What We Can Learn from the Failure of Detroit's Castle Property Management | Fourandhalf - Internet Marketing for Property Management Companies

The Property Management Show Case Study

The latest event in the property management industry is quite significant. Castle Property Management, a VC-backed, technology-first start-up in Detroit is closing their doors. Let’s talk about what we can learn from the failure of this property management start-up as an industry and as entrepreneurs.

Our guest on the podcast today is often the smartest guy in the room. He’s the founder and president of RentWerx, which is growing by a door a day: Brad Larsen.  

The Story of Castle Property Management

Max Nussenbaum, the co-founder and CEO of Castle, spoke at last year’s PM Grow Summit. His talk was inspirational, and his message was on point.

Take a look at the start-up’s TechCrunch profile:

“Property management is one of those industries that typically lags behind the rest of the US economy in terms of technology, customer service, and transparency. Castle is trying to bring the industry up to date with its automated property management platform.”

Is the assertion correct that technology and customer service are lagging in property management?

Perhaps.

Property management is an industry that started in the back rooms of real estate offices, and for years, property managers did not get any resources, attention, or technology. Let’s face it: the only people who went into the property management field were the ones who had failed at selling real estate.

So, technology and customer service have room for improvement, especially in the property management field. What about the third part of Castle’s statement: transparency?

What Transparency Means to Property Managers

Brad argues that many management companies are as transparent as they can be. Everything just short of the company books is online. Companies mean a lot of different things when they call themselves transparent. Being open about fees and costs is very common already. A lot of property managers are doing that. Are transparent at every level? Do your communication practices make people feel good about renting with you?

Many owners who hire a property manager can’t be reached or don’t want to be reached. They hired a property manager to take the work off their hands, and because of this, the drive to be transparent can sometimes have unintended consequences. Brad and his company constructed a unique, state-of-the-art portal that told owners everything they wanted to know. Statements and inspection reports and leases were uploaded and available. However, rather than helping owners, it seemed it was only inviting them to complain or point out mistakes. It wasn’t worth the time or the effort anymore, and he realized it was just easier to provide things to owners when they needed it.

Alex looks at transparency from the perspective of an investor looking to hire a property management company. He says he’ll want to see all the accounting and all the forecasting and all the documentation right there in front of him; neat, organized, and accessible. He also believes that while Brad works with the best of the best in the property management field, not all companies are as transparent as they could or should be.

Transparency for its own sake may not be impactful. However, implementing meaningful transparent practices has the potential to create a better user experience industry-wide. Castle may have missed an opportunity there, or perhaps they simply weren’t ready for the specifics of their market.    

Property Management as a Service Business: Castle’s Team

Property management is a service business, and there’s a bit of a modifier to that service when a company calls itself tech-first. Alex and Brad both run companies that are tech-focused.

But.

The tech should enable the service. Some technology is built and some is bought. Castle tried to combine technology with on-demand labor by hiring 18 people domestically and 30 people in the Philippines. Then, they had 15 stewards managing their homes. These were likely contract employees conducting inspections and showing properties.

That’s a lot of people to manage 400 homes. The plan was to put this in place and grow and scale to the point where that kind of team made sense.

It never happened.

The service component, it seems, was put onto an assembly line. Somewhere on that assembly line, things broke. Having control over labor costs is a definite positive, but if there’s a disconnect and customers are getting phone calls and emails from people they don’t even know, it can feel like their property isn’t being properly cared for. Things fall through the cracks.

According to Brad, it results in something like this: No one was in charge of everything, and everyone was in charge of nothing.

Brad’s company uses the portfolio model of building a team, and Alex uses the squad structure at Fourandhalf. The squad structure, if you’re not familiar with it, looks like a triangle. There’s a campaign director on top, an account manager and an assistant account manager underneath, and then a virtual assistant handling the lower level tasks. That’s the squad. And it may look like an assembly line as well, but – it’s not a line. It’s a triangle, so everything comes back to the campaign director. Nothing drops off. There’s accountability.

Bob Walters says to delight your customers with great service. You want to be your customer’s hero. How you get there is irrelevant. Castle Property Management never got there.  

Experience and Trust is Never Replaced by Tech

It’s easy to be impressed by technology. However, when you’re presenting your services to property owners and corporate investors, it can be hard to gain traction with technology. They want to know if you’re going to be able to take care of things. They want to know their investment will be protected.  

It’s fun to be around a cool, young, start-up genius who is clearly very smart. But, at the end of the day, an investor’s property is their biggest asset, and it cannot be played with. It cannot be experimented on. Investors want experience in the market and in the industry.

It’s what Brad calls the warm fuzzies.  

You might have great techniques and impressive technology, but if investors aren’t confident that you are going to protect their investments, it’s going to be hard to get new business.  

Experience is big because potential customers want to feel protected. When you’re making a presentation at your kitchen table to an owner or an investor, or you’re even talking over the phone or via Skype, you want to be able to talk about the things your company has been through and why you’re positioned to protect an asset and work with an investment.

Owners do not want adventures.   

Fee Structure Can Determine Success or Failure in Some Markets

Another quote from Castle’s TechCrunch profile reads like this:

“While most incumbent property management companies charge a percentage of rent collected, Castle just charges a flat fee of $79 per unit per month.”

On its own, that’s not a problem. Plenty of successful property management companies work within a flat fee structure.

That kind of income may not cover the cost of acquiring a customer or paying for business expenses. You need to generate enough revenue per door every month. Castle’s idea was to cut down expenses with technology, and then scale the company.

It never happened. You can’t do that with 40 employees, even if some of those employees are not full time. That’s a large chunk of the revenue that will go towards paying the staff. A $79 management fee may look attractive to customers, but it will be hard to make a profit.

Sometimes, when you’re entering a new market, you have to introduce yourself with a low management fee. You’ll get your base by charging less, and then raise your rates later on. This is a proven business model. However, Castle just couldn’t scale up and generate revenue.

What Drove the Failure at Castle?

Take a look at Castle’s capital and funding table.

  • They started with a $30,000 note in June of 2014.
  • They raised $272,000 in April of 2015.
  • They raised another $120,000 in November of 2015.
  • They raised an additional $350,000 in December of 2015.
  • In April of 2016, they received a last round of funding to the tune of $2.5 million.

If you’re like Brad, your mind may shut down at the thought of raising $3.3 million and then folding. Remember, they didn’t have $3.3 million to manage their 400 properties. They had $3.3 million to bring a new property management solution to investors.  

But, it didn’t work.

There are a number of possibilities for what happened and why the money couldn’t keep them flexible and able to pivot when their initial platform seemed not to be working.

Perhaps the investors saw a lack of success and insisted they fold. Perhaps they ran out of cash. Perhaps they couldn’t secure another round of financing.

You may be shaking your head at the amount of money and the size of the failure. Remember, technology is expensive. Talented people are expensive. The team at Castle didn’t get rich off this. They weren’t paying themselves very much. A lot of that money was likely tech and development dollars.

What You Can Learn from the Castle Case Study

Tech is cool. Tech is fun. Tech is a means to solve a programmatic problem.

Did you hear that? Tech is a means to solve a programmatic problem.

If you’re not giving the service aspect the respect and attention it deserves, you will fail. Customers need to trust the company and the service. They aren’t going to work with you because they trust your technology. It helps. It solves problems. But, if you’re not spending enough attention capital on the service part of your business, you’re not going to scale.

Hiring smart people is not always the answer.

Did you hear that? Hiring smart people is not always the answer.

Hiring service-oriented people will get you to where you want to be. To really create a service company that is known for its exceptional customer service, you need to hire service people. It’s culture. Blending tech people with service people can be a challenge. It’s not a natural single unit. So, if you’re not paying attention to the service aspect, and you’re not training your people or building a structure, everything falls apart.

Why Didn’t (or Couldn’t) Castle Pivot?

Why just walk away from this?

If you flop on the first 400-property strong portfolio, why not pull back and re-assess, and then work differently?

You still have revenue coming in, and it seems pointless to quit. Castle as a fantasy may be gone forever. But, Castle as a property management company could have still existed. It could have remained in the market to serve customers. They didn’t need to disappear. This is one of the questions Alex and Brad will ask Max Nussenbaum if he decides to come onto The Property Management Show when he’s ready.

Creating a service or a product to solve a problem is always a good idea. However, Castle Property Management didn’t solve the problem. What’s still to be debated is:

  • How much of that problem really exists?
  • Are those problems relevant to the landlord and investor community?

One fact everyone knows: 27 percent of properties are professionally managed. The rest are self-managed. That’s a lot of opportunity.

So, maybe the timing was part of it. Maybe in two or three years, it will work. Investors are finally starting to trust the industry. NARPM hosts a massive trade show and keeps the industry buzzing.

People will always need a place to live.

If you want to find Brad’s show, visit PropertyManagementMastermind.com.

If you have any questions for Alex and his team, contact them at Fourandhalf.

Alex Osenenko

About Alex Osenenko

Alex’s professional mission in life is to help small businesses grow and thrive. Alex is the President and CEO of Fourandhalf.com and a Co-Founder of the PM Grow, Inc. His business philosophy is simple: Happy Customers are created by Happy Employees, which results in Happy Shareholders. Alex's deep commitment to entrepreneurship and improving the lives of small business owners everywhere empower him to host “The Property Management Show” bi-weekly Podcast and speak internationally on the subjects of Growth, Marketing, Sales, and Entrepreneurship.

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Alex Osenenko
President and CEO

Alex’s professional mission in life is to help small businesses grow and thrive. He is the President and CEO of Fourandhalf.com and is serving his 5th year on the Board of Directors for CALNARPM.

After spending 9 years in the trenches with his property management clients, Alex draws on his experience to host “The Property Management Show” Podcast and co-authors a weekly Property Management Blog on Fourandhalf.com. Alex has extensive experience speaking for various NARPM events at the local, state, regional and national level.

Alex is a graduate of San Francisco State University with an Electronic Commerce Systems Degree. His business philosophy is simple: Happy Customers are created by Happy Employees, which results in Happy Shareholders. Alex serves on the Board of Directors of CALNARPM (California Chapter of National Association of Residential Property Managers) and hosts a Podcast “The Property Management Show“, available on iTunes.

 

John Bykowski
Chief Operating Officer

After graduating from the University of Michigan with a film degree, John proceeded to do everything but. During his career, John has specialized in operations and has developed processes for small companies in diverse industries, such as bleeding-edge marketing technology, social networking, trade shows and exhibitions, and cloud software. John and Alex had worked together previously, and when he needed someone to help take Fourandhalf to the next level and beyond, Alex brought in John as his first employee, and later, business partner.

In addition, now that he’s using his film school know-how to help property managers look their best in their blogs, his mom no longer feels his degree was a complete waste of time.

Danny Morris
Director of Account Management

Born in Australia and growing up in Israel, Danny has spent a lot of time traveling the world between those two places. After completing his military service in Israel, Danny began following his biggest passion, writing, which he discovered while backpacking South America and publishing his first book.

When it was time to unpack, he returned to Australia to complete his Journalism studies amongst the beaches of sunny Perth. Danny is a huge online fan and after working in a number of related jobs, he finally gets to combine his two favorite things, working with media and people.

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Marina draws upon her real estate, business operations and customer service expertise for Fourandhalf. Her favorite part of being with Fourandhalf is the opportunity she has to really get to know our clients, build professional customer relationships and truly be part of a team that assists in their success.

Her time away from work is happily spent watching her children grow up and attempting to keep up with them! Any spare moments beyond nurturing her children are filled with hiking, spending time with friends, exploring the Bay Area and squeezing in a non G-rated movie every now and then.

Marie Liamzon
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Before joining Fourandhalf, Marie worked for one of the largest banks in the world. She took on different roles, but couldn’t find what she was looking for. She pursued a variety of side projects until she finally decided it was time for a career change.

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Born in San Diego County, Kyle McLean has since migrated to the Oakland woods. A fan of tall trees and tall tales, he holds a bachelor’s degree from the creative writing program at the University of California, Riverside and is a licensed California Certified Shorthand Reporter.

After a few years as a freelance court reporter, Kyle has joined Fourandhalf for an opportunity in sales and digital marketing. In addition to reading and writing, his hobbies and interests include gardening, hiking, soccer, coffee brewing, and craft beers.

Karen Wyle
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Originally from the Philadelphia area, Karen moved eight times in seventeen years all over the East Coast and to the Midwest before settling here in Northern California six years ago. She is an alumna of Brandeis University with a BA in American Studies and earned a MBA in Marketing Management from Indiana University in Bloomington. Karen’s business career has been well-rounded, with experience including advertising, direct marketing, corporate retail, product management, new product development, and new customer generation. Beyond an office setting, she has been thrilled to volunteer her time giving back to the community with KPMG’s Family for Literacy, at her daughter’s school, and as a Girl Scout Troop Leader. Karen enjoys music, good food, traveling to new places, completing jigsaw puzzles, meeting people and making connections.

Karen became a part of Fourandhalf’s Account Management team in 2016, relaunching her marketing management career after a pause to raise her family. She is excited to rejoin the business world and to work with such a strong marketing management team.

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Paige graduated from Chico State University with a degree in Journalism. Her favorite part of working at Fourandhalf is helping clients create and produce educational blog content to grow their business. She is an avid sushi enthusiast who enjoys riding her bike and watching college football and in her free time.

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Theresa Barnes was born and raised in the Bay Area and graduated with her Bachelors Degree in Communications Studies at San Francisco State University. She worked in aviation at a private FBO for 3 years, and other industries, before joining the Fourandhalf team. She finds a balance between being a young mother, work, and living a healthy lifestyle outside of work by staying as active as possible. She is dedicated to customer satisfaction and having a great work ethic.

Brittany Stephens
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Brittany recently moved to the Bay area after graduating from California State University Chico with a degree in Business Marketing. She is known for her excellent communication, customer service skills, and shameless nerdyness. Her passions include: music, tabasco, Lord of the Rings, and the Golden State Warriors.

Logan Jones
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After graduating from CSU Chico with a Degree in Business Marketing, Logan moved back to the East Bay and pursued a career in sales. With an attention to detail and a relentless drive, he strives to improve himself and his passions each day. When not at work Logan enjoys playing guitar and writing songs, and occasionally performing around the Bay Area. He is an avid sports fan keeping up with everything SF Giants, 49ers, Cal Bears, and Golden State Warriors.

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Hope recently moved to the Bay Area after graduating from Chico State University with a degree in Journalism. She is coffee crazed, dog obsessed and hopes to visit all National Parks. One of the greatest times in her life was when she lived abroad in Costa Rica and hopes to travel more of Central America in the future. She feels blessed to work for a company who supports her love for travel and the need to learn more about what the world has to offer.

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