Have seller fire management, or fire after closing?

Question

Not an easy question, don't mean to be mean.

There are 4, maybe 5, people doing a poor job of what 2 people could do great.
100-unit apartment, 30% vacant due only to management and poor marketing, the building is great. They only use a sign out front to market. There were 4 or 5 units in need of repair and when I went to go see them I was expecting holes, mildew, dead cats, fire damage... saw dirty carpet, dirty appliances, minor drywall repairs, and a need for a fresh coat of paint. $3k-5k per "damaged" room.

The managers I talked to both literally said, "I hate people." "People are idiots." "They asked me to fix this and I said no. HAhaha." --> This was not one of the ridiculous requests tenants can make sometimes. Also, he admitted to illegally installing a plastic access hatch to get to the pipes (they need to be metal legally), which lets me on to the type of work ethic he has.

If I hire a property management company at 10% of rental income, I'll save about $70k a year in expenses and make $200k more if they can rent out another 20 units (I figure 10 units will always be vacant due to natural rent cycles).

So, do I ask the sellers to let them go on the day of closing? Or do I do that? There are a LOT of tools in the office, as well as a nice TV for the security cameras and the computer. Not sure how I try to limit the risk of them taking off with EVERYTHING.

I've also not had experience with firing people, but I could read up on that before doing it.

Andrew Cushman · Answer

@Jonathan Johnson, a few things in regards to what you mentioned:

1.  For a 100 unit property, you should be paying 3-4% fee, not 10%

2.  If you are not keeping the management, on closing day the old management leaves and your management group takes over.  Since it is currently self managed, the current staff are their employees, not yours, so it's the seller's job to relocate or fire them.  You can always make an offer to anyone you want to stay, however it sounds like in this case you need a complete culture change and thus all new staff.

3.  As for the tools, TV, etc. - that should be on the Personal Property List that is part of your contract.  It is exactly what it sounds like - a list of all of the personal property that belongs to the property and is needed for running it.  You need to get that list from the seller, and then verify it is all there when you take over on closing day.

4.  For finding a good mgmt company, I would start by asking the broker something like "who are the top two companies you would hire if you owned this asset?"  I'd then go ask the same question of other brokers who are active in the area.  If the same name or two keeps coming up, then you very likely have found a solid candidate.

Just be prepared - this sounds like a situation where the employees will make off with whatever they can, and probably without the Seller's knowledge.  Prevention is the name of the game, since once it happens you aren't likely to get much back and it's probably not worth the effort anyways.  But keep it in perspective - a few tools and a PC shouldn't make or break a multi million dollar transaction.

Andrew

Brian Adams · Answer

@Jonathan Johnson, for a 100 unit deal your management fee should be 4 to 5% and not 10%.

Normally what happens is that the Seller and the third party management contract terminates at sale. You as the new buyer can engage the old management company or bring in a new one.

In your PSA you will specify that you want all personal property, tools, etc. to stay with the property. The seller should give you an inventory list of everything and in due diligence of the asset you verify everything.

If at closing the Seller takes everything you have a legal claim since the items were identified in the executed PSA.

Jeff B. · Answer

Great - -

If the PM is owned and operated by the owner and NOT a third party  company, so much the better as the owner disengages ALL activity on the  COE settlement date.  You need to be ready to take over with a new team.

Michael Le · Answer

Also, in case you didn't know, just because you pay 4-5% for property management doesn't mean you don't also have payroll for the onsite manager and maintenance lead. A property this size you might have have a few part time people or contractors. The 4-5% is not your only cost so make your including payroll when you say you will save $70k a year.

Jonathan Johnson · Answer

@Jeff B. Sorry, to the seller. They are all on salary with the seller being the employer.

Jeff B. · Answer

What does that mean?  With this size facility, it is common to have an on-site office and resident manager 24/7. The question is to whom does this/these people report to - - the Property Management company(PM) or to the seller?

As   @Brian  noted "Normally what happens is that the Seller and the third party management  contract terminates at sale. You as the new buyer can engage the old  management company or bring in a new one."  So, the on-site staff reporting to the PM will loose their occupancy at COE.  This should be clearly stated in your Offer to Purchase and the resident manager needs to be given a Notice of New Management and a Notice to Surrender their residence.

If the PM is owned and operated by the owner and NOT a third party company, so much the better as the owner disengages ALL activity on the COE settlement date.

In all cases, you have a chore to capture all documents in the possession of the PM and all keys for the facility.  Don't forget to get NEW agreements for maintenance and yard work.

Jonathan Johnson · Answer

@Brian Adams The current management is in-house.

Samir Shahani · Answer

If it were me, I would wait until the property is yours, then fire the management company.  The anecdotes you gave of them talking about people and fixing things is enough for me to be done with them.  You can probably find a very good property manager with little-to-no effort.  Try Google :)

A good property manager will make ALL the difference in your investment success.

Have seller fire management, or fire after closing?

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