Scott Brady from Progressive Property Management, a successful property management company in southern California, is back on The Property Management Show, talking to us about an updated Blue Ocean Strategy that a property management company can use for the current market.
You might remember that he joined us in 2015, when he introduced the Blue Ocean Strategy and how it pertains to property managers. It’s the theory that property managers don’t actually have to compete with each other; their own property management company can access a local market that’s wide open because of the overwhelming number of self-managing investment property owners (SMIPOs).
Not much has changed, he tells us today, except instead of targeting only the SMIPOs, there are three pools of potential business that can help you grow your property management business.
A Refresher on Scott Brady
Scott’s journey to property management began in 2015. He was a top Realtor in the city of Placentia, California, which had a population of about 50,000 people. He ran for city council and won. He served as mayor for a term.
When the recession hit the real estate industry in 2007, like many real estate investors and professionals, he was caught flat-footed. He had been busy buying and selling real estate and building a real estate brokerage. He left the city council in 2008, and spent a couple of years regrouping. He knew that recessions happen every seven to 10 years, and he wanted to be prepared for the next one.
So, he decided to start a property management company.
He wanted to build right away, so in 2012, he launched Progressive Property Management.
Scott started with zero doors and now he and his team manage 1,200 doors.
Association management was added to his company during COVID. There was a good month where every property manager was sure all their tenants would stop paying rent. So, association management seemed like the logical next step to diversify a property management business that may have suffered during the pandemic. He began taking on association clients in 2020, and now serves 85 associations and 5,000 owners.
The lesson he learned is this: You have to think ahead. Get prepared before the other shoe drops.
One of Scott’s favorite quotes is from Jeff Bezos. When he was running Amazon, Bezos said that during quarterly earnings calls, analysts would get excited about a particularly good quarter. They’d try to figure out what they did so differently that quarter. But, if they had a good quarter, it was likely because of something they had done three or four years ago. Nothing happens overnight.
What you’re doing today will benefit you in two or three years, not two or three days.
Residential Property Managers and New Business
In 2015, Scott told us that 75 percent of rental property owners in the country were self-managing investors. Given everything that’s happened since then, what do you think that percentage is now, in 2023?
Scott believes it’s about the same.
Real estate investors self-manage their own investment properties because they think they have the time.
Property managers need to tell these self-managing property owners that they’re costing themselves money. Because if you can describe a person’s pain points better than they can, you’re going to earn their business.
By managing on their own, they’re not getting quality renters. They’re not getting lease renewals and high rent payments. They’re not being proactive with maintenance, and they’re not protecting their asset with specific programs. They’re not conducting property inspections or charging tenants appropriate fees.
As an industry, we have to tell them that they actually don’t have the time and the skill to provide their own management services, but more importantly, they’re costing themselves money.
As a property manager, if you’re charging around $150 a month, after they deduct that cost on their taxes, they’re paying you $100 a month, net. So, for $1,200 a year in management fees, they can make a lot more on their investment. An ongoing management fee costs less than vacancy. Lease renewal fees cost less than turnover.
This is the time to for a growing property management company to bring in more business. You might have been successful adding 20 doors a month in the last few years, but you’d also be losing 20 doors a month because everyone was selling. No one is selling now. So when you gain those 20 doors a month, it’s a net gain.
This is a good time to be in the property management business.
3 Blue Ocean Strategies for Property Management Companies Today
A Blue Ocean Strategy keeps the waters blue with opportunity instead of red with competition. We discussed this idea in depth with Scott in 2015, and you might want to refer to our 2015 podcast for background on this strategy. The idea is: other property managers are not your competition. Those self-managing landlords are your competition.
Scott says most property management companies can target three groups for the current Blue Ocean Strategy.
- Real estate agent. Real estate sales are down 45 percent in southern California. That’s a big hit in real estate income for agents. They love the business and the lifestyle, but how can they do that with the market what it is? Progressive Property Management offers them a business model where they can work as independent contractors and manage residential properties and associations. Scott’s company will provide a way for them to earn $2,000 or $3,000, or $4,000 a month. They even provide the properties to manage. It’s a business structure that works for Progressive and the agents.
- Residential real estate management. Whether it’s a new property owner or new clients who have been managing their own properties for years, the self-managed rental properties are still a big market for property managers. In 2015, these property owners didn’t feel like they had a lot of margin. They might have been renting out a property for $2,000 a month, and their mortgage was $1,800. Now, that property is renting for $3,000 a month, and if they managed to refinance when rates were low, their mortgage could be down to $1,600 a month. It’s a bigger margin, and they can afford property management fees. Also, that asset in 2015 was maybe worth $500,000. Now, it’s worth $800,000. It’s more valuable, and instead of selling it, they’ll hold onto it while they have a three percent interest rate on their mortgage. They’ll let you rent that house out for them.
- Associations are potential clients. Association management is another blue ocean of opportunity. In California, the minimum salary for exempt employee is now around $75,000. The large management companies do not want to manage small associations with 20 to 100 property owners. It’s not feasible for them, but it’s perfect for a company like Scott’s because his real estate agents are independent contractors. They are not paid a salary. They get a commission. So he can take an association community and charge $1,200 a month and pay the managing agent $600 a month.
Many property management companies will choose one of these oceans of potential new business. Progressive Property Management is focusing on all three.
Marketing for New Business and Prospective Clients
Scott says he is actively going after new business with direct mail, online leads, and networking. He’s willing to try a lot of different things, and then throw real money at whatever seems to be working.
And, remember: the things working now can be attributed to things that were put into place long ago. You cannot try something for a month and expect miracles.
Scott sends 5,000 to 10,000 pieces of direct mail every month. When an investor in Colorado gets that mail, and they have a tenant in Anaheim leaving, they know Scott’s company, and they’ll call. Those new property owners and potential clients have arrived at their pain point. In the property management industry, there are big pain points that ultimately bring in business:
- A tenant is leaving and the rental property will be vacant.
- A tenant needs to be evicted.
- A property needs rehabs.
You want to be in front of that client when the pain point hits and they realize they need a professional property management company.
With associations, you’re marketing your management services to the HOA board. When the board hires a management company, they hear all kinds of promises. But once the hire happens, phone calls drop off and the services don’t match what was promised.
If you can deliver and perform as promised, you’ll keep your association business.
Residential Property Management vs. Association Management
There are different ways to manage your rental property business and your association business.
With residential management, you can get lucky. Your tenants generally behave. There are no plumbing issues. You might talk to your owner once a year. Scott says that his 35 branch managers sometimes report months that the phone doesn’t ring at all for the 30+ properties they’re managing. There are no issues.
With association management, that’s not going to happen. You can expect to work every month. The HOA board will need constant communication and problem solving.
More than with residential management, HOA boards will know when you are overpromising and under-delivering. Your systems fall apart. There are no quiet months, but you can make good money doing the things that no one else wants to do.
Generally, property owners are happy with their residential management company. As an industry, property managers do a good job taking care of clients. Maybe three percent are unhappy.
But, Appfolio did a study of HOA boards, and 45 percent of those boards are unhappy with the management company they’re using. Five percent are actively looking for a new property manager. There are 2,500 associations in Scott’s market. Those statistics tell him that 150 HOA boards are looking for new management.
Managing Happiness as a Property Management Company
Scott identifies two things that aren’t being done well in the residential property management industry:
- Tenants are treated as a necessary evil, and not as residents. If your tenant is leaving next year, why not help them rent somewhere else? You want your tenant programs to make their rental experience better, not simply generate extra income. Show residents more love. Scott likes sending his residents a Christmas gift every year. It shows they value their occupancy.
- Owners only hear from their property managers when there’s bad news; a plumbing leak or a tenant not paying rent. Transform the owner experience by sharing good news once in a while.
Tighter relationships with property owners and tenants are a good way to build a better business.
Progressive Property Management’s company tagline is: WE MANAGE HAPPINESS.
Scott admits that they manage crazy, too. But, his goal is to make both owners and tenants happy. To do that, the complaint calls and the maintenance requests are handled quickly. They choose vendors who are considerate and kind. They negotiate the best deal and secure the best tenant.
Guarantees are offered on investment properties, too. If a pet damages a property, the company will pay for it.
Here’s why it matters: as a property manager, you’re not competing with other property management companies. Instead, you’re competing with that 70 percent of the population that is self-managing. That’s about 200,000 doors needing management in Scott’s marketplace. So, he’s not competing. He wants to share success and business with other property management companies.
Association management is different. No one is sharing. That’s a zero sum game, and if you gain a client, it usually means you’ve taken that client from someone else. Almost no associations self-manage anymore.
The balance of residential and association management is nice.
Today’s Property Management Market
We may be on the cusp of a new recession, and a lot of large property management firms are circulating and looking for consolidation and acquisition opportunities. Is that creating anxiety in the property management market?
Scott reminds us that five years ago, everyone feared property management entrepreneurs at Mynd were going to come in and more or less manage properties for free. Everyone in the industry thought they’d undercut the market and drive smaller management companies out of business.
That didn’t work.
Those companies could not grow organically because property management is still a belly to belly business. You’re managing an asset that’s important for someone. Scott says he has never had a potential client call looking for the biggest management company possible. They care about property management services, value, and competitive pricing.
There is a lot of money out there in the large and growing property management firms. PURE Property Management raised 80 million, and Home River wants to acquire as many small companies as they can. These giants don’t want to destroy small companies, they want to acquire them or consolidate resources and expertise in the local market.
Some companies have to sell. Some companies want to. The best decision is up to you.
Over the last five years, the industry has learned how to cut costs while managing properties. A lot of businesses are using virtual assistants and part time employees. Technology is used more and property management software programs have been embraced. There are additional programs in the industry that add revenue.
Margins have moved from what was 0 to 5 percent seven years ago to potentially 25 and 30 percent for some management companies today. That’s a testament to the property management industry and how we’ve been managing properties more efficiently, Scott says. And, we still have a way to go.
The recession will create more doors to be managed in the next three to five years. There are short term rentals opening new opportunities in the industry. There’s commercial property needing to be managed. A lot is happening.
As organized real estate finds itself in trouble these coming years, big brokerages will find themselves losing money and talent. It creates an opportunity for property management companies. Rental properties are the place to be, and it wasn’t always that way.
How will you take advantage of that?
Property Management Services and Goals
Scott is excited for this year and next. He sees a lot of growing property management companies, and he has set some growth goals of his own.
For example, he’s put a lot of money back into the business. They’re looking at business structure and new areas and they’re investing in digital marketing. He’s experimenting with lead generation, direct mail, business website improvements, and paying for referrals.
Bono, from U2 talks about the band trying to make an album in 30 days. It actually took 90 days. People asked if it’s because they struggled to create songs, but the problem was the opposite. They came up with 30 additional songs while they were in the studio!
You cannot stop digging for gold until all the gold is discovered.
Put your money and resources towards growth right now because the next five years could be the best five years in the history of property management. You can be proud of owning a successful property management business.
If you have any questions about our recent or past conversations with Scott Brady of Progressive Property Management, or you’d like to talk about your own property management business, please contact us at Fourandhalf.