harder to walk away.
At the same time too, I structured it in such a way where there would be [unintelligible [00:24:07].14] provided, and while those were effective, those credits probably weren’t enough either to make that buyer wanna stick with the deal, so it was frustrating in that regard.
Joe Fairless: But if the property cashflows and you never sell, it doesn’t really matter what you bought it for, so was it not cash-flowing after they left?
Sean Morrissey: It was breaking even. Part of that was due to the way I set up financing at this point. Now, I still continue to own that property and it does cashflow, it does alright, but at the same time too that property has taught me that there’s so much more leverage in multifamily. Single-family homes are great, but so many expenses can be tied up in repairs on a single-family home that I’m more of a proponent of multifamily these days, and buying in bulk.
Joe Fairless: Best ever way you like to give back?
Sean Morrissey: Well, what I recommend folks do, especially those folks that are business owners, is don’t ever lose sight of the folks that made you who you are today. Most notably, those are the folks that pay you for your services. For instance, our office last month, we invited all the tenants we’ve ever managed, all the landlords we’ve ever represented, all the buyers and sellers we’ve ever represented, and we basically rented out a movie theater the day after Star Wars 8 came out, and we had Santa and Mrs. Claus [unintelligible [00:25:20].01] and everybody got to watch the movie for free.
I’ll tell you what, folks that have kids – they’re thrilled about that event… Because they’re like saving a ton of money on movie tickets, the kids are super juiced on Star Wars, and they’re just super appreciative. So it’s things like that we like to do to really give back, and it’s really giving back to those individuals that have given us so much over the years when it comes to a brokerage. So to any business owner out there, don’t forget who puts food on the table. That’s critical.
Joe Fairless: That’s a really cool idea, I’m glad you shared that… And creative. How can the Best Ever listeners get in touch with you?
Sean Morrissey: We are launching a podcast, and for what it’s worth, the website there is gonna be landlordingforlife.com. You can also search it on your local podcast station. Or you can check out our brokerage website, which is Chicago-Realty-Group.com, or you can e-mail me. My name is Sean Morrissey, and you can e-mail me at Seanrmorrissey@gmail.com. That’s my personal e-mail, if you have any questions.
Joe Fairless: Sean, a really informative conversation. Thank you for sharing time with us and your expertise. One, for anyone looking to make money as a property manager, the key is (at least for you) in the technology and being as efficient as possible, and you went through the different technology platforms that you use – the rentapplication.net, Appfolio and Happy Inspector.
Then the five things to look for in a property management company – the fee structure (number one), repair and maintenance system (number two), rent collection (number three); make sure you know where those late fees go and make sure they go in your pocket, not the management company. Number four, inspections, and number five, insurance, and you gave a lot of great tips within each of those.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Sean Morrissey: Alright, Joe. Thanks so much. Have a great day!Follow Me: