DGS 18: The Art of Buying & Selling Property Management Companies

Learn how Noel Christopher, Senior Vice President of National Business Development at Renters Warehouse, has mastered the art of buying and selling property management businesses.

In this interview with Noel Christopher, you’ll learn what big box companies look for when scoping out new properties to purchase, how to properly value your company and portfolio, making your business attractive to buyers, and how to find the best buyers for your company.

You’ll Learn…

[2:15] Noel Christopher’s background in commercial real estate
[3:25] Renters Warehouse
[6:05] The most common mistakes buyers make when acquiring a new company
[7:50] How to account for and deal with churn
[9:45] Is churn inevitable?
[11:00] The dangers of closing too quickly and not doing your due diligence
[12:40] How to evaluate a portfolio
[16:40] Creating a plan for taking over a company
[18:00] The biggest mistakes sellers make
[21:45] How to create a business that other people want to buy
[24:00] Utilizing a company’s current employees when you take over
[26:55] Creating an incentive for a business owner to transition into an employee
[30:00] Working with brokerages and accidental property managers
[33:00] Identifying the two types of acquisitions: Companies versus contracts
[35:10] Is Renters Warehouse flat fee pricing applicable everywhere?
[38:00] Finding people that are willing to sell
[40:15] Letting go of the all or nothing approach
[41:40] Should you use a non-compete?
[42:35] How Renters Warehouse structures their transactions
[44:44] Do you need a middleman to handle the deal between two companies?



Want more from Noel Christopher? Send him an email at noelc@renterswarehouse.com or connect with him on LinkedIn.


Jason: Welcome DoorGrow Hackers to The DoorGrow Show. If you are a property management entrepreneur that wants to add doors and expand your rent roll, and you are interested in growing your business and life, and you are open to doing things a bit differently then you are a DoorGrow Hacker. At DoorGrow, we are on a mission to grow property management businesses and their owners. We want to transform the industry, eliminate the BS, build a awareness, expand the market, and help the best property managers win.

If you enjoy this episode, do me a favor, open up iTunes, find The DoorGrow Show, subscribe, and then give us a real review. Thank you for helping us with that vision. I’m your host, property management growth hacker, Jason Hull, the founder of OpenPotion, GatherKudos, ThunderLocal, and of course, DoorGrow. Now, let’s get into the show.

This is episode number 18 of the DoorGrow Show. I’m going to be hanging out with Noel Christopher in this episode of Renters Warehouse. He is over acquisitions and helps find these companies to purchase or buy their portfolios out. This is going to be a great segment. It’ll be really fascinating for you to take a look at this. If you are interested or have dreams of someday selling your property management business and making lots of money, or you are looking at possibly buying other property management businesses, and growing your business through acquisition, this episode will have some great insights for you. I think you’ll find it really fascinating. Let’s get into the show.

Hi, I’m Jason Hull and I’m here with Noel Christopher. Noel of Renters Warehouse. Noel, how are you doing today?

Noel: I’m doing great.

Jason: Noel has this background in real estate that sounds pretty impressive. Noel, tell us a little bit about you and some of the stuff you’ve been involved in.

Noel: Sure. I have a commercial real estate background. I started in Chicago back in the early 2000s in commercial real estate. Fast forward to the real estate crash, even before the crash, I was really into a lot of single family residential investment real estate working with a lot of different investors in Chicago and around the country actually. When the institutional fund started to buy particularly in Chicago, I was connected with Blackstone and we had a team that was a war room. We bought about 3,000 properties for institutional funds in Chicago and that really got me into the space which has brought me here.

Jason: Cool. Fantastic.

Noel: I’m now working with a property management company.

Jason: Noel, tell everybody a little bit about Renters Warehouse.

Noel: Sure. Renters Warehouse is a national vertically-integrated 3rd party property management company. Managed about $3 billion in residential real estate servicing 12,000 different investors, 16,000 homes in 18 states, 33 markets. We’re one of the fastest growing, highest rated property management companies in the country. We have a centralized service model which creates a lot of efficiencies. We’re backed by private equities. We used to be a franchise or franchisee operation.

Little less than a year ago, we had a private equity group who invested to Renters Warehouse. Now, most of the franchises and we’re expanding rapidly. We’re adding about 1000-2000 doors a month in our pipeline and [inaudible [00:04:14]. We are going to even increase those as we’re adding a lot of technology and tech initiatives to enable us to add more doors and grow faster.

What’s great is that we can grown in any market. We don’t have to set up a lot on infrastructure in a market. If an opportunity comes up in a second tier market even, that we have investors or an acquisition target, we can easily go into that market or really going where the opportunity is along with a planned growth strategy.

Jason: Okay, you are the guy at Renters Warehouse that helps them to grow through acquisition, is that correct?

Noel: Yes.

Jason: This is what we’re going to be talking about today, which is the art of buying and selling property management companies. This is something that a lot of property managers want to do, they’re not able to do, they can’t figure out how to approach other people, there’s a lot of questions, there’s issues with evaluating and churn, and all these different things. There’s a lot of potential pitfalls when it comes to buying, or selling, or merging, or doing anything of the sort in property management.

Some of the things that Noel and I wanted to make sure that everybody got out of this event is to learn what big-box companies look for when they’re evaluating and buying property management businesses. Because a lot of people start with the intent to someday cash out. Then we’re also going to take a look at how to properly value your company portfolio. We’ll talk about some of those things and we’re going to talk about how to set up your business. It’s interesting to buyers and then, I think we’ll also touch on the opposite side which is, how do you find companies to buy? How do you do that, if there are people looking? I think we have some great insights to share on those things. Let’s get into it.

Let’s talk about some of the common mistakes that buyers make that are buying companies. These are things that you’re geared to avoid. What do you think is the most common mistake that people make when they’re buying a company?

Noel: Get a location. Let me backtrack a little bit. We’re really taking a good look at how well the portfolio is performing, what the tenant type is, is this a D class portfolio, is it a C class portfolio. Really looking deep into whether there’s a lot of tenant issues, whether there is a lot of churn happening in the portfolio already, is it being mismanaged. We would rather, for example, buy a portfolio that’s 200 doors, that’s very well managed, that’s a good portfolio, than a thousand door portfolio that’s going to cost us a lot of money and it’s going to be a big issue. There’s benefit pros and cons to both. We’d love to buy the thousand door portfolios but those we take a closer look at.

Also, looking at the owner mix. Is this a 200 doors with 3 different owners or is it 200 doors with a 100 or 200 different owners, or is it a thousand doors with 500, 600, 700 different owners. That’s a lot less risk than a portfolio that, for example, we’re looking at a portfolio that’s a 1,200 doors with 5 owners, that’s a very high risk portfolio because churn is then a big issue.

Jason: Churn seems to be a real common issue. You had mentioned to me previously that not structuring the deal for the churn is one of these biggest mistakes. How do they account for churn, how do they deal with churn when they’re purchasing a company?

Noel: What we do is we take a look at the makeup of the portfolio as far as the owners. When we buy these portfolios, you’re kind of married to the seller for a little while. We incentivise the seller and the buyer to mitigate churn, because for one, we don’t want to buy a portfolio that we end up not buying as much as we thought, because we lose a lot of deals or a lot of doors.

What we do is we put in a churn factor. Let’s say 12 month’s capped at 15% is the churn. Anything up to 15%, any door that leaves in that 12-month period, we’re not going to pay it for. Sometimes it’s negotiated down, sometimes it’s a negotiated up, depending on how risky the portfolio is.

If it’s a single owner or there’s not a lot of owners in that portfolio, then we’ll have a higher churn rate. If it’s a lot of mom and pop investors there’s going to be less churn. If one person leaves it’s not going to infect the portfolios as much. We’ll incentivise the seller to make sure that there’s a smooth transition. That also leads to some of the things as a seller as well.

This causes the sellers to really do a lot of due diligence on us, what our process is, and what the integration period is, and how we’re going to integrate that portfolio. Down to the verbiage of the letters that we send out to the owners, how we’re going to meet with the owners, all of those things that really causes both sides to really get to know each other, and be comfortable with the transactions so we don’t lose any doors. Because even if we don’t have to pay for them, we still don’t want to lose the doors.

Jason: Yes. In regards to churn, is churn inevitable?

Noel: Oh, yes. That’s why we’ll cap to certain amount of churn because churn is inevitable.

Jason: There’s always going to be a certain amount of churn. I think, this is a mistake a lot of people think, “Man, I’m going to buy a 400-door company and I’m getting 400 doors.”

Noel: Yes, exactly. There’s always going to be a lot of churn or not a lot of churn. There’s always going to be churn. You can only mitigate it to a certain amount. A lot of times we’ll leave in, depending on the type of transaction, especially if the company’s got some great marketing in place, there’s going to be a lot of residual doors coming in, we may lose some doors. For a period of time, some doors can be added. It’s really a net number. What was added and what was lost during this time period. Usually, the added doors aren’t for the full time period, it’s usually the shorter time period. A lot of guys have some great marketing going on, it’s kind of, “What do you do with that? What do you do with those doors that are going to be coming in?” For a period of time, we’ll let those be added, if we like what they’re doing.

Jason: Got it, okay. Another challenge you had mentioned to me is closing too quickly, not doing their due diligence. How do you see this play out?

Noel: For the reasons of the churn and in understanding the tenant mix and what’s going on with all the individual owners, closing too quickly can be a big issue. If you close quickly on their portfolio and you haven’t done your due diligence, you might hit your limit on churn and lose more than that 10% or 15%. You just don’t know what you’re getting. You really have to do a lot of due diligence, really understand each property, what’s going on. You’ll have properties that maybe the owner hasn’t paid for a churn in several days or a few months, that’s an issue. That’s a door we usually wouldn’t want to buy. We’ll take doors that will exclude out of the churn rate on the front end. So say, “Hey, these 20 doors, we’re excluding them now. If you add them in later, we’ll pay for them, but right now we’re going to pay for the doors that are performing.” That’s one thing that we do.

We only pay for properties that are under management, that are performing. They don’t necessarily have to be rented right at the time but there has to be a management agreement, they’re being leased. It’s not like they’ve been leased for three months and they haven’t been able to find a renter, or the landlord hasn’t paid for churn in two months, we’ll red flag those doors. They can add them in later, but upfront, we’re not going to pay for those.

Jason: Right.

Noel: That’s where that churn kind of works in both ways, in favor of the seller and the buyer, so you have some time to figure it out.

Jason: How do you look at the portfolio? Because it sounds like what you’re saying is that, you need to know how the portfolio is made up. Not every door is worth the same equally. It’s not just like, “We’ll give you this much per door.” It’s what’s the portfolio look like. How do you evaluate that?

Noel: A lot of people don’t want to give up a lot of new information in the beginning. Ideally, we want to see a P&L statement. We want to see where the zipcodes and the street names of the properties. We’re not really concerned about the actual address. We want to see, “Okay, we got properties in 60642 and it’s on Talman Street, Chicago,” so we can get an idea of the neighborhoods.

We’re more concerned about the revenue, not the expenses, because we’re buying the door. How somebody operates their company on the back end, and how they run expenses, a lot of guys are running their personal expenses through the company, cars and all this kind of stuff. That’s going to affect their net revenue. Or they might have not enough employees, or too many employees, or they’re monetizing their repairs and maintenance which we don’t look at.

We really look at that gross revenue. We look at the makeup of the portfolio as far as the owner mix. We look at what the churn’s been. How many doors they’ve been adding. It’ll tell you a lot how they operate and how happy the owners are going to be, because that’s really a big thing and also, tenants as well.

We look at all those things and we don’t have a formula. We have a formula based on the financial numbers but there’s a lot of things that are look and a feel, talking with the seller and getting to understand their operations, we put a risk to the portfolio. That does affect what we pay.

Jason: I think that’s interesting. You’re not so concerned about what the company’s expenses and costs are. Because if you acquire them, you’re going to bring your model to the table, you’re going to deal with that. You’re really just concerned about the gross, the revenue and how that might fit into your model. What if their structure, their pricing and their model is completely different? Let’s touch on that.

Noel: Yes. That will affect the churn, sometimes in a positive way, sometimes in a negative way. We’re a flat fee model, we charge between $89 and $99 a month. We charge $350 for renewal, we charge one month’s lease for a lease up. We don’t have a lot of admin fees. We don’t have a lot of what I call, junk fees.

If this is a portfolio that’s charging 5% and it’s averaging out to $69 a month and they don’t charge renewal fees, they charge only half month’s leasing fee then, that’s going to be way more careful integration and it will be worth less to us. What we don’t do is, we don’t switch everybody over when we buy immediately. We’ll let the current contracts run out.

If they have a model that’s very similar to ours, we look at that and there’s going to be less churn, there’s less risk. We feel more comfortable with that model or with that acquisition. Also, if sometimes their half the pricing is way higher than ours. That could be a positive thing as well, because we’ll let those contracts run out. We like to see where all the contract are, when they’re going to be released, when the renewals are going to be in, we put that into our model of our EBITA. We’re throwing that in a three year model, we look at where it currently is, how it’s going to perform and then we switch it over how it’s going to perform. That’s how we come up with a price.

Jason: Gotcha. Another common mistake then is just not having a really well-thrown out plan for the take over or for the acquisition.

Noel: Yes. What we see is a couple of things, is that they’re not monetizing, they’re not charging the right fees, they’re charging too little. Usually, it’s rarely too much because it’s a pretty competitive market. Another thing is that, we see a lot of people say, “Well, I’ve spent all those money in technology. I’ve spent all this money doing all this things and so it’s worth X.” It doesn’t work that way. It’s how is it performing.

It’s not how much time, and effort, and energy, and sweat you put into it. It’s what kind of revenue is there. We really have to look at that. Especially people who’ve just started out and they’ve grown a great portfolio, they’ve got a lot of doors, and that’s great, that’s valuable to us. But, it’s probably not as valuable to them because they’ve spent a lot of money upfront. Especially the guys who have done and they’ve created some great systems and they’re going to grow. It may not be good time for us to buy them because they’re really not going to get to monetize all that money they spent in time, building that up.

Jason: Great. Let’s look at the mistakes that the sellers are making because most of the risk, it sounds like, is on the buyer.

Noel: Absolutely.

Jason: But what are the mistakes that the sellers make?

Noel: The biggest mistake is people valuing their time, and energy, and work they’ve put into something, and trying to put a number on that compared to what the revenue is.

Jason: Okay.

Noel: That’s a huge mistake.

Jason: Over valuing their company in general.

Noel: Yes.

Jason: Everybody loves their company, it’s their baby.

Noel: Right.

Jason: They put years of time, energy and effort into it. Blood, sweat, and tears. They had sleepless night trying to figure stuff out. They feel that this is worth a lot. Is it a challenge to break it to people what it might really be worth?

Noel: It is. Somebody asked me this question as far as, “Do we use a multiple?” Yes, we use it multiple based on our model. Our multiple based on our model might be a multiple, for the seller, it might not. Because if their model is very unique or different and it works for them, but it’s not going to work for couple of things.

A lot of people that have a great model that’s good for managing 200 doors but it’s not good for managing 2,000 doors. It’s sometimes too hands on, it’s not scalable, they spent too much on technology, all of those types of things, or their fee structure, especially is different. We’ve run into guys, they don’t charge release fees, they just charge for the time that it’s listed per weeks, weird things. That really negatively affects model because you’re going to have a lot of churn when you switch people over.

We base it on our EBITA, and we based it on what we’ll do, a lot of those things. A lot of just not really, truly, understanding what they have. A lot of people don’t even know what their costs are. Another thing we see is that, we don’t buy the maintenance repair companies. We found that that is a tough business. Most of the time we look at a portfolio and we see that we’ve got 60% of their revenue is for maintenance and repairs. That’s usually not a good thing because they’re charging too much. They’re focusing on the repair business. Some people created a property management business to feed their repair maintenance business, not to manage doors and those types.

Jason: Right. I’ve heard business owners selling, let’s say, “I’m only willing to sell if you also buy my maintenance company, because my maintenance company is half of our revenue.”

Noel: We’re not interested in doing that. We don’t monetize repairs and maintenance. It really depends we’re at and we’re truly acting in the best interest of the owner. Not to get too off topic but some calls in, we’re about escalation avoidance, we’re about not getting somebody out there. If your revenue is from the repairs and maintenance business, it’s hard to have everything aligned.

Jason: Right.

Noel: We don’t like to buy that. When they tell us that, we’ll tell them that they can continue. We’ll use them as a vendor, we’ll use them as the first right of refusal, possibly. But then they have to adhere to our standards. We’re going to be making sure that their pricing is in line with what needs to be.

Jason: Right. Let’s get into the question, how do I create a business that other people will want to buy? And maybe we can talk about your criteria.

Noel: Sure. When we’re looking at the pricing structure, a lot of people we see, especially when they’re starting out, they will charge a lot less fees to get their business. They’ll give people that 5% fee or make a lot of concessions to win the business. If their portfolio is too full of doors like that, it’s going to negatively affect what we’ll pay. They need to make sure they get everybody into a unified pricing. We’ve looked the portfolio where you’ve got 1000 doors and 300 different pricing structures. Every guy, they’re doing a deal with, they’re doing deals tenants, they’re doing deals with the owners, they’re trying to do a lot of things. That’s really hard to value. It’s not very attractive to buy because there’s going to be a lot of churn.

Getting this pricing aligned, I think the flat fee model’s a way to go. It works really well. We see guys who have a 5% model but then that only works on high end properties. It doesn’t work when you start to scale it, truly. The main thing is having a good P&L that you can read and understand, and not focusing on those expenses. Actually how you run the business, it’s really how the portfolio performs. If somebody is asking about the notes, we’re focused on the portfolio not the business. We don’t think that it’s profitable to buy a business and let it run on its own. We can have value add to this as our centralized model and again the way we do things, which we think is better than most. That’s really the big thing is, is making sure they’re aligned.

We’ve had some guys we talked to that are going in and over time getting their pricing more aligned with what we’re doing so we can acquire them. There’s also pros and cons to that because what we’ll play today may not be what we’ll pay tomorrow.

Jason: You’re looking at the quality of tenants, you’re looking at the quality of the owners, you’re looking at the quality of the properties, where the property is at. How about their online reputation and reviews?

Noel: That does make a difference. One caveat to all of this is that, if we’re buying your property in a market that we have not established yet, and this is something we have uncovered too, is current employees and things like that. When we’re buying a property in a market that we haven’t established yet, we’re very much more interested in how the businesses is being operated, who their employees are.

We’re actually interested in the employees as well, when we’re buying a portfolio. If we’re buying 1000-door portfolio in a market that we have 1000 doors, that means we’re going to have to staff up and we’re going to need more staff and we’re going to keep on. During the integration period, we will keep on a lot of the employees and continue to run that portfolio, and then slowly, over a 45-90 day period, integrate that into our process. That‘s where that churn comes in as well. It’s not, we purchased it in day one, we integrate it into our process and we go. It doesn’t work that work that way because you’re going to have a lot of churns.

We want to figure out what’s going on with the portfolio. Figure out some of the really good employees that are running that portfolio. Figure out if they are good fits in our current model and if they aren’t but they’re great employees, we’ll want repurpose them to do some different things. One of the things that comes up a lot is the employees, we don’t come in and just get rid of everybody and just buy the doors.

Jason: Right.

Noel: Most of the property manager companies, there’s a few key people who have a lot of influence. They’ve brought in these owners or their customers and we don’t want them to run away.

Jason: Right. Just kill the relationship and never be loyal to them, out the door.

Noel: Yeah, because you’ll lose people. And then it goes, if it’s a new market, in many cases, if they’re great operators and it’s a new market, we’ll take the owner of the company and many times will become an employee of Renters Warehouse as a market leader, and they get paid very well. They continue to run a business that they’ve built up, put a lot of time and energy into, have a lot bigger backing and scalability and take a lot of thing off their hands that they are doing that are centralized services ads.

That’s another caveat to all of this, is that as we’re going into new markets, if it’s a great operator, out firm acquisition in a new market is always the most important, and that’s where it comes into. We don’t care if it’s 1,000 doors or 200 doors, we want somebody who’s a good operator that might be a good employee that knows the market, that knows what’s going on, that we can really grow with them, and then go and make some other strategic acquisitions, and start organically growing which is a big part of what we do.

Jason: Explain how somebody goes from being a property manager business owner to an operator then?

Noel: We’ve got a couple of acquisitions that we’re working on right now, if that’s the case. We were not only evaluating their portfolio, we’re evaluating them as operators, and do they fit into our culture? We have our very entrepreneurial culture, the market leaders in our markets can be very entrepreneurial. Have a lot of say on what goes on and they’re really responsible for growing that market and training the sales agents and things like that. And then, we take a lot of the heavy lifting things off of their plates, like accounting, dispositions, maintenance coordination, rent collection, all of these things we’ll handle on our corporate office.

[00:27:46] really go out and do what they’re good at. Most of the time, they’re good at bringing in doors, growing the business. We really search in a new markets for good operators. We’ve turned down bigger acquisitions in new markets in order to get the right operator in place. Because we feel that’s the most important, that initial acquisition.

Jason: There’s a real incentive then for somebody that let go of this, being the business owner and transitioning to being an operator within your model?

Noel: Absolutely, there is. Especially in new markets. In addition, we find a lot of our acquisition targets are people who have grown 300, 400 doors. They also have a great real estate brokerage which we are not in the real estate business. We don’t represent sellers or buyers buying investment property. We would rather create a strategic relationship with somebody.

Let me give you an example. Somebody has this great brokerage, they have 400, 500 doors, they’d really prefer to run their brokerage and sell their property management business. And then, we create a great relationship with them on going where, if any of those doors that we acquired from them, if any of those people want to sell, we’ll refer them back over to that brokerage. They can keep referring us doors, keep doing the business that they’re doing, and keep providing a great service to their customers and not have to give up that whole property management side of things.

That goes with whether they are churn key operator. There’s a lot of great brokers that work with masters that do a great job and they can backed into the property management business. It isn’t what their core business is. I have talked to some guys recently that have 1,200 door and it’s not their core business. Now they’re kind of struggling and they’d rather just be going out there and doing acquisitions, finding properties for investors to buy and really work in that business and that’s what they’re good at. It’s really good relationship for us to come in and we can be an extension of what they’re doing.

Jason: Quick question about that. When you’re looking at companies to possibly acquire or to work with, what’s the difference in perspective between those that are paired up with a brokerage currently, they have a property management armor, whatever, or those that are just property management company?

Noel: For us, not much. We look at that and we look at the doors. We look at the revenue of those doors. We’re not concerned about the brokerage. It’s just different relationship. It’s a little bit of a different conversation. Sometimes they [inaudible [00:30:45] your conversation, because somebody is not selling everything that they’re doing.

Honestly, I’ve seen a lot of guys who’d be really surprised to sell somebody, by accidentally picked up over 1000 properties. You would be surprised how many people can act into it. They started managing their own doors. They had a couple investors come in, couple more, and then they decided they want to grow that business. But what they didn’t do is create a lot of assistance from the beginning. Now they get overwhelmed. They get to 500 doors, 600 doors, they get completely overwhelmed. The business is going to go in two directions.

Most of the time, when they get in that situation, it starts to go down hill. Quality of the service starts to go down. We had a group that four, five months ago, they got 500 doors, we were going to offer them a great price. Today, the business, it churned down because he didn’t think we offered them the right price. Now, he wished he turned the deal with us because he hit that critical mass and he didn’t have the systems in place and he started losing doors. It’s a decline in business and we value that differently.

Jason: That’s probably negatively impacting their reputation online. It’s probably affecting their real estate sales.

Noel: Absolutely, absolutely.

Jason: Right. I think what you’re saying is, for people looking to buy a property management company, a great target market or great target audience would be the brokerages that are almost the accidental property managers.

Noel: Absolutely. I’ve met a lot of these guys and they’re sitting there with 500 keys on their chain. They’re on the phone a million times. They’re not doing what they want to do. That goes with a lot of people in that business. They would rather be out there buying and selling properties, working with investors, and the property management is just a necessity. It’s either a necessity because they don’t believe there’s just good property managers in the market.

The property management business is very fragmented, or they’re just having to do it because they have fallen into it, they were in the REO business, now they started managing properties. Those are great targets for sure.

Jason: With the contracts or the company, there’s two types of acquisitions. Tell us about the two types of acquisitions that Renters Warehouse looks at and whether this is a good fit for other property management companies looking to buy.

Noel: You mean the difference between if we’re buying a company or buying just the contracts?

Jason: Yes, thank you.

Noel: Okay. Even if we’re bringing on somebody as an operator within our company that we’re buying, we still value it the same. But the difference is that now you’re talking about it’s a new market, they are great operators, we really like them, how am I going to keep some of their employees, we like to keep them on board, we think they can really grow market. It’s really still about the door price because we have to value those two thing separately. We look at the door price and we say, “Okay, what do we need to pay this person. What kind of stock options can they get. As well as, a lot of things that I’m doing, that my team is doing, in growing doors in that market that benefit from that.” The caveat to some of those guys is, “Hey, here’s what we can pay per door. Here’s what you’re going to get for all your hard work. You’re going to get paid a salary, you’re going to get a lot of the things you’ve been doing that you don’t like doing, you’re not going to have to do anymore. You can focus and grow in the market and that’s going to be your side.”

Those are rare instances but since we’re growing so quickly, it happens because we’re growing into a market. If that’s a market we haven’t been in, there’s huge opportunities for guys at markets that we’re not in currently, to really monetize all the hard work they’ve put in, because not only they’re getting a multiple on their business and their net revenue, it’ll probably take them two to three years to achieve, in most cases. They’re also going to continue to monetize it more by having a salary and having a great company that has a great culture behind them to really grow market.

Jason: Okay, great. Let’s take a look at some of the questions that some of our audience wanted me to ask you. I’m looking at the ones that people threw into the chat that we’re not ignoring the question and answer real quick here but is your flat fee pricing uniform across all markets?

Noel: No, it’s $89 or $99 per month. We do give some discounts for small multi family that can discount that fee. On our larger markets it’s $99, on our smaller markets it’s $89 usually. It depends what’s the marketplace is.

Jason: Will that model work in really high rent areas? Also, really low rent areas?

Noel: Yes, and here is why. For the high rent areas, we can take a lot of market share. We’re looking at Chicago. In this city, where average rents are $2,500 or higher, $99 a month is a great model. I think there’s a few people that are happy that were coming into town because we’re really going to push down the pricing. Then, the lower end markets, those are higher maintenance, those are tougher to manage usually, depending on the tenant type. We’ll push our pricing down as much as we can. It seems to work because it’s not about the lowest price, it’s really about the quality of service.

We really truly believe that our service is better. They’re going to have a lower repair maintenance cost because we’re really focused on escalation avoidance. We’re very good at what we do, we’re very good at tenant retention, we’re very good at collecting rents, all those things. It’s a pretty easy sell for us. We’ve had some investors that we’ve taken over in Kansas City, in Saint Louis, and Cincinnati that are lower in properties and our prices structure still works for them because we’re able to stabilize their portfolio.

We also have portfolio services division, investors that own more than 15 units, they’re getting some specialized services with dedicated account manager and that’s something a lot of guys like. Usually, it’s a very much of a win for the owners. When we’re acquiring a property management company. A lot of these sellers have built this up and they’re very tied to their owners and what we offer is a win for their owners. They’re stepping into a situation where it’s very well managed and professional and they understand it. Sometimes our objection is these are their personal connections, we do a very good job at them.

Jason: Let’s talk about finding people willing to sell. When  property manager is looking to acquire, like my brother is like, “Man, I really want to just buy property management companies. I had the money to do it. We want to do it. I can’t find anybody willing to sell.” How do you approach people to have this conversation? Because property managers are pretty proud, they’re entrepreneurs and business owners. I doubt any of them are just going to say, “Hey, look at me really easily.” How do you find people that might be willing to sell?

Noel: Well, I’m here right now, so that’s one thing. It’s really been connections. If you’re in your marketplace and you know people, you start putting the word out that you’re buying as well as prospecting. Looking for property management companies, looking at how many listings they have, getting an idea, getting to know people. I look at LinkedIn and randomly a company pops up, I’ll call them up and say, “Hey, we’re buying property management companies. Are you interested to sell?” Many times they’ll say no, many times it’s a lot more of a conversation and it’s about networking and ask them if they know other people. There’s a lot of different ways to work in with them.

Just because somebody says no today, doesn’t mean that next week or next month when they’re having a really heavy that they will call you up and say, “Hey, I’m actually interested in selling. I can’t do this anymore. I’m fed up with it. It’s too tough.” Or we’ve come into the market and we’re starting to eat away at their market share, they want to sell. There’s a lot of different reasons, but many times, people say no outright but they’ll come back or they’ll throw out a number that’s ridiculous and they’ll shop around and realize.

Jason: Which starts a conversation.

Noel: Exactly.

Jason: Yeah. Okay, just putting out the fillers and letting people know, reaching out to them, that can at least start the conversation. I heard a great idea at NARPM Broker/Owner Conference, it was mentioned, because they’re proud to approach them and just say, ”If we were to do something together, could we make more money?”

Noel: Like any small business owners, I’m very proud of what you’ve done. Sometimes you have to jump at the person you’re talking to. But most of the times it’s not, “Hey, do you want to sell your business?”

Jason: Right.

Noel: It’s like, “Hey, you’re really good at what you do and I really like what you’ve been doing. Let’s see if we can monetize your business more than you are right now.” The net revenue that somebody makes compared to what we can pay usually, it’s two or three years on top of that net revenues. It could be a good cash event for them. Maybe it’s not buying all of their doors, maybe it’s buying some of them. Letting it monetize some of their doors. That’s something that we absolutely consider. Especially guys who have their real estate brokerages, maybe let them building up some doors if they have a good investor flow and we’ll buy a few hundred doors from them and let them build that business back up.

Jason: Interesting. You’ll buy just part of the portfolio. This doesn’t have to be all or nothing.

Noel: Yeah, it doesn’t have to be all or nothing. As long as you’re not trying to just sell the dogs of the portfolio.

Jason: Maybe it’s more common that they’re like, “I don’t want to drive out to this area anymore.” Or, “We started to branch out here but it’s kind of difficult for us to manage, maybe we could off hand that.”

Noel: Exactly, especially to the smaller ones. Now, I saw somebody ask a question about no non-compete. We’d like to do non-competes on bigger acquisitions. If we were buying a property management company out and buying doors, we will put in a non-compete. If it’s a smaller guys and they have brokerage and things like that, we don’t always do a non-compete. It’s really situational on the non-competes. But we don’t want to fund somebody to have the money to go ahead and create systems and then come turn around and compete with us. That’s not what we’re trying to do.

Jason: Right, but these people may sell off a lot of their doors and they might be small and then they maybe can build up more. You might take them again.

Noel: Yup.

Jason: Okay.

Noel: We just keep referring them over to us. It’s the best scenario. Yeah, non-competes are situational.

Jason: Okay, great.

Noel: I saw somebody ask about, is there per door formula. We have our per door formula on our back end but it’s not a set formula. You can’t just look at it and say, “Our gross revenue is here. This is what we’ll pay because there’s a lot of nuances to it. There’s several different things.” I think one thing that we didn’t talk about was the way we structure our transactions. We usually put down, and we do it for several reasons, we usually put down, let’s say, 50% and then we will take it. The seller will carry a note for three years on the other 50%. That is tied into the churn and keeping that churning place. It enables us to be able to acquire more doors. Things like that. That is factored into the formula. Those are usually larger transactions or smaller transaction where we pay out right. But we can be more aggressive on the pricing and doing something like that because we’re trying to grow so quickly.

Jason: Yeah, I think when people ask that question, they’re trying to evaluate their company right now, “How much could I get?” If they are interested in figuring that out, a lot of property managers related, this is similar, a lot of property manager will offer like a free rental analysis. Maybe would it be a good strategy to do something similar? We’ll do a free company analysis.

Noel: Absolutely, we will do that. We’ll like talk to them and we prefer, if we’re really interested in selling. We also have a free rental analysis, that’s a different thing but we will evaluate a portfolio and give you, if we can get some P&L, like I said, we’re more concerned about the revenue. A door count, ideally zip codes, and streets that the portfolios are located. Within 24 to 48 hours, we can come back with a per door price before due diligence and come up with a number and start a negotiation. We can do that very quickly.

Jason: Do you recommend having some sort of agent, goes middleman to broker the deal and handle the deal in between the two companies?

Noel: No, the reason being is that, it depends, is that a business broker? We absolutely pay referrals and we love it. We say, “Hey, we’re not interested in selling your company but if you find us somebody that you personally know and you’ll help us get a deal done, we’ll pay you a referral.” Because we are trying to grow so quickly, we’re not trying to capture every single deal myself. For example, if I’m already talking to somebody and it’s a larger investor portfolio holder or a property management company, and somebody also knows them, and they can help make that deal happen, we’ll pay them. We’ll pay them a referral. It’s usually between 1% and 3%, depending on the purchase price or if they find us an investor, that is a single family rental investor, those portfolio owner that we can manage their properties. We’ll pay a per door price for a referral.

We’re open to doing that. We like to work with guys. Some guys that have helped us refer some doors in, despite of the seller company as well. We’re very open and very malleable in working with people for sure.

Jason: If people have questions or they want to start having the conversation with you, maybe evaluate their company, how would they get in touch with you?

Noel: Sure, one thing real quick. A new doors, if people refer us doors, a door at a time, we’ll pay what our company call a realtor referral fee. That’s usually around $500. If someone says, “Hey, I’ve got an investor. I’m going to refer a door in.” We’ll pay a referral for you. On-going and we’ll keep that relationship going as long as possible even with that same investor.

If they want to get in touch with me, I’m on LinkedIn. My email is @noelc, that’s noelc@renterswarehouse.com. We’re on Twitter, ProLandlord. We’re all over social media. I’m very accessible. Connect with me on LinkedIn or send me an email and we can have our conversation.

Jason: Fantastic. Noel, I appreciate you taking the time to hang out with me here. I recommend you get in touch with Noel if you have questions about buying or selling your property management business and have a conversation. Like Noel said, you can reach out to him on LinkedIn or email. Noel, thanks for coming out.

Noel: Great, thanks a lot, Jason. Really appreciate it.

Jason: Hey team, Jason here. I hope you enjoyed the episode with Noel Christopher talking about buying and selling property management companies. If you are interested in buying or in selling a property management business, be sure to get inside the DoorGrow Club. We have topic areas for those that are buying and we have a topic area for those that are selling property management businesses. Go ahead and post there your own little one ad or craigslist ad or something. You can post in there and to put out fillers for people that might be in the market to buy or sell property management business. That’s all I had to say.

About Jason Hull

Jason's mission is "to inspire others to love true principles." This means he enjoys digging up gold nuggets of wisdom & sharing them with property managers to help them improve their business. He founded OpenPotion, DoorGrow, & GatherKudos.