This question is for brokers that manage agents who specialize in residential property management.

Now that my REO business has reached a point of critical mass I'm looking to expand into other areas. I'm not a touchy-feely sales type person, but love numbers, analysis, and streamlining business solutions. There is significant demand in my market for a one-stop residential property management company that can deliver all of the services required by an out-of-town investor. Most of the existing property management companies around here are fly-by-night unlicensed operations that will disappear with the investor's rents at the first sign of daylight.

All of the pieces for a successful company are already in place. Contractors, accountants, attorneys, and 24/7 support staff are on the payroll (or strong relationships exist).

The proposed property management company will be operated as a profit center, but I'm not willing to provide a broker split on the revenue. My perspective is that property management clients eventually become buyers and sellers. Is this unreasonable?

My existing broker does not offer the flexibility and control that I need to conduct my REO business efficiently, so I plan on leaving soon anyway. Any input you have regarding the perspective of the broker would be greatly appreciated.

Thanks in advance,
Ryan

Ryan I DON'T manage agents who specialize in property management. Does not mean I don't know anything about it. Unlike you I absolutely hate property management. I would rather quit the biz and sell my brokerage than do it.

A few points you absolutely need to know before doing this.

1.Make sure your property management company is held in a seperate corporation. This way other departments of your business will not be affected if you get a lawsuit.

2.Make sure your new broker offers property management. Because of high litigation in PM E and O insurance policies charge a really high rate to insure. So unless a broker focuses on that they usually don't want to pay the extra costs. My friends own a PM company and manage about 162 properties. It will consume your whole time.

3.Another tip is to make sure you write down everything. That way you can stop a tenant in thier tracks when they said an issue was not followe dup on.

Ryan,

Super Realtor has some smart comments.

I think your thinking is a bit unreasonable. A broker who licenses an active property management agent is assuming significant liability --- potentially multi-million dollar in scale. Tenants can be injured on the premises. Some folks love to create fair housing issues. There is liability for deposits, rents and payments. The list goes on and on. Even a separate corporation is not enough. I know from personal experience that the brokerage will be sued if you have any tie.

You would do better to partner with a broker. They will provide you space, broker support, liability protection, and access to their client base and agents. You would run the operation. Those kinds of joint ventures can be very successful.

One word of advice -- It will likely take longer and be harder than you think to acquire clients. Just putting up a sign and running a couple newspaper ads will be insufficient.

Remember that anyone under current property management has a contract for a definitive period of time. Thus, they probably can't switch to you even if they want to right now.

You'll need to spend significant effort wooing potential landlords. I'd get a list of non-owner occupied properties and obtain the owner names (check with your county assessor or equivalent). Start mailing them postcards. Then, call them one by one by one.

It may take you a year or two to really have a significant number of properties under management.

The reason I venture this is that I was involved in setting up such a company. It was really, really slow at first (lots of potential tenants but not very many properties under management to rent to them). It took two years to get the numbers up.

One possibility is to approach the other companies to see if they would be willing to compensate you if you rent their properties to one of your potential tenants. That kind of finder service may be the best focus for the first year or so. Once you expand your landlord pool significantly, then you can make a business decision whether to continue such a service.

Best of luck!

Thanks for the great comments super and staggart.

The liability issue certainly is a stickler. I'd be happy to carry an additional E&O policy if that would reduce the broker's fears.

I'm not jumping into this with a "get-rich-quick" mentality. I manage my own investment properties and fully understand the hassle that is involved. The exit strategy is to build a decent sized business over the next 7 to 10 years (maybe $75-100k in annual profit?), then sell or give it to one of my kids once they finish high school / college. Instant revenue isn't my goal. Most of the income will go to the employees handling the day to day operations. My position would be that of owner/manager. I already have two full time jobs, and don't need a third, but this is something I could manage due to my flexible schedule.

Ryan,

I realize I wasn't completely clear.

Liability for property management is not just a question of E&O coverage. It also impacts general liability policy and umbrella coverage. I saw a quote for adding a property management entity to a brokerage and the cost was nearly $10,000 a year. More properties, more liability.

But, liability is only a portion of the considerations.

You will want the synergy that comes from the brokerage sending landlords over to be managed and tenants to be rented. They benefit from having convenient access to the services for their clientele.

Another thing to think carefully about is your pricing structure. Often, new firms try to be cheap. Often, they find out they can't even cover their expenses. Property management can be a fairly low profit business. You need to be very, very careful to get the pricing structure right.

One thing you might want to consider is piggybacking on the staff in the real estate brokerage. Many brokers are struggling to cover overhead. Perhaps using the receptionist to answer calls and the bookkeeper to handle the books (at least initially) would help. Split the salaries some how.

Your state association probable has a special section devoted to this where you can pick the brains of brokers not in your are- but at least in your state.