Our topic today is maximizing fees, otherwise known as value-added services. The main revenue source for most property management companies is their management fee, but there are many value-added services that can be incorporated to increase revenue. Our guest, Darren Hunter, specializes in this and is a household name in the Australian property management community. He has spent most of his professional life helping property management companies figure out their business and today he’ll go over fee maximization for property managers.
- The typical profit margin of property management companies in the United States.
- The psychology behind landlords and three-part pricing strategies.
- How you can implement 3 different value-added services today.
Who is Darren Hunter?
Darren Hunter began as a property manager in 1989. A consultant and trainer now for the last 11 years, Darren works with property managers and their companies in Australia, New Zealand, and the United States. He has specialized in helping real estate business owners earn more money not only with new business but with their current business as well. It’s called fee maximization, which is the ability to increase and add fees with current owners.
An Overview of Value-Added Fees
In Australia, there is a mentality on the east coast that the management fee should cover everything. Property managers are afraid to charge for things other than management and leasing. So, those companies typically earn 15 percent of their revenue outside of management and leasing fees. On the west coast of Australia, however, you find 50 to 60 percent of income coming from fees outside of management and leasing. Those are the best earning companies in Australia.
In the United States, most of a management company’s revenue is coming from management fees and tenant fees, but not anywhere else. It’s an interesting breakdown, and sets you up to easily double your profit margin. NARPM did a survey that said 20 percent of the average property management company’s revenue is profit. If you are earning a total fee income per property of around $2,000 per year for one property, and your profit margin is 20 percent, it means you’re only earning $400 on that property.
With traditional thinking, to double your profit margin, you need to double your roofs and front doors. But, all you really need to do to double your profit margin is find another $400 a year in these extra value-added fees. That’s a more efficient way to double profit. You won’t need more doors and more staff and more overhead costs.
On DarrenHunter.com, you can find a knowledge library that includes 11 Profit Laws Regarding Fees. The first one is easy. Two people meet each other at a barbecue and discover they own investment properties and they each use different management companies. Those two people will talk about what they’re charged in management fees but not any other fees. That’s not as high on their radar, and it’s not as important as management fees.
Focus on getting the management fee to be the market rate. Then, maximize the leasing fees. A lot of areas in the U.S. don’t have leasing fees at all. But, if you maximize that fee to the accepted market rate, you can then do the work in the add-on fees. That’s where you get your results. Property owners really focus on the management fee. You can work with add-on fees because your owners are not thinking those are as important.
Three-Part Pricing Strategies
Some management companies will set up a tier system where they have a low fee option that comes with optional add-ons, a middle fee option that includes most of the management services but still leaves room for add-ons, and the highest tier, which is one fee that includes everything. People often go to the middle and they tend to negotiate which package they want instead of negotiating fees. There are also two-tier systems with a lower package and a higher package. Two package systems still offer a choice, so there’s not just one fee structure. You can usually get a property investor into the top package, where one management fee covers everything. Just make sure that the fee is high enough to cover all your services.
Price anchoring plays to psychology. In a three-tier property management pricing structure, you’re really expecting to sell the middle package. The top tier package might not sell as often and the bottom tier package is the anchor against that popular middle package. There are different market cultures at play, and you have to go with what works.
Do your best to limit pricing choices to three. The more packages you have, the more confused people can get. That’s going to prevent them from making a quick buying decision. If you structure three packages right, you can succeed as long as it’s easy to understand. If it’s too confusing, you can lose business because people won’t be in the mindset that’s required to make a purchase. Experiment and see what works. Testing and measuring is the key to reading what people will accept in your market.
High Ticket Property Management Items: Lease Renewals
After management fees and leasing fees, you can charge a lease renewal fee. If the average rent is $1,500, and you charge $750 for a leasing fee, your renewal fee might be $375, roughly half the cost of the leasing fee. That fee alone, when done properly, has the potential to increase your profit margin by 50 percent. This fee comes up once a year. If you’re managing 250 properties and you expect half those tenants to renew, you’ll earn $46,175 on that fee alone, which looks like a healthy boost to your bottom line. It’s a pure profit strategy. You aren’t taking on extra work that will cost you more resources.
How would you go about explaining this to your clients? Well, another of Darren’s 11 Profit Laws is the Law of Alternative Cost. This is what it would cost if the service was not provided. So, if you didn’t provide a lease renewal and the tenant just went month to month, what would be the cost to the owner? The tenant might move out during the winter months and the owner may have a vacant property for longer. There will also be new leasing fees. So, the owner loses the cost of one month’s rent plus leasing fees. The alternative cost could be thousands of dollars. When the alternative cost is thousands of dollars you can justify a quality leasing fee. Don’t fail to express that alternative cost, or your fee will look too expensive.
NARPM has close to 7,000 members and their designations – RMP and MPM are invaluable. The MPM – Master Property Manager –is graduate level work and the RMP – Residential Management Professional – is great for property managers who are starting out. These designations will do wonders for a property management business. You get coached, and you’ll be able to learn from people like Darren. You’ll discover new revenue streams and build a support network. There’s lots of value to studying for your designations. Check out NARPM.org.
High Ticket Property Management Items: Inspection Fees
Inspections or assessments should be another service you offer. This is when you go to the property during the lease and make sure the tenants are following the terms of that lease. Many managers aren’t charging for this service as all. Property managers ought to visit the property once or twice a year, and you shouldn’t avoid charging for that service. If you sent a plumber to a property to fix a leaky faucet, what will that plumber charge? The plumber might charge $150. You wouldn’t call the plumber and complain about the cost. You pay it because that’s what a plumber is worth. In the property management world, what is your time worth for conducting that inspection or assessment? You are spending time:
- getting to the property
- inspecting the property
- and documenting the process.
This is a difficult job with a lot of risk management and compliance. Your time is worth something. Don’t charge cut-rate fees.
Some property managers might feel like property inspections are the essence of property management, and should be included. But, what does the rule book say? There is no rule book. The management fee does not have to cover the inspections. If you believe you’re worth it and you know how to justify it, you can charge for anything. You can even charge a rent collection fee on top of the management fee if you know how to justify it. So, if you think that the management fee must cover the inspections, then that’s your mindset and you believe it. But, if you think it’s separate, you can charge it.
You’re competing against other property managers who do include inspections as part of their management fee. However, the mindset is still more important than the market. If all your competitors are not charging for a routine inspection fee and you are charging a quality fee, your owner might question it, especially if competitors are not charging it. You’ll need to convey that your inspections are high quality and prioritized. Maybe the competitors aren’t actually doing those inspections because they aren’t charging for them.
The amount of revenue you can earn depends on how many inspections you conduct. Inspections are typically done at least once a year, and if you can justify it, try to get two inspections a year. If you charge $100 for each inspection, and you have 250 properties that are inspected twice a year, you’re going to bring in $50,000. There is some labor and time involved, so your cost might be 50 percent, and you’ll have gas and mileage. So, you’ll have a 30 percent profit margin, which is $15,000.
High Ticket Property Management Items: Administrative Fees
Some management companies will charge a monthly administrative fee. This will cover postage and technology like your software costs. It might be $10 a month per property. Justify this by explaining your office operations and the costs that are associated. You can sell that you’re charging a flat rate on this fee rather than tracking and charging more or different fees every month. So, that might be an extra $120 per year per door. If you have an owner with multiple properties, determine whether you’ll charge this fee per property or per owner. But it’s fair to say you can charge this $120 annual fee on 75 percent of your properties. That’s another $21,000 per year, which is pure bottom line.
Again, this is a mindset. When an owner gets a letter or a notice about business expenses and overhead increasing due to compliance and the fact that the fee structure hasn’t been revised for the last five years, it will be accepted. Owners value their peace of mind over paying a little bit extra. A large majority of clients will accept the fees as long as you can justify them.
2018 PM Grow Summit
Many of you probably attended the PM Grow Summit last year. This year it will be January 31 – February 2 in the Gaslight District of San Diego. Check out PMGrowSummit.com and look at the speakers and talks from last year. The PM Grow Conference difference is that everything is included. It’s a VIP experience. You pay for your hotel and flight, and everything else is provided. All of the sessions are recorded, and you’ll get your conference notes as well. In 2018, we’ll be talking about how to learn to build, manage, and lead a team to scale.
High Ticket Property Management Items: Additional Fees
Here are some other fees you can charge in addition to your management and leasing fees:
- Move in and Move out Inspections
- Photography and Video
- File Transfer fee on account set-ups when you inherit a property or a tenant in place
- Internet Marketing fee
- Eviction Protection Program
- Repairs and Maintenance fees
- Outside of Normal Duties fee
- Insurance Claim fee
The biggest impact from this list will be the marketing and maintenance fees. With maintenance, property managers will charge a percentage of the maintenance invoice. If you send a plumber out, you’ll charge a percentage of the plumber’s fee for your organization. It’s not popular, and you have to know how to present it.
Change the mindset that the management fee should include this. If you have an owner who pushes back against 10 percent repairs, maintenance fees and etc. and other agencies don’t charge anything, talk about your value. Properties that are old and neglected are usually managed by companies that don’t pay attention to maintenance. If you can demonstrate you’re proactive with repairs and maintenance, owners will see they have benefits. The property will be in better condition and its value will increase. You can frame it as reactive repairs versus proactive repairs. The best vendors are worth your maintenance fee. If you can point out that vendors are charging you less than they would be charging outside of your property management relationship, then that management fee will make sense.
The revenue here depends on a property’s condition and age. Maybe you could expect to earn $100 on a property’s maintenance annually. With 250 properties, that’s another $25,000 to the bottom line. This is much better than growing with rent roll growth. Rent roll growth requires extra overhead and additional costs.
Implementing the Value-Add Services
With all of the fees that have been discussed here, you could have more than $107,000 coming into your property management business. It’s up to you if you want to do this for you.
You can increase your fees. You can earn more money with the business you currently have. All of the mindset issues you have are dragons in the mist. They don’t actually exist.
There are three actual circumstances where you can’t do this:
- If you’re offering bad service and you’re asking customers to pay more, it will not work.
- If you don’t believe what you’ve read here, you won’t be able to do it.
- If you wait and think about doing this in six months, you won’t be able to do it. Do it now.
People also read:
- 10 Mistakes in Running a Property Management Business
- Different Pricing Structures for Your Property Management Business