DGS 9: Increasing Fees in Property Management with Darren Hunter – Part 3

In this episode, Darren shares a variety of owner & tenant fees & how to justify them. He also covers some additional insights into fees & mindset. Learn why having the cheapest fees is a losing tactic used by small property managers that usually fail.

You’ll Learn…

• Various owner fees & some justifications [1:29]
• The two ingredients to getting better fees [9:21]
• Outside normal duty fees & what to say when asked to do anything outside of contract [9:46]
• Various Tenant fees & some justifications [10:47]
• How nominal fee increases can easily double your profit margin [14:53]
• How having the cheapest fees is just a recipe for disaster [17:40]
• Property Management is a tough job & you are worth it! [18:49]
• The Law of the Main Game – Owners generally only focus on your main fee [20:08]
• Should you share your tenant fees with the owners? [22:47]
• Ensure 12+ months of owner peace of mind & make it surgical process. [25:21]

Tweetables:

With fees, if you believe you’re worth it and know how to justify it, you will get it.

Raising property management fees is an owner-by-owner surgical process.

Resources:

The Eleven Profit Laws on Fees by Darren Hunter:
http://www.darrenhunter.com/articles-and-knowledge-library/boosting-income-and-profitability-articles/the-eleven-profit-laws-on-fees-part-one

http://DarrenHunter.com

Transcript:

Jason: Welcome. If this is your first time listening, then thanks for coming. The DoorGrow Show is a podcast for residential property management entrepreneurs that are interested in growing their business and life. If that is you, be sure to subscribe and rate us in iTunes and join your fellow DoorGrow Hackers online at doorgrowclub.com, our free community for property management entrepreneurs. I’m your host Jason Hull, the founder of OpenPotion, GatherKudos, and of course, DoorGrow. Now, let’s get into the show.

This is episode number nine. In this episode, we’re wrapping up the interview that I did with Darren Hunter. In this episode, Darren gets into a lot of the different fees. He talks about different mindsets, skill sets. This really is the capstone to the interview and there are some really great takeaways so make sure to take notes, as I mentioned before on the previous episodes. If you haven’t caught episode seven or eight, which are part one and two, make sure you go back and check out those before going onto this one. This is some really great content. I hope you enjoy it.

Darren: Management fees are expressed generally as a percentage but what you need to be careful is giving them as a fixed rate. I don’t know your management agreement if you’re charging fixed rate. If fixed rate works for you, that’s great but you need to to make sure that you’ve got easy flexibility to increase your rates if they are fixed. Naturally, if they’re expressed as a percentage and the rent goes up, your income goes up. Now also, leasing fees are expressed generally as a percentage of a month’s rent and they go up as well or down in accordance with rent levels which is what you want.

We do see some offices have, say, a lower management fee in general and a higher leasing fee. We see some out there, they’re high management fee, high leasing fee. We see people out there with a low management fee, low leasing fee. We see people out there with a management fee and nothing else. I’ve got a client of mine in San Francisco and he was only charging a management fee, a lower management fee but the problem was he was really, really good. I said, “In the lower, if you get what you pay for, you are funneling badly.” Because they only see you as a quality agent and then they see your cheap fees and they must be thinking, “Well, that doesn’t make sense.” It’s like charging a brand new Mercedes at the cost of a Kia.

Jason: Right.

Darren: It doesn’t make sense.

Jason: People would be like, “What’s wrong with this new Mercedes?”

Darren: Correct and they think what’s wrong with this? We actually then added a leasing fee. We added a [00:03:04] fee and he had a problem real problem with it. He said “Darren, I’ve never done this before. I don’t think my owners…” I said, “Okay, let’s just work on belief. Let’s work on why you’re worth it and then, let’s work on script to be able to justify those fees.” He really arm wrestled me across the Pacific on this particular issue. In the end, I said, “Hey look, I can’t help you until you just go and give these new fees a try with new owners because we want to go do it with these current owners too.” I said to him, “Hey, I’m just going to leave it to it. There’s nothing more I can do because your mindset is.

Talk about leasing fees and also lease renewal fees. Really, if you are really focused on making sure that a tenant’s lease is renewed and keeping them locked into a fixed term, which means if they break that or leave early, then of course, there’s rent that needs to be paid by the tenant, other cost and so forth. You’re protecting your owners.

I just want to state that if I went and bought a property in your town. If you said to me, “Well Darren, we dont worry about renewing leases because tenants just let them go on to a month by month lease.” I will not want to sign my management with you because that’s your mindset that’s going to cost me money, because now, I’m not protected should that tenant wish to leave during the quiet time, during a winter period, or something like that.

Jason:  Yeah, that will be dangerous.

Darren: And we say to owners, “Look, we charge a lease renewal fee.” He says, “Well, the other agent down the road doesn’t charge.” Yes mister owner, commonly, when we get properties transferred from other agents, guess what we find? The tenants are generally being left to go on month by month. You understand financially what can happen to you if the tenant breaks their lease in a month by month as opposed to a fixed term lease. That we charge x. From that point of view, the lower renewal cost, if it’s going to cost them 10 apples, if they’ve got a tenant on a month by month in lost rent, in leasing fees, you can’t get back advertise, all those sort of things and it’s only going to cost them three apples to renew that lease, well those 3 apples is a bargain in comparison to the 10 apples.

Now also, just before we move on. Commonly, I teach if your leasing fee is a certain fee, the lease renewal fee will be half that. Generally, half of the actual leasing fee is quite acceptable.

I do see a lot of people where their leasing fee is x but their lease renewal fee is so tiny. They obviously don’t realize the value they’re bringing to the owner. I say, “Okay, justify your fee.” And they go, “Well Darren, we have to make a few phone calls to the owner, a few phone calls to the tenants, someone signs something.” Forget it. Owners don’t care how long it takes you to do something whether it’s a few minutes or a few hours.

Jason:  Right.

Darren: You promote the benefit of this to the owner by keeping the tenant locked in and what the alternate cost will be if they go with an agent that doesn’t actually focus on it or has little to no fee. That’s lease renewal.

Moving inspections also. At the end of the day, these things are very, very easily justified if you’re doing video as well. If you’re doing detailed photos or written inspection. Whatever it is, just show them examples of these things. Definitely with new owners as well, it’s very, very easy to justify.

Inspection or assessment fees, now it depends on what state you are in. Some brokers don’t want to call their walkthrough inspection an inspection, they might want to call it an assessment but you understand it’s just a routine check of the property. Other of my clients like in Arizona, they might be changing the air conditioning filters while they’re at it and so charging inspection fees or assessment fees, monthly admin fees. This, in Australia, is very, very common, where a small amount of money is charged per property per month. Then it adds up to a nice fee at the end of that.

How do you justify that? It’s petty expenses. It’s phone calls, it’s postage, it’s this, it’s that. We don’t want to where be charging month by month those actual cost, mister owner. We don’t want to be a lawyer that charges such and such money this month and then the cost blow up the next month and it goes up to this and it’s all unpredictable month by month. We just charge x same fee, month in month out. Some months we win, some months we lose. Also, a maintenance fee is very common. You’re organizing maintenance on the owners behalf, charging a percentage or a fixed rate.

These are really, really easily justified. The owners says, “Hang on. The other agent down the road does not charge maintenance fees.” “Yes, great question mister owner but, have you ever been to buy a property and you’ve gone to an inspection and you stood on the other side of the road. Have you got out of your car and actually guessed that it was a rental property from the other side of the road?”

Jason: Yeah.

Darren: Because obviously, it’s a run down. It hasn’t been looked after and that’s what the agent that only does a reactive maintenance. If something breaks down, the tenant gets on the phone, call someone that sends men out to fix it but they don’t keep proactively on top of maintenance. With us, we make sure that your property is maintained year in year out. When it comes to sell, it’s at its maximum condition which means you get the maximum price for it. But if you go with the reactive agent that doesn’t charge for it, that’s what you’re going to get.

Jason: Yeah, reactive maintenance costs are going to be far greater than proactive maintenance costs.

Darren: Yes and of course, the reactive agent isn’t going to charge for it because it’s not part of their focus and its not part of what they do. They just collect the rent.

Jason: Right.

Darren: Do you see what’s happening here? Do you actually see that I believe in what I’m saying?

Jason: Sure.

Darren: You hear the conviction coming through? And you hear me able to justify it. Again, the two ingredients to getting better fees. If you believe you’re worth it and then you know how to justify it, you’re going to get it.

Jason:  Then there’s the third one. The third one is knowing what fees might be possible. And so if you need to know that, you reach out to Darren.

Darren: Right, we’ve got lots and lots of fees. Okay, moving on. Other owner fees, account set up fee, court fees, marketing fees, outside of contracts. This is outside of normal duties. Here in Australia, we might get an owner ring out and say, “Darren, we want you to send one of your property managers to go out to the property and we’re meeting a bank valuer or an insurance loss adjuster. We want you to babysit the appointment for one or two hours.” “Yes Mr. Smith, and the fee will be… We’re happy to do it.”

Jason: “We would love to do that, here’s how much it would cost…”

Darren: I cannot go on until I give full credit to the man that taught me that the answer is, “Yes Mr. Smith, and fee will be…” That’s Jean Bennett, Jean The Lean Mean Fee Machine from Florida, Orlando. He is a national trainer for NARPM, a close, dear friend of mine and he taught me that right back in 2005. Outside of normal duties fee.

Accounts set up fee, we talked about that. Annual technology fee and some others. That’s just owner fees. Let’s go to tenant fees. Of course, your late rent fee is the most common. By the way viewers, in Australia, we can charge zero tenant fees across Australia. Australia is one of the few countries in the world where the tenant is a protected specie.

Jason: That’s not in America. It’s the opposite.

Darren: That’s where you are, Jason. When it comes to the fees, and the thing is that the government here is crazy. We got this consumer protection culture as strong here as what the gun culture is as strong in America. We got this mindset that the tenant is some poor creature that cannot afford to buy a property and therefore cannot be nippled and dimed with fees but guess what? That same tenant goes down to the bank and they get charged bank fees, they get charged credit card fees. It’s like, you can see my point?

I love America when it comes to tenant fees. Here we can only think, we can only wish. But anyways, some tenant fees. Your late rent fees, usually charge those as a percentage of the monthly rent. The tenant’s three days late, they get charged a percentage and then that might be $5 or $10 a day, everyday it’s late after that to make it more and more painful. In California, as far as the only state where that fee is allowed but no other tenant fees. But, just cross the border and it’s a lot free and easy to charge fees.

Also, repairs fees for damage is another one. Early termination fees, break lease fee, court attendance fee, move out inspection, how about a no show fee? If they don’t show up to an appointment. That’s a trick charge, if the person has to drive out to a property, the tenant’s not home, there’s a fee for that too. Application fee, a lease admin fee.

I’m dealing with an office in New Mexico at the moment. We’re charging a lease admin fee, where the tenant signs up the property, signs up their lease and this particular agent drives out to the property, meets the tenant there, goes through the appliances, goes through the manuals, goes through to the property with them, and inducts them properly at the property. They charge a fee for that. We are only just installing that because I didn’t believe that I get it before. But they are now successfully getting that one.

Jason:  Nice.

Darren: A pet violation fee or a pet fee. This can be charged per pet per month, instead of a fee upfront. There’s some offices doing that. A lost item fee, like remote controls or something like that. None return of keys, there’s a fee for that. Eviction notice, a formal eviction notice is being served. We’ve got a fee for that one too. A risk mitigation fee.

This is interesting and a good friend of mine in San Antonio, Texas told me about this one. This is where a credit score is done on a potential tenant at application stage on their credit. If their credit score doesn’t come up to a certain standard, it might be below, this is a conversation, “Look Mr. Tenant, we’re happy to consider your application but your credit score hasn’t come up to our full requirement, therefore we’re going to have to charge you a risk mitigation fee of x.”

Jason:  Sure because it’s riskier to take them on and they know it.

Darren: Correct, there’s extra risk that we are undertaking. Insufficient funds fee is another one. We’ve got a whole heap of others as well. Generally, when we work with people, we currently see where their current fees are with owner and tenants. We look for the ways that we can increase. What are some extra owner fees? We might be able to add an extra one, maybe two, increase a couple of owner fees. How about some extra tenant fees. This is generally what we are looking for.

Jason, the average profit margin in a real estate business or a rental portfolio is 20%. In Australia, that means all income minus expenses, it’s about 20% left. It’s also the same in America as well because NARPM did a national survey where it came up at around about 20%. A lot of the officers I’ve worked with, we’ve commonly seen total income per property that’s all owner fees or tenant fees. Looking at around about, on average, around about maybe $1500 a year on average. But that’s not what they’re earning because they’ve got to pay salaries, they’ve got to pay insurance, they’ve got to pay rent, they’ve got to pay cell. They’ve got to pay all of these expenses and that takes up 80% of that income. Their profit on those might be $300.

That’s all they’re earning. If their profit margin is $300, to double their profit margin, we only have to find another $300 worth of fees. It’s not that hard. The traditional thinking, let’s say they’ve got 200 properties, $200. Their profit margin is 20%. Traditional thinking says, “Go find another 200 properties, double your workload, double your staff, double your headaches to get the double profit margin.”

Jason:  Right.

Darren: But I’m saying, “No, you don’t have to.” In that case, you only have to find an extra 20%. It could be $300 and I promise you, we would easily find that.

Jason:  This is the amount of money you make per door. Your margin is only what’s this, that’s left over.

Darren: It’s only this at the top.

Jason: You just need this much more and you’re doubling your income.

Darren: Correct, doubling your profit margin. Let’s just get that. Doubling your profit margin, which is the reason why you get out of bed in the morning. It’s for the profit. It’s not to pay and to support the economy and support jobs growth. That’s not your primary reason for getting out of bed. It’s the profit. Profit is not a dirty word in America. You’re allowed to earn a profit. What we’re seeing is a lot of these mom and pop businesses, they grow their 10 to 20 to 30 to 40 to 50 properties, they haven’t got fees in mind. A lot of the points of difference out of the surveys we did, you know what some of their points of difference were? We make sure that we’ve got the cheapest fees in the area, that’s why you should sign up with us. Well that’s a recipe for going broke.

Jason:  Yeah.

Darren: What happens with these mom and pop businesses? They get up to their 80 properties, they’re really stressed with all the workload, and they look and think, “I can not afford to put anyone else on.” That’s where they come undone with their sins of the past, of not getting their fee structure right and knowing how to believe in what they’re worth and then charge a decent fee and able to justify it. That’s where they come undone and they hit the wall and they just sell out really cheap to their competitors.

I remember speaking to a crowd in Atlanta, Georgia and there were 300 brokers in the room. After talking like this for three hours, at the end of my three hours, I was absolutely convinced that only 5% in the room actually understood what profit management was.

Jason: Yeah.

Darren: They’re just doing it for whatever fees they charge.

Jason:  Probably because they have no idea of what all their expenses really are.

Darren: No idea. Look, property management is hard enough. It’s one of the toughest jobs out there. Did you know? The same attributes, the same qualities that make up a quality property manager, they’re exactly the same qualities that make up a police officer. That is the difficulty of the job. Why do you want to be cheap? It’s hard enough. You’re dealing with tenants and their homes. You’re dealing with owners and their money, and boy, the clash of the titans just comes into play with all those values just clashing and you are the guy in the middle to solve all the problems. You need to be charging quality income and quality fees for what you do because at the end of the day, the job is hard enough and you’re worth it.

Jason:  I love it. Darren, I really appreciate you coming on. This has been fascinating info. I think you dropped several knowledge bombs that are super useful. We have a couple of questions here if you have a couple more minutes that we could go into just real quick. How important is to stay within a reasonable price range of your competitor who doesn’t matter? Well, of course it matters is my take. You have to be reasonable.

Darren: Here is the matter, here’s another law. This is going to help you. Call it Law of the Main Game. This is how we explain it. There’s two owners. They come to a barbecue. You know what a barbeque is.

Jason: Yeah, sure.

Darren: They come along and they have a beer and they’re talking to each other and they say, “You’ve got a property for rent, so have I.” “Fancy that.” “Who are you with?” “I’m with XYZ realty down the road.” “Really? I’m with ABC property.” “Oh my goodness, and what are they charging you?” “My guy, he charges X%.” “Really? Funny that. My guy, he charges Y%.” Guess what? They didn’t talk about any other fees because they forgot, or they just didn’t know.

Jason:  Yeah.

Darren: This is the secret in the sauce, is that you need to make sure that your management fees generally are competitive. What the rack rate or acceptable rack rate is for your general area without colluding of course, but it just means you’re not doubling your management fees. You’re not doing that. You’re just keeping it around about the market rate because that’s generally the fee that owners care about. But boy, it gets wishy washy after that. With the leasing fees in general, you can have a little but quite frankly, I’ve seen massive variations in typical market places like Dallas, or Austin, or San Antonio, or other cities like Florida where they’re all over the place and those people that get the high fee, well guess what? He’s justified it. The person that gets the low fee, guess what? They justified it and they got it too. But all of the other stuff, what I’ve worked at it really doesn’t matter. It really doesn’t matter because the focus is on the main game which is the management fee. It might be the leasing fee.

Other than that, the other stuff, we call the add ons, really isn’t any big deal when you know that you’re worth it and you can justify it. We get a lot of agents that sign up owners and they make their extra $200, $300, and $400 profit out of all the add on stuff. Plus also improving the fees that they charge the tenants. The only thing that stops them is their mindset and usually, it’s a wrong mindset.

Jason:  I love it. Your main fee should be in the realm of reality and then after that…

Darren: Correct, realm of reality or the Law of the Main game, keep it generally competitive and then start doing the work in the other stuff. That’s generally what I find works. I have changed. I have done increasing management fees above market rates but there is a special point of difference of value we need to put in there for sure. Other than that, generally that’s the secret of the sauce or formula that we like to use.

Jason:  Another question is does the PM get the fees or split it with the owners. If you’re collecting all these extra fees from the tenant’s side, have you ever seen property managers give any of that to the owners?

Darren: Okay. Here’s my feedback on that from what I have seen, where I shared with the owner. Let’s say that property manager said to the owner, “Look, this is our fee we charge to the tenants. We share 50 50 with you.” The owner goes, “Okay.” And another agent might go, “Mr. Owner, we charge the tenant this fee and we keep it because of XYZ ra ra ra, and we keep it 100%.” And the owner goes, “Okay.”

Jason:  Okay.

Darren: It comes down to if you believe you’re worth it and you know how to justify it. That’s a very generalized statement without getting into the nitty gritty of what these fees are. Again, if you know you’re worth it and you justify it to the owner and he thinks that sounds like a reasonable explanation, generally the response is okay. You just want to be on the more profitable okay.

Jason: Yeah, exactly. It sounds like this is probably a backdoor exit for some owners that are nervous about increasing their fees. They’re like, “I’ll just incentivize the owner to be okay with it because I will give them a piece of it.” But it’s probably not necessary.

Darren: Here’s another one. Here’s another one I’ve seen too. Releasing fee. You might get an agent that says, “Mr. Owner, we’ll charge you such and such leasing fee for a 12 month lease or charge such and such for a two year lease.” The owner is just going to say, “Okay.” Or you’re going to say, “Mr. Owner, we charge x leasing fee for signing up a new tenant and locking in a lease.” They go, “Okay.” You just gotta understand that just make sure that you’re on a proper mindset when it comes to charging, you’re not losing fees because of some perception that you have that now has become your truth because more profit is actually other side of that mindset.

There are some mindsets which are true and real. You’re not going to go charge fickle management fees. There are some reality checks with that one but you’ve also got to make sure false mindsets that’s costing you a lot of money.

Jason: Cool, I love it. I want to go back to your article real quick. I love the end of it where you have the real reasons you cannot increase fees.

Darren: Yes.

Jason: The real reasons.

Darren: Having done it so many times.

Jason: The real reasons you probably should not increase your fees is your service level is poor.

Darren: We’ve gone through those already. They’re those peace of mind things.

Jason:  Yeah.

Darren: Is that you’ve got to go with owners that have peace of mind. Takes at least 12 months to establish a relationship before you have the right to put your hand out and say this is why. A minimum of a year, but if the owner is still unsettled, then wait. This is done on an individual basis. When we work with clients, I go through a spreadsheet, owner by owner, by owner, by owner.

Jason: Owner by owner, and ask them about each one.

Darren: I don’t do blanket bombing. It’s a strategic, surgical process of going owner by owner into the three categories and then going with the property manager. Property manager then says, “Well, hang on. This particular owner such and such,” “Oh, thank you for telling me that. Let’s put this on hold.”

Jason:  Okay, so it’s a surgery, not a pill.

Darren: It’s a surgery and it’s very strategic and it is a delicate process.

Jason:  Love it. So Darren, how can people get a hold of you?

Darren: You can email email me darren@darrenhunter.com. I’ll be happy to make time, catch up and talk about your circumstance. But go onto my website darrenhunter.com and if you go in the menu, if you look up Fee and Income Maximization, you’ll see a whole heap of pages there, about six pages that talk about what I do. There’s an explainer video as well.

Also, in my article is Knowledge Library. You also have a number of articles that have taken me 10 years to write. Also, if you just go to subscribe to our e-newsletter three tabs down, you can subscribe to our newsletter and make sure you get up to date with what we’re after and what we’re doing.

Jason: Fantastic. Darren, I appreciate you coming on. Love to have you back, I’m sure again some time and we’ll be seeing you probably at NARPM.

Darren: And before you go, if anyone’s going to be at the NARPM Conference in Vegas in a few weeks, I like either a diet Dr. Peppers, or a Jack and Coke.

Jason: There you go. Alright, cool. Darren, appreciate your time, appreciate you hanging out with me. It’s been fun and we’ll be taking again soon.

Darren: Alrighty, thank you. It’s been great.

Jason:  You just listened to the DoorGrow Show. I love the feeling of contributing, I’m sure you do too. Support the DoorGrow Show by leaving us a real review in iTunes. It not only helps us, but helps others. Thank you.

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