Why I fired my (beloved) PM

[Brie Schmidt]

For anyone who knows me, or has listened to my podcasts, you know that I rave about my PM. C (my PM) and I met in spring 2014 when we put in an offer to buy his triplex. He had a great relationship with his tenants and treated them like we treat our tenants for our self-managed properties. We started talking and it turned out he manages properties for his wife and her family. So we ended up buying a few of the family’s properties and hired C to continue to manage them all.

C was a teacher who wanted to do real estate full time, since we could not replace his teaching salary with PM fees at this point we agreed that we would try to ramp up during the school year so that by the following spring we could afford to replace his salary. We closed on our first properties in July 2014 and things were a bit chaotic with the transition. About two months had gone by and we still never got any sort of report or P&L. He was so busy in the field taking care of the violations and the transition that he didn’t have time to do the books, so I agreed to take over the accounting until school was done.

We continued to ramp up buying another 14 units in December 2014, 14 units in February 2015 and 12 units in May 2015. We were growing like crazy and I wasn’t too upset when little things were falling through the cracks. When he left his teaching job in June 2015 I expected things to “tighten up” and be fully operational…but they didn’t.

I started working with partners in June 2015 when we bought a 3 unit property. Things seemed to be running smoothly, but I was still doing all the books and admin stuff and paying him 9%. I chalked it up to his need to be in the field more than he needed to be in the office, so I tried to get him organized and set up with systems. But by August he was still handing me handfuls of receipts every month and didn’t even know who paid rent until I sent him a report. We were about to do our biggest acquisition yet (18 units) and it was all with partners, so I had to be super cautious.

It was then that I had the scariest conversation of my life. I was talking with another area investor who also loved his PM. This guy had been to his wedding and was such a good friend they never even signed a PM agreement. Long story short, things went south and they had to make a change late on a Sunday night. The owner had no leases, tenant contact information, ect. The PM had been cooking the books and they had to transition with nothing more than the addresses of the properties they own. It was now 8 months later and things were much better, but he lost thousands of dollars because of what happened. So it got me thinking… what would I do in that situation?

We did have a contract, but all the tenant files were at the office 2 hours away, so if something went south he could get to them before me and then I would almost be in the exact same situation. It was then that I decided to do an audit of everything. I came to find he had missing receipts, contractors paid from our account without W-9’s, tenants not on leases, and overall chaos. If I wasn’t doing it, it just wasn’t getting done. We had tenants getting 5 day notices for 6 months in a row who were 2 months behind in rent and he never even filed an eviction!

With 18 units coming on board with first time partners, I just couldn’t let their units fall into the same problems. We decided to transition everything over to a PM software so C could be better handle the accounting and keep tabs on who is past due. So we had a long, long, conversation in the beginning of September about everything. C and I have an amazing relationship and I walked away from the meeting confident that we were on the same page and that things would be fixed before they got too bad. He asked for one month to complete everything and that was that.

Well, at the end of the first month it wasn’t done but he asked for two more weeks so I agreed. I was supposed to go to Puerto Rico for a vacation, but felt uneasy that nothing was done so I cancelled my trip so I could stay close.  By the end of the second month not a single thing had been completed at I was up on a Saturday night at midnight reconciling our bank accounts because reports were due to the partners on Sunday and he did not do it.

So I knew what I had to do. I set up PM interviews that week and handled to transition of our portfolio to two different PM’s. I choose to split it for a couple of reasons; we were big enough to have some priority with each PM, taking over that many units at once is overwhelming and I felt they would be better equipped to handle half, if one screws up I have a backup, and they know I have another option so they are incentivized to do their best.

Letting C go was very hard, I chugged a glass of wine and was shaking when I did it. But for the first time in months I slept through the night knowing that we made the right choice. It was never a question of his integrity, but we were open to so much liability with tenants not being on leases or contractors not having W-9’s that we just couldn’t risk the liability. He was very good at half the business, but was not equipped to handle the whole business.

I had always thought that having an “in house’ PM was far superior to hiring a property management company, but now I realize I might have been wrong. The PM companies are already set up with the systems and staff, and chances are they have seen/dealt with it all already. It was been three weeks since we made the move, and way too early to tell for sure, but I have about 20 hours a week back in my life because I am not doing stuff that is their responsibility. I can now focus more on my brokerage business and website business and not be working “in my business”

So the lesson learned is to check and verify. If I had never learned from the other investors fallout I would have never thought to double check my PM. And very bad things could have happened to us.  So we are moving forward, and after a few months will continue to grow once we are sure they can handle it.