My Owner Building Portfolio, Asks Me for a 3% Discount off PM fee

[Kristen Williams]

We have worked hard to build our relationships over time, with owners and investors, and we are even expanding. We have done this by evaluating workload, and setting fair Property Management rates with our owners, on a case by case basis. We treat them all as equally as possible, but realize some are very high maintenance, and others, sadly, have taken advantage of us, asking low rates to begin with, as they build, and then we make them a lot of money, only to ask us to lower our rates, so they can earn more by saving on our cost, since we are to them, essentially, overhead. I have been working with a certain client for 5 years now. We started out leasing for them only, and he and his family self-managed. Then, tenant issues started arising where they were wanting maintenance done, it was promised and not completed, etc.. so we showed him the benefit of professional management. We set a very fair rate, and have managed 3 of his properties. Now, he is buying 3 more properties, and I already have 2 of them pre-leased at an excellent rental rate with qualified, impeccable tenants. Now, he has asked us to lower our rates by 3% so that he can save money, because it is tight for him, as he is buying up. He is a very well respected, very kind and thoughtful individual, so I was surprised at this. I felt that he did not value our services and asked if we had not provided them well enough. He was very pleased with us, but was strictly looking at savings, and said he and his wife and grown son could do the maintenance themselves, and save that money. He has also asked us for all the security deposits to be sent to him to put into a trust - which takes our compliance into a worrying level, so we are going to have him sign a statement that he is responsible for them.  I understand his perspective, but as a PM business, will the stance of "some money is better than zero money" going to diminish all the extra and above things we do for him, and devalue our business? Or should we remain solid in staying at our current rate. We have not raised rates on any owners in the past 3 years, in order to keep them. Thank you in advance for your thoughts. 

[Jaysen Medhurst]

Sounds like you've found yourself in a race to the bottom, @Kristen Williams. If this owner (or any other owner) doesn't see the value in quality PM services, you're not doing yourself any favors trying to undercut the numbers. I would think about this from a few different angles, all of which assume you are currently competitive with other PMs in the area.

1. What does it actually cost you to manage these properties? If you only spend an hour or two a month on 6 units, maybe a discounted rate still works. He's basically anchored himself to a price of "$0" and you'll never be able to satisfy that. You obviously can't manage these at a loss, but if they're easy and you think he's going to continue to grow, it may be worth staying on.
2. Reducing your rate as an owner has you manage more units makes complete sense. I don't know about 3 percentage points to go from 3 to 6, though. For 1 or 2 SFRs, I'd expect 12%. For a few MFRs or small complex 10%. For larger complexes or larger portfolios THAT ARE NOT EXCESSIVELY BURDENSOME TO MANAGE, I could easily see 8% or even lower. Define for your business what those ranges are and then explain them to your owners. If they push back, stand your ground. If you provide a great service you deserve to be paid fairly. Don't undervalue yourself.
3. Lastly, perhaps this is an opportunity to rethink how you charge your clients. I don't love the way most PMs charge (i.e. monthly percentage, plus placement fees). It does not align the PM's interests to the owner's. If rent is $1k and the PM gets 10%, plus 1-month fee for placing a new tenant, the PM is actually incentivized to have higher turnover, the exact opposite what the owner wants. @David Wolber and I spitballed a pricing plan a while back to address just this. The idea was that the PM gets a relatively low placement fee (say 25%), but progressively larger fees when a tenant renews a lease at new market rate (an important part). This was offset by a slightly higher monthly management fee. The idea is that the PM is incentivized to 1) get great tenants who are more likely to stay a long time and 2) provide great service to reduce vacancies. Hopefully, Dave can speak more the specifics and how successful it has been so far. IIRC, the break even point was ~30 months. If a tenant stayed less than that the owner ended up paying less in total fees than with a traditional contract. More than 30 months and the PM came out ahead. Again, aligning PM and owner to minimize turnover.