Last modified 8/25/2020
Property management is a large and fragmented market. Buildings with 50 units or less generate ~$29 billion of PM fees generated in the US alone. Yet it’s also highly fragmented. The largest player in the market represents 0.14% of the market, and the majority of property management companies are locally-owned and operated with only a handful of employees.
Sometimes this isn’t by choice. There are certainly property management companies out there that would love to scale. They just don’t know how to—or at least, don’t know how to effectively.
In our experience, when a property management company is first getting started, it will take on anything that comes their way. The end result is a scattered, difficult to manage portfolios. A property management company may grow to 1,000 units under management, but only a fraction of those units may be a good fit for that company’s business. These property management companies can quickly find themselves in over their heads.
Growing through acquisitions is not a bad strategy. In fact, it can make a lot of sense. It’s a lot easier to grow a property management company through acquisitions than to try and grow the business organically, one building at a time. But if you’re going to try to grow your property management company through acquisitions, there are a few things to consider.
First, understand what additional capacity you will need.
Property management companies often make the mistake of acquiring 200+ units and assume that their existing infrastructure is sufficient. Maybe they’ll add one more staff person, but otherwise, they think they’ll be fine with the team they already have in place.
This is a huge mistake. See, buildings each come with their own history. Each unit has its own story. That knowledge is generally stored in one or two people’s brains at the existing property management company. So while it may be the case that the last property management company was able to service this portfolio with just one staff person, the transition may actually require significantly more staff capacity – at least at first.
Evaluate your existing operations. Are you a team of specialists or generalists? A team of specialists may be better equipped to absorb a portfolio without adding significant new capacity. For instance, if you have someone devoted to accounting, maintenance, etc. then your team can divide and conquer the new units under management. If you expect a generalist to manage it all, it may cause a rapid drop-off in service. You should aim to service this portfolio to the same level, if not better, than how it was serviced before.
Bring on a principle of the company you’re acquiring to assist with the transition.
As alluded to above, there’s usually someone at the existing property management company that has a host of institutional knowledge about the portfolio you’re looking to acquire. All too often, that information is never written down or transferred to the new management company.
That’s why it’s a good idea to consider bringing on one of the staff members of the company you’re acquiring. Ask for a three- to six-month commitment to assist with the transition. Spend time pulling all of that knowledge out of their heads, and get it down on paper! Be sure that information now lives with the property and not the property manager.
Consider the geographic concentration of the portfolio you’re looking to acquire.
Growing through acquisitions is a great way for a property management company to expand into a new market. It’s much easier to gain a foothold in a market when you manage a substantial portfolio of properties vs. trying to acquire management contracts one-by-one in a new market.
This approach gives you instant credibility. Let’s say you’re a property management company in Oakland and you wait to expand into other Bay Area markets. You call Mr. Smith, the owner of a 6-unit building in San Jose. One of the first questions he’s going to ask you is what other properties do you manage in San Jose? “Nothing,” you say. Mr. Smith laughs and hangs up the phone.
When we evaluate acquisition opportunities, we always consider what impact that acquisition will have on our market reach. In our experience, if the acquisition will give us a substantial presence in that new market, it could be worth paying a little more for that portfolio. Once you have a footprint in that territory, you can begin growing organically.
Understand the composition of the portfolio you’re acquiring.
Not all property management companies service the same type of units. If you’re looking to acquire a residential property management company, that portfolio may include some mixed-use, commercial and or some otherwise funky residential properties.
Is your team equipped to manage a diverse portfolio?
Do you even want to manage these types of properties?
Be sure you know what you’re getting yourself into before signing on the dotted line.
Be on the alert for red flags.
There’s no surefire guarantee that your acquisition will be a good one. But there ARE a few tip-offs that an acquisition won’t be a good one. Be on the lookout for these red flags:
- The company you’re looking to acquire has a bad reputation. If your goal is to acquire a company and build your existing footprint, you need to be careful about the reputation of the principles of the organization you’re considering for acquisition. Don’t just look at the company’s Yelp reviews. Take your due diligence one step further. To the extent possible, talk to owners, brokers and existing residents. Acquiring a company with a bad reputation can do more harm than good in the long-run.
- Has the company been involved in litigation? There are a lot of property management companies that have disconcerting business practices. This won’t necessarily be evident when interviewing a company. Research whether the company has been sued before, and if so, why. What is the status of the litigation? Is any litigation still pending? If so, you might want to walk away.
Remember: there’s a difference between acquiring a company and acquiring their contracts; if you acquire a company that has pending litigation, you could potentially be on the hook for damages down the road.
- The company has no hesitation to sell. There are a lot of reasons why someone will sell their property management business. Sometimes it’s time to retire. Sometimes the principles want to focus on another aspect of the business. Either way, in our experience, selling your business is not an easy decision. Negotiations often get emotional. If it seems like the owners are willing to give away their property management business, tread lightly. This is a major red flag.
Growing through acquisitions can be a smart business decision. But for this growth strategy to be fruitful, property management companies need to take a thoughtful approach. We hope, by sharing some of the insights to our approach, that others will be able to avoid some of the pitfalls that can ultimately cripple a once-successful property management company. Interested in learning more about our acquisitions approach or want a free valuation of your company?
I am happy to further discuss, reach out at firstname.lastname@example.org.