JF1503: Locate Your Major Revenue Stream And Take It Wherever You Want with Evan Hoffmann
Evan has a very interesting take on how investors and entrepreneurs can take control of their revenue streams. He is an investor himself and also consults others with their businesses. Hear what he has to say about what he calls a value proposition pricing scheme and how it relates to multifamily investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Evan Hoffmann Real Estate Background:
- Principal & Chief Strategist of Incisive Solutions, providing revenue growth strategies to the multifamily industry
- Has been employing optimization techniques and helping companies grow revenues for 20+ years
- Based in Denver, CO
- Say hi to him at https://www.incisivesolutions.org/
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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, Evan Hoffmann. How are you doing, Evan?
Evan Hoffmann: Doing great, Joe. Thanks for having me on.
Joe Fairless: Well, I’m glad you’re doing great, and it’s my pleasure. A little bit about Evan – he is the principal and chief strategist of Incisive Solutions, which provides revenue growth strategies to the multifamily industry. He’s been employing optimization techniques and helping companies grow revenues for over 20 years. Based in Denver, Colorado. With that being said, Evan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Evan Hoffmann: Sure, absolutely. When I said that I’ve been employing optimization strategies for 20 years, I’d almost simplify to say that I’ve been pricing somebody’s widgets for over two decades. I first started out in the car rental industry, pricing cars for the Hertz Corporation and a few others, and then moved on to other facets of hospitality, both hotel and in cruise lines, and I’ve been involved in multifamily both at the REIT level, and then also on my own as a consultant for the past 11 years.
Basically, what I do is I help multifamily owners, operators, investors, developers and redevelopers to find and locate where the revenue streams are and where they wanna take them. That can mean all kinds of things, based upon the individual needs and what it is that keeps these folks up at night.
Joe Fairless: Will you give us a case study of just one group or a person you worked with, just so we can have a sense of what you did?
Evan Hoffmann: Sure, absolutely. In one example I had this one client that owned a 156-unit apartment community that they had just done a value-add kitchen and bath upgrade on on most of the units… And the issue with them is they had a sense that they were leaving money on the table, that perhaps they weren’t positioning themselves in the right way from a pricing perspective, and also from a marketing perspective. The one leading indicator of that was that they were still [unintelligible [00:05:00].29] pre-lease a month and two months out at nearly 100%. That for me is a red flag, saying that there is an awful lot of upside opportunity from the pricing side of things.
They were also concerned about that they had invested so much money in the product, they were also looking to upgrade their demographic. So what I was able to do was to go in and create a value proposition pricing schema across the unit types and the different amenity variables within those unit types.
As an example, something on the second floor with a courtyard view may be priced a bit higher than something that was ground floor, closer to the street… That kind of thing, so that as folks came in and looked at it, they could see the value proposition and were willing to pay a higher amount for a premium located unit, even though the interiors of them were identical. That’s just one example.
Joe Fairless: Let’s talk about that a little bit more in detail, and then we’ll go to another example, because I think this is a good way to guide our conversation, just to go through these examples.
Well, let’s see – value proposition pricing schemes… That sounds like something — other than their investment in you, it sounds like something that they didn’t have any out of pocket costs for. Is that accurate?
Evan Hoffmann: That’s absolutely correct. They’ve already done the upgrade on the place, they’re then bringing me in to bring a fresh set of eyes in. Sometimes there is an RO without the I. You don’t necessarily have to have the investment without getting a return and getting a [unintelligible [00:06:29].16] revenue stream. This isn’t always going hat in hand and going to cap-ex.
Joe Fairless: Should every multifamily owner do that, the value proposition pricing scheme based on where the unit is, and views, and that sort of thing?
Evan Hoffmann: Yeah, 100% of the time. It’s interesting, I get into conversations with folks and they think that that’s relegated only to an A product… But there are ways to create variables and variations for A products, B products, C products, high rise, mid rise, [unintelligible [00:07:00].10] There are lots of different ways to skin the cat and ways to look at it, so that then you can offer surely the right product, to the right customer, at the right time, for the right price.
Joe Fairless: What product was this 156-unit?
Evan Hoffmann: This was a product that went from a C+ to a B, or so…
Joe Fairless: Okay. And what were the different pricing variables or tiers?
Evan Hoffmann: Sure. This was garden-style, but there were floor differentials. Based upon the demographic – and that’s a whole other conversation we can talk about on a tangent… But based upon the demographic, this was a younger demographic, so the higher floor commended a larger premium, and we’ve discerned that by looking at how many days vacant the ground floor units were, versus the second floor, versus the third floor. The third floor units were the quickest to turn, the ground floor units were the slowest to turn… And there were younger folks that were kind of workaday folks, rather than folks that were in the older end of the demographic scheme.
Joe Fairless: Did I hear you say the ground floor was the slowest to turn?
Evan Hoffmann: That’s right.
Joe Fairless: But you charged a higher premium on the higher floor?
Evan Hoffmann: That’s right. Sorry, the quickest to turn – to move in. I apologize if that wasn’t clear.
Joe Fairless: Oh, okay. Got it.
Evan Hoffmann: Yeah, not turn time; move out to move in.
Joe Fairless: Okay, got it. I’m with you now.
Evan Hoffmann: So we were able to do this for all units in the building. The next piece was to look at proximity to parking, because there is a premium, as long as we’re not talking about street parking… But talking about parking whether there’s reserve space, or it’s simply first come first served… Based upon the ability to carry groceries, then get in and out, convenience, especially in winter climates; Denver, although it’s a lot nicer than certain other parts of the country, it really has severe winters… That also has a piece.
There were some units that had [unintelligible [00:08:46].04] so they got a premium. And then quite frankly, on the other side of the spectrum we had a few units that unfortunately overlooked the dumpster area. The owner did the best to mask with fencing and so forth, but it was still not exactly up to snuff, so we actually put a negative amenity value on that, bringing it slightly below the base we were playing with.
Joe Fairless: Okay.
Evan Hoffmann: So that created a total stratum of price points, even within the same — whether it was a one-by-one box, or a two-by-two box. Each of those had enough variables to create a real value proposition.
Joe Fairless: What percent qualified for an upgrade in rent from the standard rent, would you say?
Evan Hoffmann: In that particular case, because there wasn’t a huge differentiation here, because all the units had been upgraded except for a handful — based upon the kitchen and bath rental, those upgrades were about $180-$250, and then the variables between floors and proximity, that added maybe another $100. So using three times the rent, almost everybody qualified for any of those. There were very few that couldn’t qualify for a top floor [unintelligible [00:09:57].19] that did qualify for a ground floor bare bones type.
Joe Fairless: Okay, got it. What’s the reason why the owned would do a decrease in the rent if it overlooks the dumpster, because it seems like they could get away with not having decreased rent on one unit. What we found is that there were 2-3 units that qualified for this, and the vacancy loss on those was excessive relative to the others. If you had a 600 square foot one-bed one-bath, pick the floor of your choice, and one looked at the dumpster and one didn’t, then the dumpster [unintelligible [00:10:32].27] each and every time.
We’re not talking about a lot of money. On $1,500 rent you bring it down $50. The other benefit of that is having loss leader pricing. That is available all of a sudden; from a price point perspective, you may be competing or have an advantageous position to compete with someone else, and then you do the offer [unintelligible [00:10:52].17] showing them the upgraded pieces.
Joe Fairless: And will you elaborate on what loss leader pricing is?
Evan Hoffmann: Loss leader pricing is that you advertise the lowest price available unit. If you have one unit that’s $1,300 and another unit that $1,600, you either advertise whether you have a website or don’t have a website, whether you’re using [unintelligible [00:11:11].01] simply posting on Craigslist or on Zillow, you post the individual units and that lost leader puts you into a different straddle when people are searching with price ranges.
Often times on many of these places you’ll be able to put in a price range that you wanna pay as a renter. So by having that loss leader pricing, you will show up in more searches if it’s below a certain level. If you have 20 people that are shopping $1,300 to $1,500, and you have another 10 that are shopping $1,250 to $1,500, and now that loss leader is at $1,250, all those other folks now find you. That’s the benefit of loss leader pricing – it increases your vision, your scope, and hopefully your gust cards.
Joe Fairless: Let’s pretend that a Best Ever listener is listening to this and he/she is like “I love it. I’m going to hire Evan, if he’s available.” I know you’re the principle in two [unintelligible [00:12:06].29] at your company, but let’s just roll with this… “I’m gonna hire him.” What is the process — well, I’ll give you a leading question, because I think I know the process starting out, but I’d love for you to fill in the gaps. When you get hired to do another 156 units, is the process first you review the historical vacancies for each unit, and also review the competitive set to see what the [unintelligible [00:12:32].09] to increase rent, and then you take a look at the property itself, tour it, and then you come up with the different categories for how you could increase rent for each of the different types?
Evan Hoffmann: You pretty much hit the nail on the head, Joe. The way I like to do it is I actually prefer to go out and look at the concept first. I’ll identify some folks online, I’ll also check the neighborhood, but then I will go and actually do a ghost shop, where I will create a persona of myself, saying I’m looking to rent… And I will shop three or four of what I determine are the main competitors, because I wanna understand what they’re offering… Not only from a bricks and mortar perspective, but also what they’re offering from a customer service perspective; what does the chain look like? How do they engage me? What are the questions that they’re asking me?
Then and only then will I actually go on site, to my client property, because then I can go “A-ha! Here are the advantages, here are the disadvantages.” How do we play up one? How do we minimize the other and then work with both the nuts and bolts of going through the rent roll, but also talking to the team.
An important aspect of this, because we are so reliant on the team on the ground in this industry, perhaps more so than any others, from a pricing perspective, is understanding what their mindset is, and how they feel about the product, and quite frankly, how they’re delivering services and how they’re talking to folks.
Joe Fairless: What are some questions that you would like to be asked when you’re ghost shopping, if it’s an exceptional experience?
Evan Hoffmann: If it’s an exceptional experience, I want some of that to really get down to asking me what it is that I’m looking for, and really define what that means. When I tell somebody “Yeah, I’m looking for a lot of room”, if they simply go to the biggest unit on the property, then they haven’t really done the full discovery. “Evan, when you tell me that you want space, what does that mean for you? Does that mean that you need a big kitchen because you’re a cook? Does that mean you need lots of closet space because you need storage? Are you worried about your furniture?” I want them to walk me down the garden path. In an optimal situation, they’re not giving me a quote for more than two units in the building. If they’re giving me a quote or a price point or fliers on more than two units, then I walked away without them finding out what it is I really need.
Joe Fairless: I would have shown you the biggest unit. [laughs] I’m glad I’m interviewing you, because I’m improving my skillset during our conversation. Okay, that’s really good stuff. After you go shop the competitors, do you have an opportunity to go shop the property that hired you?
Evan Hoffmann: That depends upon the client, whether they feel that there’s a need for that or not… Because at the end of the day, I wanna do this in kind of a collegial [unintelligible [00:15:15].21] working in collaboration with the client. Half of them will say “Absolutely, please go shop and then we’ll introduce you afterwards”, and others want it to be just an organic conversation that we go on there. And I understand both sides of it.
Joe Fairless: What’s more effective?
Evan Hoffmann: It’s better if I get to go shopping first.
Joe Fairless: Okay.
Evan Hoffmann: Because then they’re no longer on stage. Now they are in their natural state.
Joe Fairless: Got it. So you look at the competitive set, you go shop, you review the historical vacancies, and then you come up with the different categories that you can increase rent based on proximity to pool, or whatever?
Evan Hoffmann: That’s correct. The first thing we have to do is determine what base floor plan rent is, and what I mean by that is “What’s the price for the box before it has any of these other structures?”, so that every single 600 square foot one-bedroom one-bath starts off at a single price point, call that $1,000. Then you add on your other layers; the other layers are “What is the amenity value at the property level of being close to a pool, close to parking, having a better view etc.?” and then going in and literally walking as many units as possible, at least within proximity, to then get sight lines, so that you can then assign that amenity value to the unit that has the base floor plan rent, so you have those building blocks that then create a market rent for the individual units.
Joe Fairless: What’s another case study?
Evan Hoffmann: Another case study was a smaller property where the first thing that they had to address in my estimation as I looked at it was the lease management curve. It was a smaller building, somewhere under 50 units (42 or so), and literally, 50% of the units were expiring in February and March. What that did was that put an inordinate amount of pressure on renewal and retention in those two months. That mean they likely could not ask for a renewal increase with that much potential exposure, or at least couldn’t ask for what the market would bear, let’s put it that way.
And then the next bit of business is if those people left at 50%, now all of a sudden you’ve got 10 units you have to rent in a 40-unit building. Holy catnap, that is an awful lot of inventory. You’ve just created your own supply problem.
Joe Fairless: Did I hear you say “Holy catnap?”
Evan Hoffmann: You did hear me say “Holy catnap.”
Joe Fairless: [laughs] I will use that for the rest of my life.
Evan Hoffmann: Feel free.
Joe Fairless: Okay, so what did you with this problem?
Evan Hoffmann: What I was actually able to do with them was I first started working on resident retention. And what I suggested is that we begin to offer either short-term leases or very long-term leases to those people that were the farthest below market. So if the market after doing the market study was, let’s call it $1,500, and those people that were still paying $1,200-$1,300, we would go to them first and offer them 4, 5, 6-month extensions at a flat rate, or we would offer them 16, 17-month extensions at only a 1% or 2% increase to reposition them into peak leasing season.
Joe Fairless: Okay…
Evan Hoffmann: Once we were able to solidify that, we minimized the damage. That’s the first thing we had to do. Because my strategy is always you’ve gotta talk about resident retention and renewal pricing before you talk about the sexy stuff of new lease pricing and sales, which is where people usually go first.
Joe Fairless: Yeah, that’s so smart. So the key there is you’re repositioning their lease to end during peak leasing season, which also gets away from the masses at this property, when their lease expires.
Evan Hoffmann: That’s exactly right. Peak season means a lot of different things based upon the market, the submarket, and even the unit size. A studio will have a different expiration curve than a two-bedroom will, particularly if it’s located nearer to a university, more in the burbs… There’s lots of variables into just expiration as opposed to “Okay, Memorial Day to Labor Day.” There’s an awful lot more to it.
Joe Fairless: Anything else as it relates to either one of these two engagements that you had that we should talk about, that we haven’t discussed already?
Evan Hoffmann: Well, I think the big piece of that, Joe, is that you’ve got to know from an investor perspective, because an awful lot of your folks are investors and looking to invest, or looking to invest more – it’s doing your due diligence upfront, understanding what it is you’re looking at, and really digging into your rent roll. It may have been had this person realized that 50% of his leases were expiring in the winter months, maybe there was a better price to offer by bringing that tension to the seller.
The other bit of business (and you brought up) is saying what people qualified at the various price points; before you venture into any type of capital expenditure, the first thing you should know is what percentage of your current resident base, based upon three times the rent when they moved in, would be able to afford the new target ones… Because then you know your exposure before you begin that process.
Joe Fairless: If the 40-unit – let’s say instead of those leases expiring in February and March, let’s say peak rental season in general, for this property, is April/May. If all 40 leases were expiring in April and May, how would you approach that?
Evan Hoffmann: That’s actually not a good story either, because at the end of day, you just took peak leasing season and flattened it. Because you still had so much supply at any one given time, what I would try to do is striate it out across the 12 months, and almost make it look like a pyramid… So that you’ve got the fewest number of leases – onesies, twosies in January, February March, and October, November December, and then work your way up to, say, June as being the highest pinnacle of that. So you would still have to reposition those, because all 40 expiring at once still really puts you behind the 8-ball.
Joe Fairless: What’s your best real estate investing advice ever?
Evan Hoffmann: Probably the best advice is really understanding what it is you’re buying. And when I say that, I mean if you’re buying less than 100 units, you’d better be looking at every single lease, and all of the different line items, because you could be looking at something that is wonderfully occupied, has great rates, and then all of a sudden you dig into it and you have 25% of the folks that a) never should have qualified to be there, you may have a behavioral problem besides an economic problem, and/or there’s all kinds of things going on in the ledger, where they’re actually not paying what it looks like they’re paying. So at the end of the day, you absolutely have to know what it is you’re buying.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Evan Hoffmann: Sure, let’s do it.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve recently read?
Evan Hoffmann: Best ever book I’ve recently read… That’s a tough one. If I’m gonna relegate it down to the best ever business book, that’s simple – The Art of War, by Sun Tzu. It’s an ancient Chinese book literally on warfare, but there are so many aspects of that that you can bring into how to conduct yourself in business. It’s extraordinary actually how one is able to look at the basic principles of that and apply it to a business method… About the way, the terrain, how to win victory without going to war.
As an example, if you’re competing with someone down the street, maybe there’s a way for both of you to win/win, because you’re going after a different demographic. So before you start dropping price and cratering the marketplace, take a look and maybe even have a conversation with your competitor down the street.
Joe Fairless: What’s an example of a project that you initially took on, and despite whatever you tried to do, it just didn’t pan out?
Evan Hoffmann: The one example in my head had to do with change management, and that’s a big piece of the pie. If you’re gonna go in and restructure this whole thing, you have got to be able to get buy-in from all the stakeholders… Whether that’s the partners, the owners, the operators, all the way down (quite frankly) to the frontline staff, whether it’s maintenance, leasing, or the on-site manager. If they don’t believe it, as soon as you walk away, they’re gonna revert to [unintelligible [00:23:55].08] and they’re not gonna go by the guiding principles. So change management is a huge piece of that, so people understand the Why behind the What in the change.
Joe Fairless: Best ever way you like to give back?
Evan Hoffmann: I give back to the community, I volunteer with the Denver Dumb Friends League, which is one of the largest animal rescue facilities in the United States. I donate my time, I also do fundraising stuff for them… I work with educating the youth of Cambodia, I do some fundraising stuff for them – a friend of mine turned me onto that – and then I also work with Freedom Service Dogs, where they take dogs that have been rejected by everyone and actually turn them into service animals for vets.
Joe Fairless: How can the Best Ever listeners get in touch with you and learn more about what you’re doing?
Evan Hoffmann: They can certainly go to my website, which is www.incisivesolutions.org, or you could find me, Evan J. Hoffmann, on LinkedIn. I also have a business Facebook page for Incisive Solutions and under Evan J. Hoffmann. So a lot of different ways you can find me.
Joe Fairless: Is that business Facebook page active with tips and stuff, or is it more of a storefront?
Evan Hoffmann: It’s more of a store front. I do post articles and comments on them. If I see something interesting in one of the 20-25 different markets around the U.S. that I work in, then I will post that for the contacts and readers to see, and then put a comment on whether I agree/disagree, or just simply put it out there as fact-based.
Joe Fairless: Great stuff. I’m so glad that you were on the show. Best Ever listeners, if you want to add value to your property without any money out of pocket, then look at value proposition pricing; we talked about how to do that, the three steps for doing so – look at the competitive set, go shop them, and know what your baseline rent is. Then two, ideally, go shop the property that you’re serving, or at minimum have a conversation with them, walk the property etc. and then three, review the historical vacancies for each particular unit (there’s the key there, each unit), and then you can establish some premiums and increase the value of the property without putting any money into it.
Then secondly, if you’re looking at a deal with leases that expire within the same month or two, that’s a problem, and as Evan described to us, the reasons why, and how to reposition them into the peak leasing period of time, and that’s the key there. Really interesting stuff.
Thank you so much for being on the show. I thoroughly enjoyed it, I learned a whole lot. I hope you have a best ever day, and we’ll talk to you soon.
Evan Hoffmann: Thanks so much, Joe. You too.