Mike Kalis is the CEO and president of Marketplace Homes. He joined us on the Property Management Show podcast to talk about growth plans and discuss the challenges of acquiring property management companies.
Marketplace Homes – 19 Markets and 3,100 Doors
Marketplace Homes was born 11 years ago, in metro Detroit, during the collapse of the housing market. The idea was to help people get out of their existing homes and into a new home. At that point, the only way to do it successfully was to rent out the existing property.
The company grew quickly, and they appeared on the Inc. 500 list four years in a row as one of the fastest growing companies to watch. Marketplace Homes grew in 19 markets, and they presently manage 3,100 doors. They’re adding 150 to 200 doors per month.
The goal of Marketplace Homes is to give the property management industry the multiples it deserves. They want to have 30,000 homes under management and be the first public property management company on earth.
As a company, Marketplace Homes has done a lot of acquisitions, and they want to do more.
Some people become accidental property managers, just like others become accidental landlords. The market is pretty hot right now, and brokers who were making money selling homes full time are not so enamored with the property management business anymore. They’re burning out with this business, so Marketplace Homes is pursuing the portfolios of people who are ready to retire or pursue other opportunities.
Marketplace Homes plans to get to that 30,000 homes in five years. They currently employ 85 people, so they are ready and staffed up to handle that growth.
The Reverse of Growth and Castle Property Management
With the previous podcast focused on the lessons that could be learned from the closing of Castle Property Management and Mike’s presence in the Detroit market, it was hard not to talk about what went wrong with Castle. Like Alex, Mike believes they ran out of money. He also believes that people need to come first and tech needs to come second.
Great people will fix lousy processes and ineffective technology. However, great technology will not fix lousy people. The team at Castle was great. But, in a service-first industry, it’s very hard to focus on the tech and succeed.
The Challenges of Acquiring Property Management Companies
Acquiring property management companies comes with a number of challenges. Three of them are pretty obvious and difficult to overcome. They are:
- Financing the purchase.
- Finding companies that want to be bought.
- Integrating the companies into your own operations.
How Do Companies Like Marketplace Homes Finance Their Acquisitions?
It’s a lot like buying real estate. You pay with cash or you settle for terms. Cash can come in through investor money, operations money, or other types of income. If you’re trying to put together several deals and you have the cash flow to support it, you might explore an SBA loan. Otherwise, you can rely on outside investors, bank loans, and your own capital.
The other option is to buy a company with terms. You know that each door you acquire will generate a certain number of dollars every month. With an acquisition, you’ll take a percentage of that income and give the rest back to the owner.
It depends on what the sellers want and the buyers agree to. Some want a large check so they can go off and explore different opportunities. Others like getting a monthly payment coming in from those properties.
The key is a good partnership. The sellers have to be sure they’re going to get their payment if the deal is for terms instead of cash. To offset that risk, sellers often earn two or three times more than they would in a cash deal. Otherwise, you have to trust the buyers. If you’re worried that you won’t get paid, you probably shouldn’t do the deal.
Deals don’t close when there’s a lack of trust. Face to face meetings can make a big difference. Meeting each other and getting an idea of what each company is about can inspire a better business relationship. Physical connections are helpful when you’re acquiring a company. So is the exit strategy. If the seller doesn’t have a clear exit strategy, there’s a good chance the deal won’t close.
So – cash, loan, or terms are the best ways to finance an acquisition. Or, some combination of all those. And, meet someone face to face when you’re buying or selling. Be honest, and talk about exit strategies.
Why Sell a Property Management Company: Fitting into Industry Shifts
Property managers who were once brokers know there’s more money to be made on the brokerage side now, and that’s a good reason for them to sell their companies. The industry has shifted. There aren’t as many accidental landlords right now. So, if you built your business off those clients, you have a shrinking portfolio.
The property management industry is in a state of suspension. Property managers do well in a down market, such as the one in 2011 and 2012. Property managers do pretty well in a hot market, too. Just look at 2015 and 2016.
Currently, the industry is in between cycles. The next couple of years will likely be quiet, especially in terms of accidental landlords. The accidental landlord client has been reduced by about 70 percent. That will continue to drop, as the investor client emerges.
There’s also a geographical difference. In Atlanta, it’s easy for investors to put money into real estate. It makes sense. But, in New Jersey, it’s hard to get the same outcomes. Investors are priced out in markets like San Francisco. So, depending on where your company is located, the next few years will make a difference to whether you’re able to grow.
Take a look at your portfolio. Is it made up of investors who are still acquiring properties, or is it made up of accidental landlords? Investors will grow. That profit is going to happen, and hopefully those gains go towards other properties.
Property management is a counter-cyclical business. This is perhaps the biggest Bull Run for real estate in 100 years. So, if you’re choosing to be a property manager instead of a broker during this period, you had better be the very best property manager in your market. You can survive, even in a competitive market, if you’re great at what you do.
But, if you’re a mom and pop shop managing 70 homes, you may need to reflect on whether you’re the best in your market. With the market trending the way it is; if you’re not the absolute dominant person in your market right now, it might not be a mistake to sell while there’s still some value in your company. That’s the thought process of Marketplace Homes.
How Do Companies Like Marketplace Homes Find Companies to Buy?
To grow through acquisition, you need to know where to find the smaller 70 to 100 unit portfolio companies with people who are burnt out. You also need to find larger companies that are ready to transition. Sometimes, it’s as simple as picking up the phone.
An acquisitions team can provide support by reaching out and staying in touch with companies that may inquire years before they’re actually ready to sell. That’s a longer sales cycle.
Networking is a big part of the acquisitions process. It’s critical to attend events like PM Grow Summit and NARPM conferences. Be open and willing to chat honestly. It’s not too hard to get lists of property managers from organizations like NARPM. Sending out emails and engaging in constant outreach is the best way to acquire those properties.
It’s hard to think about the end or exit when you’re building a business. If you have an end goal in mind while you’re growing, that’s great. The point is to build an institution instead of a one-person business. It’s not about you and it’s not even about your company. It’s about knowing how to build something that has real value. You’re creating something that produces financial results. Marketplace Homes wants to take that thing you’ve created to the next level.
How Do Companies Like Marketplace Homes Integrate the Businesses They Buy?
After the acquisition is found and financed, it’s time to integrate the new company into the established company. This can be tricky.
The goal is to not lose owners. Marketplace Homes has an onboarding team, where specific people from each department will be assigned to the portfolio. There’s also a Solutions Team who talk to homeowners about the partnership. Every single client that’s acquired is contacted. They introduce themselves and explain what’s going on.
The exact fee structure is kept in place. You might argue that this doesn’t make sense, and may even cost money, but it can be an important way to establish trust and maintain stability.
Otherwise, most of the processes can stay the same. Some operational things may change, such as contact information for emergency repairs. Those are the things that owners are taken through, step by step. There’s also a team that contacts tenants. Similar to the onboarding process with owners, things are explained to the tenants so they know what’s changing and what isn’t.
The branding depends on the company that’s been acquired.
For Marketplace Homes, the general practice is to absorb all of the acquired companies under their umbrella. It makes the most sense and it keeps the business simple. The exception is when there’s a brand that carries equity. And, this may change in the future. Staying open and flexible is a good way to succeed.
It wouldn’t be a Property Management Show podcast if Alex didn’t ask his guest about their customer acquisition cost. For Mike and Marketplace Homes, it changes for every funnel and every market. Generally, it’s between $400 and $700.