What We Can Learn from the Failure of 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.

Emily

About Emily

Emily is passionate about data and design. She earned her degree from University of Washington in Seattle. Her role is on the account management team. If you liked this blog, please leave a comment below or contact us to learn more.

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Estimate ROI (Return On Investment) Based on Desired Growth

Desired Growth (# of properties) :
Average Monthly Rent :
Annual Contract Value: $0
Customer Lifetime Value: $0
Estimated Annual Profit: $0
Estimated Lifetime Profit: $0
Estimated Portfolio Value Upon Sale: $0

How we got these numbers

• Annual Customer Value (8% of average rent multiplied by 12)
• Customer Lifetime Value (4 multiplied by ACV)
• Estimated Annual Profit (at 20% of ACV)
• Estimated Lifetime Profit (at 20% of LCV)
• Estimated Portfolio Value Upon Sale (1.2 times ACV)

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