JF1801: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 6 of 8 | Syndication School with Theo Hicks
We started covering how to manage the property management company of your apartment communities yesterday. Today, Theo will cover how to approach firing them if they are not performing to your standards. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.
As you know, each week we air two episodes (a podcast and a video series) that are part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we give away some sort of document, PowerPoint presentation, Excel template, some sort of resource for you to download for free. All these episodes, as well as the free documents can be found at SyndicationSchool.com.
This episode is a continuation of a series entitled “How to asset-manage a newly-acquired apartment syndication deal.” This is part six, and – well, if you haven’t done so already, I recommend listening to parts one through five, where first we discussed the ten asset management duties in parts one through three, then in part four you learned more details on one of those duties, which is maintaining economic occupancy. We went over 19 ways to list and market your rental listings in order to make sure you’re maximizing not only the physical occupancy rate, but the actual economic occupancy rate (the rate of paying tenants). Then yesterday or an episode before this one – part five – we went over how to manage your property management company.
So in parts 1-3 we went over the best practices for being the asset manager, and then one of those is obviously managing your management company, so we went into more details on that yesterday, and specifically what you need to do in order to make sure you’re getting the most out of your property management company. Well, what happens if you’re not? What happens if you are implementing those practices and they aren’t sending you the reports you’re asking for, they’re not showing up to the weekly calls; maybe all of your variances are way off, the occupancy is really low, lagging behind… Well, what do you do then?
One option is to do a performance plan with them and try to figure out how to get them back on track, but another option is to fire them and to find a new management company. That’s what we’re gonna talk about in this episode. It’s gonna be about how to approach firing a property management company. Essentially, we’re gonna talk about 1) when you should fire a management company, and then 2) if you’ve made that decision, how to actually go about doing it so that you’re ensuring a smooth transition from the company you’re firing to the new company that you’re bringing on.
There’s really only three reasons why you would want to start the process of firing a property management company. One is if they’re committing some sort of crime or fraud against you. If you discover that they are committing a crime or if you discover that they’re committing fraud – maybe they’re stealing money, embezzling funds, or whatever – then obviously you should begin the firing process immediately. And of course, if you’re not staying on top of your management company, if you’re not doing these weekly performance reviews, if you’re not requesting different financial reports – well, you’re not gonna know. And if you’re not visiting the property frequently… You’re really not gonna know if they’re committing fraud or committing a crime. That’s why in part five I’ve mentioned the reports you should request and here’s how often you should visit the property so that you can determine if some sort of crime or fraud is being committed… Plus talking to the residents as well. So that’s one – if they’re committing a crime or fraud, you should start the process of firing them immediately.
Number two is going to be lack of execution. That’s the second reason why you might want to consider firing your property management company. But before you instantly jump on them and blame them for your projected budget and your actuals being so far off, you first wanna make sure that it is indeed your property management company’s fault. You wanna make sure that it’s something they are doing or not doing that is making such a large variance between what you projected and what’s actually happening.
For example, let’s say you projected a $150 rental premium on the renovated units, and then you realize that you’re only getting $50. Well, the failure to meet that $150 rental premium might be because your occupancy is a lot lower on the property. Or maybe it’s because you have a high loss to lease. Well, that could be the fault of your management company because they’re not marketing properly, or they’re not targeting the correct people. Or it could be because of the market conditions. Maybe when you bought the property the market was in a completely different state, and after you’ve closed, after a few months something happened where the market took a turn and the rents dropped, and the demand for your particular unit dropped. Well, that’s not necessarily your property management company’s fault, and if you fire them, it’s not really gonna fix the problem, because firing your property management company is not going to fix the market.
Let’s say, for another example, you are having a lot of deferred maintenance issues, or let’s say you have deferred maintenance issues and they’re not getting resolved quickly enough, or they’re not getting resolved properly. Or let’s say that the renovations performed on the interiors are not good, things are falling apart after a few months or a few weeks, or whatever. Well, that could be the fault of the management company, but it also just could be because of a poor vendor, and instead of firing the management company, you can just fire that particular contractor, and that will solve that problem.
Overall, if you’ve identified some lack of execution somewhere at the property, before jumping to firing the property management company, the next step is to actually figure out what’s going on, to figure out exactly why there is a lack of execution, and make sure to confirm that it actually is the property management company’s fault, and that if you were to fire them and to bring on someone new, that would actually fix the problem, and it’s not something that’s a vendor’s fault, it’s not something that’s just the fault of the current market conditions… Because – well, if you fire them and it’s the contractor’s fault or it’s the market conditions’ fault, then you’re gonna keep seeing the same issue with the new property management company, and you’re gonna fire them again, and you’re never gonna really get to the root cause of what’s happening… And if you don’t ever get to the root cause of what’s happening, you can never really fix the problem. So that’s the second reason you might wanna fire the management company – a lack of execution.
The third one would be a lack of communication. Obviously, we all have different wants and we all have different preferences in regards to the level of communication and the frequency of communication we have with our management company, so this is kind of subjective… But it’ll be kind of a gut feeling and you’ll be stressing out about it if your property management company is an ineffective communicator. So here’s a few examples of things that would be an indication that they’re not good at communicating. Obviously, you’ve got your weekly or monthly meetings; well, are they prepared for those meetings? Are they showing up on time, or are they always late? Are they always having to reschedule to a different time of the day or a different day of the week? Are they not prepared with the reports or have they not reviewed their reports at all? Does it just seem like they have no idea what’s going on?
How long does it take them to reply to your emails? If you email them with a question that an investor asked you, do they get back to you that same day, or the next day, or a week later? Do they never respond at all? How easy is it to get them on the phone? If you call them, is there someone that’s always on the phone that answers it, or does it go straight to voicemail? If you leave a voicemail, how quickly do they return your phone call – the same day, the next day, a week later? Do they communicate with you immediately if something goes wrong at the property? If there is a really big storm and there’s some water damage in some of the units – well, when do you find out about that? Do they call you that day and say “Hey, we’ve got water damage at the units. Here’s how much it’s gonna cost to fix. Do I have your go-ahead?” or do they say nothing? And if they say nothing, do they actually fix the problem? When do you find out about it? Do you find out about it when you come there in a month and you realize that half the units have had water damage for a full month?
Those are some examples of things that your property management company could do that indicates that they’ve got poor communication skills? …and I guess in the sense of that last one, if there’s water damage and they’re not fixing it, that’s kind of a lack of execution as well. These are all signs that you might want to fire the management company.
Now, this is an important distinction – unless you’ve determined that they are committing fraud or some sort of crime, then we recommend waiting at least one quarter (three months) before you begin the firing process. So let’s say you determine that the reason why the rental premiums are $100 below your projections is because of a lack of execution on your management company – well, let them know about that issue and try to brainstorm a way to fix that problem and have them actually execute, so that you’re achieving that number. And if after a quarter they still aren’t executing, they still are doing the same thing they were doing before, then you can begin the firing process. Same thing for a lack of communication. If say for a month they stop showing up for the weekly calls, don’t fire them right away; get them on the phone and see if they change their behavior. If they do, great. If not, after a quarter then you can start that firing process.
The first step, if you’ve determined that it’s time to fire your management company, is before you actually reach out to them and say “Hey, you’re fired”, make sure you have a replacement property management company… Because you never really know how that conversation is going to go. If you fire them and they leave that day and you’ve got no one else to manage the property – well, then you’re kind of screwed; you’re kind of in a worse situation. A horrible management company is better than no management company, at least for the time being… So make sure you’ve got a replacement on deck and ready to take over the second you have that conversation with the management company.
If you remember all the way back to one of the earlier Syndication School series episodes we talked about how to find a property management company; so if you just go to JoeFairless.com and search “How to find a property management company”, you will find that episode, and I believe we also have a blog post on the questions to ask as well.
So you’ve determined that your property management company is a terrible communicator, they’re not executing on what they said they’re going to do, and maybe they’re embezzling funds, so it’s time to fire them. After you make the decision to fire the management company and you’ve found that replacement, here are five things that you need to think about and address in order to make sure there’s a smooth transition.
Number one is staffing. You need to figure are you going to fire all the existing staff at the property, that’s on site? Or are you going to allow some of them to stay under the new management company? So are you just firing the site manager or are you firing all the leasing agents and all the office staff, all the maintenance people as well? Everyone on the payroll – are you firing all of them as well, or just the actual overall property management company, but you’re gonna keep these little subcontractors and allow them to stay?
In order to determine who stays and who goes, have your new property management company interview and vet the current staff. Once they take over, they’ll interview and vet everyone who’s there, and then let them decide who should stay and who should go, just because they have a lot more expertise on that than you likely do, especially if it’s your first few deals.
Now, keeping some of the existing staff can be very helpful and ensure a smooth transition, because they already have previous experience and they likely also have inside knowledge on operating the actual property… But of course, if the current staff is not performing, then the property management company might need to bring on an entirely new staff. So for the staffing there’s pros and cons of keeping them on. The best bet is to just have your management company interview them and let them decide who stays and who goes.
The second thing you wanna think about are the financials. Your new property management company should – ideally, if you screen them properly – proactively request all of the financial documents from the previous property management company that they need in order to effectively take over the operations of the property. They don’t wanna just go in there and have a blank slate and not know what’s happened the past month, the past year, the past two years, depending on how long you’ve owned the property.
If you remember, in part five I’ve listed all of those reports that you wanna request from the management company; well, your new management company should request those reports from the old management company as well. They’re gonna want the historical profit and loss statements, they’re gonna want a copy of all the current leases, they’re gonna want the current rent roll, they’re gonna want a chart of the accounts which lists all of the income and expense line items, they’re gonna want to know about bad debt, delinquency, the occupancy status, the leasing status, the leasing activity… They’re gonna wanna know everything about the property leading up their firing, so that they can take over from where the old property management company ended, identify the issues and resolve them as quickly as possible.
If they don’t have that, they’re not gonna know what’s wrong at the property, and they’re gonna have to manage it for a few months, six months or maybe even a year in order to determine exactly what the issue was with the last management company. So that’s number two, financials.
Number three are renovations. The new management company is going to need a list of all the units that have and haven’t been renovated. Also, they’re gonna need to know exactly what was done to each of these units, preferably as detailed as possible, because the new property management company needs to know what units were entirely renovated and what those upgrades were; what units have been partially renovated or are in the process of being renovated, or I guess maybe were in the process of being renovated and then your property management company stopped doing it… Then from those ones, what else needs to be done with those units. And then what units have not been touched at all. That way, once they take over the property they can finish up those partial units and bring those to full, and they can begin and complete the non-renovated units… Whereas, again, if they don’t, they’re gonna have to walk every single unit, they’re gonna have to ask a bunch of questions on what you want done in the units, and it’s not gonna make it a smooth transition.
Obviously, if the old property management company doesn’t have that, then the new management company is gonna have to walk all the units and bug you, obviously… But ideally, again, this is all about making a smooth transition. There’s a list of all of the units and their current upgrade status.
Number four is vendors. The new property management company is gonna need a list of all the vendors who currently work on the property: the maintenance person, a plumber, a painter, the go-to appliance repair person, carpet person, drywall person, HVAC person, things like that. Then similar to the staff, you’re gonna want to have the new management company interview all these people to determine if they should stay or if they should go.
Then lastly and similarly to vendors is the service contracts. The new property management company is also going to need a list of all the contractors who work on the property: the pest control, pool person, landscaper, security, things like that. Then they’re gonna want a copy of all the actual contracts as well, just because they need to know who are they obligated to work with and who can they actually replace and find someone else.
So those are the find things that you wanna think about and do in order to ensure a smooth transition. Again, that’s 1) staffing, 2) financials, 3) renovations, 4) vendors, and 5) service contracts.
Now, here’s a few other things to think about when you are going through the process of firing a property management company. Number one, firing anyone (not just a management company), the firing process in general isn’t easy, and unforeseen difficulties are going to arise. You should go in knowing that, and knowing that however you think it’s gonna go in your mind is most likely not how it’s actually going to play out in reality.
In order to minimize the negative impacts of firing a management company, here’s three things you can do. Number one, when you’re actually firing them, use what we’ll call soft communication skills when you’re explaining why you’re firing them. Don’t call them up on the phone and say “Hey, this is Theo. I just wanted to call you and let you know that you’re fired” and then hang up. Obviously, you’re not gonna do that, but don’t do it anywhere near that. Instead, you’re gonna be closer to, for example, talk to them in person, ask them how their day is going, whatever, and then say “You know what, I’ve really enjoyed working with you, but at the moment I’m getting a lot of pressure from my investors to find a new management company to manage our property, so we’re gonna have to part ways.” You can blame your investors, so it’s not necessarily you are saying you wanna fire them, it’s your investors… So the conversation can go a little bit smoother. Something like that.
Overall, the point is you don’t wanna just aggressively say “You’re fired!” and then walk away. You don’t wanna be really aggressive and get mad and say “Well, you did this, this and this, and that’s why I’m firing you. I hate you, and I’m gonna write a terrible review for you online”, and things like that.
You’ve gotta keep in mind that when you’re going to fire them, they still have a lot of control over your property, and you don’t want them doing anything crazy, which — obviously, if you’ve screened them upfront properly, that shouldn’t be an issue, but you never know.
Next you wanna make sure you actually read the contract that you signed between you and your management company, just to make sure that you are certain about whether you can actually fire them. Sometimes the contract says that you signed a 12-month contract and you have to pay them for those full 12 months. So if you fire them after six months, you have to pay them six months additional worth of management fees. Or if you want to cancel the contract, you need to give us 60 days notice. So make sure you read through the contract first, to know what you are allowed to do, or if you are to take an action to fire them, what you’re going to have to do extra to actually get out of the contract.
And then lastly, have a representative from your new management company do those five things that I mentioned above: interviewing the staff, getting all the financials information, getting a list of renovations, getting a list of the vendors and getting a list of the service contracts. Have them do that. You shouldn’t be doing this yourself.
You also might wanna have the new management company actually get that information by talking through a neutral party. So rather than talking to the actual on-site manager who you’re firing, have them talk to the regional manager instead, who isn’t as emotionally involved with the property, just because they’re probably managing hundreds of properties… Whereas the onsite manager, that’s their job, and they will be a lot more emotional about the firing than the regional manager.
Overall, number one, when you’re firing them, use soft communication skills. And you should be the person that does this; don’t have the new management company come in there and do an up in the air type situation.
Number two, make sure you’ve read the contract between you and your property management company to make sure that you’re going through the process the right way… And then three, have the person from the new management company who’s actually going to request all the financials and lists of vendors etc. – have them do that through someone who’s not the actual on-site manager that you’re firing. Make sure it’s someone that’s like the regional manager or someone that’s not involved emotionally with the actual property.
As I mentioned, obviously firing a property management company is not gonna be a fun process, but if there is fraud, if there is crime, if there is a lack of execution, if there is a lack of communication, it just needs to be done, sooner rather than later. There’s lots of horror stories out there about terrible property management companies that could have been resolved by obviously screening them better upfront, but by also firing them sooner than later. It might be a rocky few months to transition from the old to the new, but once the new property management company is up and running, you’re gonna be grateful that you were able to make the transition.
That concludes this episode, where we talked about the process for firing the management company. Make sure you listen to parts one through five of this series. I’m not exactly sure what we’ll talk about next week, but we’re gonna continue talking about how to successfully asset-manage a newly-acquired apartment syndication deal. We’re probably gonna talk about different ways to make sure that you are not only attracting high-quality tenants, but you’re retaining high-quality tenants at your property as well. That’s probably gonna be what we talk about next week. But again, until then, listen to parts one through five, listen to some of the other Syndication School series; we’re now in series 20, so there’s 19 other series that you can listen to about the how-to’s of apartment syndication.
Also, make sure you download the free document for this series, which is that weekly performance review template. We’ve also got 20+ other free documents for you to download for free. All of that can be found at SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow on Follow Along Friday.