DGS 35: Using Options to Grow Your Property Management Firm

A lot of people may want to upgrade their home or location, but money is tight and they are tied down. Mike Kalis of Marketplace Homes has a solution for this. Not only does he help people break ties with their existing homes and move into new ones, but he successfully built a business around this practice.

Today we are talking about how to use options to grow your property management firm. Doing things like helping tenants and owners by leveraging rent-to-own options. The goal is to increase revenues and have enough money to provide a high level of service.

You’ll Learn…

[04:02] Mike’s company is close to 3000 doors in 28 states.
[04:49] How we will talk about increasing revenues on transactions.
[06:54] The biggest benefit is helping owners get out of their homes without having to sell right away with a rent-to-own plan.
[08:01] This is also a second chance opportunity for the tenants.
[09:09] Pros and cons a tenant could put money down and if they don’t purchase they would lose that. The owner could lose out if they set a price that is lower than future market value.
[10:32] What an option agreement actually is and selling the option to the tenant for $5000.
[12:53] How this method actually helps grow a property management business.
[14:01] How accidental investors are the one’s property managers make the least from. This method helps make a profit from this group.
[21:14] Signing the purchase agreement right out of the gate and list and itemize all expenses. Making sure the tenant understands the fee is non-refundable.

Tweetables

Resources

Marketplace Homes

Marketplace Homes on Facebook

#DoorGrowClub

Mike Kalis on LinkedIn

Transcript

Jason: Welcome DoorGrow Hackers to The DoorGrowShow. 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 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 DoorGrowShow, 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 35. In today’s episode we have Mike Kalis of Marketplace Homes. We’re going to be talking about how you can use options to grow your property management firm. You can learn how to benefit tenants and owners by leveraging rent-to-own options. Let’s get into the show.

We are live. This is The DoorGrow Show. Jason Hull here hanging out with Mike Kalis. Did I say it right?

Mike: You got it. Yes sir.

Jason: Okay, great. Mike, tell us about you and about your business a little bit. Then we’re going to get into something I’m completely unfamiliar with, which is options.

Mike: First of all, thank you for having me on the show here, Jason. I dig what you’re doing. You’re one of the few technology people that’s trying to actually be in property management. I think that’s pretty awesome. I also thank you for spending 30 minutes with me to figure out how to make my video camera work.

Jason: Yeah, you bet.

Mike: You’re awesome as far as that goes. I went to college. During that time, studying marketing, was doing landscaping, putting bricks into the ground to try to cover things, and decided that wasn’t a great way to make money. I started my career with a builder called Pulte Homes. They’re based out at Metro-Detroit which where I happened to be from. They’re one of the biggest builders in the United States. I worked there for three years. That was right in the end of 2007. In Detroit it was really 2006. In 2007 the things collapsed, fell apart a little bit quicker. Everywhere else we have that distinction.

We figured out how we could take care of people’s old homes until they purchase their new homes. We would use margin from the builder to either purchase the people’s old homes, manage the old homes, pretty much whatever it takes so they could get rid of their old property and buy from one of our partner builders. We started that company in 2007. It’s been 10 years since we’ve been running Marketplace Homes. We’re on the Inc. 500 list. 3 or 4 years, it was one of the fastest growing companies in the country.

We’re going to close in on about 3000 properties in a couple months here all across the country in about 28 different states. We have 80 full-time W-2 employees on our staff, mostly just became an accidental landlord and somewhere along the line about two years ago and decided that maybe we need to stop being accidental and start being intentional and really trying to grow that business.

Jason: How many doors total?

Mike: We have a bunch of deals coming together. But we’ll be close to about 3000 doors in the next month here.

Jason: That’s spread out over how many locations?

Mike: 28 states.

Jason: Mike, with anybody with high-level doors or that’s created an empire like you have, you’ve figured out a few things here or there, generally. I was excited about having you on. I asked you, “What’s something unique that you could share with my audience?” What you told me was basically how people could grow by offering options. Let’s start really baby level here for me. What are options?

Mike: Sure. Before I even talk about options, I should talk about why anyone even cares or why they would want to do this as a property manager.

Jason: Makes sense, okay.

Mike: We figured out a while back, if you’re going to get $1000 or $2000 to fill a home and then maybe make $1000 in year-end trails, that’s not a ton. You could make it work but that’s tough. I see property managers do all kinds of things to add $20 in the op fees or $5 in this or $5 in that. What we’re going to share in this show today is how you could increase revenue on transactions anywhere from $1000 to $5000 upfront. One of the reasons I want to share this is because I really feel like our industry needs to be more professional. One of the things that makes us unprofessional is when other businesses don’t collect enough money and then are unable to provide the level of service that they need to be able to provide.

If you’re talking about wanting to grow doors, we generate 1000 to 1500 owners calling us every month wanting help with property management. You guys are good at getting that stuff, getting the doors going for that kind of lead gen. But you have to be able to create enough revenue off of each client in order to be able to put the money back into marketing to really blow that up.The biggest thing to property managers is, “What is this lease option that many people have been doing this for a long time?” They go and get it. What I want to share with you on this show is how we’re able to generate $1000 to $5000 extra on every single transaction through options.

Jason: Okay.

Mike: That’s why anyone would care.

Jason: That’s a great why: more revenue, more money. There’s a benefit also I think for the customers that you’re getting this money from as well.

Mike: The biggest benefit is that not every owner but a lot of owners will call and say, “Man, if I could just sell this house, that would be great.” But the math doesn’t work. I need to get $150,000. We’ll look at it we go, “It’s worth $130,000.” We always say, “It’s not a matter of if I can get you $150,000, it’s when. Is it in 12 months? 24 months? 36? I don’t know. But at some point in time, I should be able to get you the dollar amount that you’re talking about. Would you be interested in us working with a rent-to-own client that might be willing to purchase your home down the road at a higher value that your home might be at it at that time?”

There’s a big benefit to an owner because they could potentially sell the home without transaction cost. They don’t have to pay a real estate commission. They don’t have to turn the property. There is always some work that you need to do to a home when a tenant moves out of it and get it ready for sale, carbon, paint, whatnot. They don’t have to have any rent lapse, which is going to be another big losers. Even in a good market, it could take a few months for a home to sell them and to be able to actually close if they hit a rent loss. The owner saves all of those things.

The tenant. We like to say that we’re in the second chance business. They might add something on their credit, maybe it’s not perfect. They’ve been renters for a long time. We want to try to make them an owner. In most cases, their payment is going to drop big time if they’re able to actually own the property. They might be paying $1500 a month than a $150,000 home. But if they buy it, their payment could be $900 a month. There’s a huge advantage if they’re able to buy it.

To the property manager, you’re able to make some of the fees off of the options upfront. You can have a reason and create some alignment to want to see a door go out the door. Because otherwise if you’re a property manager, you don’t really want the tenant to buy it because then you’ll lose that management.

Jason: Right. How do you convince the renters to do this? My mind is thinking somebody’s got to lose here. Somebody’s going to be spending maybe more money or something like that. That would probably be the renter in hopes of being able to buy it.

Mike: It’s really not. There’s going to be pros and cons to each side of this transaction. Here are ways that everyone could potentially lose I suppose. A tenant could maybe put down $1000 or $2000 on an option to purchase. If they don’t exercise the option, they would lose that money. The owner, sometimes we get these objections, they’ll set a price. Example, before a home that they wanted $150,000. They set an option at $150,000. Today it’s only worth $130,000 but lo and behold, the market jumps big time. All of a sudden it’s worth $160,000. Now the tenant can exercise an option at $150,000 and the owner would have to stick to it.

We think that pigs get fat and hogs get slaughtered. If you have a price that’s $20,000 more than today’s price and they’re able to do that in the future, maybe that’s a win. But it really is something where everyone can win. If the market goes up a bit and the tenant’s able to purchase it, it’s a big winner. I don’t know. Those are some of the pros and cons.

Jason: Okay, cool. How would a property manager get started doing this? How would this work for them?

Mike: Okay. There are a couple different ways that will structure options with owners. I think first is what is an option? An option is just an agreement between two parties to purchase a property during a set period of time for a set price. Often with an owner we’ll say, “Hey, we would like you to assign our company, Marketplace Homes, the right to be able to buy your home for $150,000 and we would have the right to buy that for the next 36 months.” We would then take that option and we go to the tenant. Typically, a markup for us is about $5,000. We try to make about $5,000 on that transaction. We would go to the tenant and say, “Would you like to purchase an option to be able to buy this property for $155,000?” That’s a typical transaction. Then we’ll sell that option for something usually between $1000 to $5000.

That’s where people were tuning in and go on, “How would I make $5,000?” It’s that. You should just say, “Hey, for $5000 you would have the right to buy this property for $155,000.” You have 36 months or whatever the term was that was agreed upon to exercise that. If you don’t exercise it you’d lose your money. But if you do, all the funds that you put down could go down as a downpayment. That’s typically how a lease option works.

One way for the property manager to do this is to assign the option to them and then reassign the option and mark it up to the tenant. If you had some owners that didn’t want you to do that, a different way is to assign the option directly to the tenant and then maybe just take a cut of that option fee when you do that. Either way it is fair. It just depends on what each party is looking for.

Jason: How are you using this to help grow the property management business? It’s adding revenue and then what are you doing?

Mike: If you’re able to drive up the marginal revenue off of each transaction then you can drive up the amount of money that you can reinvest in the marketing and other things to go and get more clients. You can also add more to your team instead of being a one-man shop out there.

Let’s say that you put together a property management deal. You get $1000 upfront and $100 trail. We actually charge a flat $90 fee, that’s what we do. It’d probably be $90. For us we view that all as cost, that’s the custom. Acquisition and the cost fee, our commissions, signage, lockboxes, all that stuff. Then we’re trying to survive off of that trail.

If you could add $5000 to that, that whole entire equation changes. If you can get $1000 to fill a home plus $5000 when a tenant goes into the property, now all of a sudden you’ve got some capital upfront. You can continue to keep rocking. Last month we’ve marketed 150 properties. If you make $1000 on each one of that, that’s one number. If you make $5,000 on each one of that, that’s a different number. That really changes your ability to grow as a company. You can’t do an option on every single transaction. That wouldn’t make sense.

Jason: I love this idea because the accidental investors are typically the people that you make the least revenue off of. Because these accidental investors just want to get out of the property as soon as possible. Unless you can either convert them to a long-term buy and hold strategy or I guess that’s another option, you can do this lease option with them. It’s not going to be profitable. A lot of people try to just avoid these accidental investors so that they have a property on for instead of one year, three years, five years because that’s a big multiplier.

Let’s take a look specifically if they were looking into their portfolio right now and they’re like, “Okay, maybe I have 15% to 20% I can explore a lease option with.” How would they identify which ones are ideal for this?

Mike: It has everything to do with the values. I’ll have homeowners and property managers call and say, “Mike, how many people actually exercise these things?” The answer is if the home is worth more than the option, 100%, everyone does. If the home is worth less than the option, no one does. It’s really the better pricing you could give me, the better the chances that somebody’s going to be able to exercise it, the more that you can charge the tenant for.

If they had an option to buy a home at $150,000, we look at everything. It looks like it’s worth $150,000 today. Maybe they should put down more than $5000 to lock in that price and have that set for the next couple of years while they work on improving their credit. The values and where everyone’s at is going to make a big difference.

Great place to start is to look at all of your owners and say, “Hey, what’s the number that you need?” Then take a look at the property and say, “How far off is this home from where they need to be?” Is this somebody that if they could just sell the home would be thrilled to just sell the home? If all those things check, you call the owner and just say, “Hey, I have an idea here. If I could get a tenant in the property that might be willing to buy it, would you like that? What price would you love?” Then just call the tenant and say, “Hey, need opportunity? The owner’s willing to lock in a price for you. You might have to put a little bit of money down but if you’re open to it, it’s the first step towards owning the home. Would you like to own the home that you’re in?”

Like I said, it’s not going to be everybody. But for some of those equations, that can be really good. Tends to work better on single family homes, less on condos. Tends to work better when there’s three or more bedrooms. Tends to work a little bit better when it’s more of that neighborhood home, where it’s really a family that’s just trying to build some roots. Those are some indicators and things that it might be a good candidate.

Jason: I’m in a rental right now. It’s a three-bedroom home, it’s in a nice neighborhood. I’ve got this landlord who I can tell doesn’t like the property. She’s doesn’t like having to to deal with it. She used to have 20 properties of her own. She sold them all off except this one. I know because my mom’s an agent, I had her look it up. The only reason she hasn’t probably sold this one is because she’s upside down. She’s waiting ‘til it accrues a certain dollar amount so she can get out of it. As me being a tenant, I still like reaching out to her every time I need a request done, it feels uncomfortable like I’m annoying her. She takes too long to deal with stuff sometimes. If she’s listening, sorry. She’s got other things on her plate. How would I approach in this situation saying, “Hey, would you be open to this lease only option?”

Mike: The first question is just would you be paying it more or less if you own the home versus rented it?

Jason: Right. Probably less for sure.

Mike: I’ve had some people that have a home and they’ll say, “Actually, I got a heck of a rental rate.” Then you might want a really, really long option where you’re just like, “I’m happy just […] along.

Jason: Yeah.

Mike: […] that’s a plus. The other thing would just be like, would it be interesting if you could eventually buy the home with basically no money down?

Jason: Yeah. That would be nice too.

Mike: I’m always trying to maximize cashflow and trying to not tie up capital in different things because I always think I have some genius idea that I could go with money. Trying to stretch as much as I can.

A way to structure that that might be interesting if I were a tenant and try to make it as advantageous for me as possible would be I’d ask for an option, I would ask no money down, and I would tell her that I’d like a $500 credit from every month’s worth of rent that would go towards that purchase price. What’s unique about this is often times a lender would be able to recognize those credits as your funds which can then be used as a downpayment. $500 after 12 months would be $6,000, after two years would be $12,000. You can drag that out. You can make that number bigger or smaller. You’re in California. I know that $500 is like a nice lunch. In the Midwest, that would go pretty far. I’m where you’re at. That would be a neat way to structure that.

Here’s what’s great about it for you as a tenant. If the next big housing prices happens and prices plummet, you just don’t buy it. But if everything continues to skyrocket and jobs are just exploding and everything is great and two or three years down the road whatever the dollar amount is that you have on it, looks like that’s actually a little bit undermarket. You either buy it, you reassign your option and sell it to somebody else if you just want to live somewhere else. I don’t know. You would find some way to exercise that even if it was a home that you wanted to stay in or not because there’s a good value in there.

I think to the owner, they would probably push back and ask for a little bit of cash down. I guess that’s the negotiation there. Usually the owners are going to say, “I want $1 million down,” and the tenants just say, “I don’t want to put anything down.” It’s just trying to find the ground in the middle that makes sense.

Jason: Alright, cool. When you first started doing these lease options or these rent-to-own situations, what were some of the initial pitfalls and mistakes that you learned that you think others can avoid?

Mike: I don’t know that there really was any giant pitfalls other than just it was something where you start began offering. There was a period of time where you just talk to so many people and they just say, “Really if I could just sell the home, I would.” Those were always just the words right out of their mouth. We say, “Okay. What price would you like to sell it at?” They give you a price and you go, “That’s not going to work right now. “They would nod and go, “Yeah.” Why don’t you just give us the right to buy it? I don’t know.

Things that we didn’t do right out of the gate, you should probably sign a purchase agreement with the seller. Then you want to sign an option that gives you the right to exercise that purchase agreement. At first we didn’t do a full purchase agreement. Then small things became a problem. You think the only thing to put in there is the price, $150,000. Who pays for taxes, how you prorate things, who’s responsible for what, all of that stuff is very important.

I think the first year that we did this, we did not many of them, and we didn’t have all the paperwork put together. Probably getting the paperwork and alignment, making sure that the tenant really understands this is a non-refundable option fee. We put those big, bold letters. You got to exercise it. You’ve got to give us notice 30 days prior or else you could forfeit this. There are some that once they get in the money, the owners basically just hoping they don’t buy it so that they can maybe go on and resell it. If the tenant waits past that time, they no longer have a right to buy it. Make sure everybody understands that. For the most part it’s just a neat thing to do that I think offers homeowners and tenants something a little more than just answering the service call.

Jason: Oh, I love it. I’m guessing realtors could probably figure this out if they’re also doing property management. But if they’re just property managers, a lot of this still sounds very real estate-ish, and they’re a little nervous about the forms and the documentation. Where would you recommend they go to get the right documentation, documents, and formatting for all this stuff? Where would you point them?

Mike: I don’t know. Every state is a little different. Usually you can go on to the MLS and any local market that might be able to give you the right purchase agreement for that state. You can probably go online and you can Google option agreement. For us, personally, we talked to our attorneys and they draw some stuff up.

I’m a big fan of simplicity. A lot of attorneys don’t really love my agreements. Often there are like one or two pages. That’s it. Our clientele and the people that we work with, we want to keep things in a language that everyone can understand. We don’t ever want somebody coming back and say, “Hey, I didn’t read the fine print.”

Our lease and management agreements are two pages long. It’s bullet-pointed. Most of the bullet points are one or two sentences long. I am a little different. Most attorneys will go through and make a 600-page document. The problem is you initial every page on the bottom, you sign the thing off, and then something a month later goes wrong and you call and they say, “Didn’t you check page 54 subsection 307?” Ofcourse they didn’t. Whereas we can say, “Hey, there are 10 paragraphs. Each one is one or two sentences. Paragraph 7 says this is a non-refundable option deposit.” It’s not that hard to figure out. I don’t know, that’s my theory.

Jason: Okay, cool. Would your purchase agreement and your special bullet point option agreement, is that something you’d be willing to share or is this something you feel as proprietary?

Mike: I could share it but it’s just going to be different for every single state.

Jason: Sure. I think it’s helpful for people to have a starting point. If you’d be willing to, that’d be really cool. We could put a link to that or something later.

Mike: Yeah, send an email. I can share with you some of the documents and different stuff that we do on that. That would just be my only caveat because we have 28 different states. There are a whole bunch of different versions. They’re         kind of similar but sometimes there are different little rules and nuisances.

Jason: Right. The big disclaimer is you got to probably have a lawyer check it out like you did and make sure this is applicable to your state and do it right. I’m sure everybody listening to this would not do anything other than that.

I like your idea of making sure that any sort of agreement is in plain, human, easy to read language so they understand what they’re getting into. That’s going to prevent a lot of misunderstandings and challenges later on. I like that you’re breaking it up into bullet points, maybe even adding headings here or there. We want to make content easy for people in general.

Mike: I agree.

Jason: Cool. Mike, I appreciate you coming out. How can people check out you, your business. How can they get a hold of you? What do you want people’s big takeaway to be?

Mike: Yeah. More than anything, I like what you’re doing here as far as you’re creating a form where other property managers can share ideas. I dig the Facebook thing. I posted something on there this past week. It was nice to get 30 other property managers chiming in, at least a bunch of people that seem like they have my back. Other people going, “Man, we get what you’re going through.” That’s cool because we’re not always able to connect.

My big thing is I just think in this industry we have to get more professional. There’s way too many people out there that are one-guy or two-guy shops that they’re doing everything that they can, that are busting their butt. I started with one home in my basement managing properties. But having gone through that, I understand how stressful that is. Being able to break through some walls and get to a place where you can have different teams of people that are focused on different things is really, really important. I just love everybody having a form to share ideas. This one’s cool, it’s about options. If that’s interesting to people, that’s great.

Our company is trying to grow to 5000 homes by the end of the year and 10,000 homes by the end of next year. We’re doing that organically, adding 100 plus properties just one at a time every month. Then the other way that we’re doing it is through acquisitions and strategic partnerships. If anybody is out there in an area and they want to chat, we would love to talk. My website is marketplacehomes.com. There’s a tab in the bottom that says talk to Mike. You can just click that. I get all those emails, I check them. They come from tenants, owners, and anybody interested in anything. We get all kinds of stuff on there. The other thing would be either LinkedIn, just look up Mike Kalis.

It’s great to be on the show. I really appreciate it, man. My hope is that I can learn how to             grow a really cool moustache like you have there.

Jason: Yeah. Just get really lazy and don’t cut it. That’s it. You just don’t cut it.

Mike: I’m jealous.

Jason: It takes some work, I guess. Pleasure to have you on, Mike. Each time we talk, it’s been great getting to know you. Like Mike mentioned, for those listening, do check out the DoorGrow Club. If you go to doorgrowclub.com, that goes through the Facebook group. The level of interaction in there has been incredible. The group’s relatively small right now. I think we’re getting closer to about 300 members already. We just started using the Facebook group for the DoorGrow Club a couple weeks ago. The momentum there is pretty strong. Make sure you pop in there. I think it’s going to be a great resource for property managers to get real and raw with each other. It’s for property management entrepreneurs. Don’t add your staff, don’t add everybody in your business. It’s really for the broker-owners who want to keep this tight. It’s for the people that really are decision-makers so they can talk about the tough stuff they need to be doing in their business.

Mike: It’s so cool. We went on there. I actually posted something about a lawsuit we had. We all don’t like to talk about things that go bad but we threw it out there. I think I had 30 other responses, the things that were going on, people that have had similar situations. Different things happen because we all have owners and tenants that we have challenges with. I think if we can all hang out together and just share our best practices. If nothing else, at least just know that somebody else have the same challenge that you do, share some ideas, learn that the older I get the more that I realize that I know less. I thought I was brilliant when I was 20. By the time I was 30 I realized I didn’t know a lot. The older I get, the more I’m like, “Man I don’t know a darn thing.” Being able to share with everyone else in a similar business has just been great. Thank you for setting that up. Pretty cool.

Jason: Yeah, appreciate that. Mike, it’s been a pleasure having you. I’ll let you get back to your fantastic day.

Mike: You too. Thanks, man.

Jason: Bye.

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