These are strange times in the association management industry. Unlike residential management, where there are hundreds of management companies, usually managing 50 to 500 properties, there are fewer than 100 association management companies managing over 25,000 associations in Southern California; and that number seems to be decreasing. In just the past few months, I have seen at least 10 midsized companies sell or simply shut down. I have been investigating why this is occurring and what it means to associations. The industry is comprised of three sizes of management companies:
- The Mom and Pops – These are small operators who usually wear all the business hats. They don’t have departments (accounts payables, receivables, collections, financials, managers, etc.) and instead do everything themselves. These smaller companies thrived in the past because there were fewer laws and regulations and it was easier to manage a community of 20 to 100 owners. Since the boards remain with them because of the personal service, if they choose to leave the industry, their communities scatter to find a replacement. These communities find very few Mom and Pop companies still operating, and the fee they were paying, was typically much lower than larger companies.
- The Midsized Companies – I would consider Progressive a larger midsized company. A midsized company is large enough to have departments and the owner may not be actively involved in the day to day operations. Many of these companies grow to a comfortable level for the owner, usually 20 to 50 communities, and then stall in growth. Most of their growth has come from word of mouth, or they are the local company, but it may have taken them 5 to 10 years to get to this size. This is where I have seen the most change. I will delve into that later.
- The Big Boys – These are companies that cover a large geographic area, and some are in multiple states. They manage hundreds, if not thousands of associations. You would recognize the names: Management Trust, First Service, Associa, Powerstone, Keystone-Pacific, Seebreeze and a few others. They pay their managers very well (usually $85,000+) and expect them to manage communities at a rate that is at least twice their pay. For example, a person paid $7,500 a month would be expected to manage $15,000 a month in management fees. If the average management fee were $1,500 and 100 owners, they would manage 10+ communities and 1,000+ owners. These companies have not grown “organically”, for the most part, but by acquiring midsized companies.
So why are midsized companies either waiving the white towel and surrendering or selling to the Big Boys?
- Higher Costs, Lower Income – The cost of doing business, particularly in salaries, has skyrocketed. The minimum wage for an exempt employee, someone like a Community Manager who works evenings and weekends, is now a little under $65,000. Once you add in benefits and employer taxes, this is closer to $75,000. Only 3 years ago it was $45,000, meaning payrolls have increased 60%+. Not too many of our associations would agree to a 60% increase in our management fees over a 3-year period. While costs went up, escrow income has decreased precipitously. Two years ago, we expected 5% of the properties we managed to sell and we earned an average of $800 to complete the escrow paperwork (demands, transfer fees and documentation). If you manage a portfolio of 2,000 owners, that was $80,000 in additional income. Today, fewer than 2% of owners are selling in a one year period generating only $32,000. That is a big swing upward in costs while concurrently experiencing a 60% drop in income.
- No Man’s Land – Managing 20 to 50 communities is truly no man’s land. You have all the costs of a big operation, but you have not achieved economies of scale. We learned long ago about the value of “Remote Team Members” (RTMs); department staff who live overseas but contribute to the operations of our organization. They do the “grunt work” at a fraction of the cost of in-house employee. We manage over 115 associations now, but only have 8 full time staff and utilize 10 RTMs. We don’t have traditional Community Managers, but train real estate agents to be our Community Managers and pay them 50% of the management fee. Otherwise, we would have another 10 exempt employees on staff doing the work of Community Managers. These mid-sized companies are too big to change and too small to have the resources required to manage complex communities.
- No One Else Wants to Jump In – Even though boards are dissatisfied with their current management company, there is a dearth of competition. The Big Boys all have similar business model and can’t afford to manage smaller communities (those under 100 owners). Residential management companies prefer the higher income per owner in managing single family homes, townhomes and apartment buildings and see the HOA business as the “penny” business. It is outside their comfort zone. It is difficult to start an association management company from scratch and few associations want to work with a company with no or just a handful of associations under management. There is not a new company jumping in for every one going out of business.
What does this mean to you?
Fewer Companies, Fewer Options
If you are 10 to 100 owners in size, there are fewer options. The Big Boys will demand higher management fees to cover their burgeoning overhead or choose not to manage you at all. We recently took over management for a few communities who were abruptly given notice. For communities under 20 owners in size, there are fewer still. The small Mom and Pops are simply vanishing. Their children don’t want the business, and their business model does not mesh with bigger companies. I suspect the next trend once all the midsized who wanted to have sold, is that the big companies will start merging or acquiring each other.
Higher Costs, More Owners
Even if they do bid for your services or retain your account, expect your Community Manager to be quite busy. Increasingly the large companies are moving to a Community Manager/Assistant Community business model. The Community Manager attends meetings, creates the agenda and interacts with the boards, and the Assistant Community Manager deals with owners, vendors and maintenance coordination. This person can be paid hourly and much less than the Community Manager, but they still must collective manage at least twice their combined pay. So instead of one Community Manager managing 10 communities with 1,000 owners, the two must manage 18 communities with 1,800 owners.
Stay with the Devil You Know, Or Don’t
A recent poll by the software provider Appfolio revealed that 70% of boards are dissatisfied with their current management company. That was surprising, but more shocking is the fact that only 10% are considering or actually looking for a new management company. That means 60% of boards are staying with the devil they know rather than finding better management services. With the gradual loss of management companies, both midsized and small, there are certainly fewer choices. But you do still have choices. My company has added 60 associations for 2 consecutive years because of this trend of the big getter bigger at the expense of boards and providing poor customer service by overworked Community Managers.
I know you are on my site, but what makes us different?
- A Goldilocks Company – We are big enough to provide the resources you need, but small enough to provide the service you expect. You will have my, the owner of the company, email address.
- We Pay Our Managers More and Limit the Number of Owners They Can Manage – Our Community Managers earn 50% of the management fee and we limit them to 5 communities or 500 owners. We expect them to provide better service.
- We Guarantee Our Communication – As a board member, you will have your Community Manager’s cell phone number and we guarantee to return any owners email, call or inquiry within 48 hours.
- Centralized Operations with Local Community Managers – Our management departments are located in Anaheim but our Community Managers largely work from home and are out local “boots on the ground” for our communities.
- Licensed and Certified – Our managers are licensed real estate agents and have secured their CCAM (Certified Community Association Manager) from CACM (California Association of Community Managers). We also provide internal training and educational seminars.
- Totally Transparent Pricing – We charge a flat fee per owner (which decreases as the number of owners increase) and 3% of the total monthly dues. Go to our pricing page at www.Progressive-AM.com and you can calculate your monthly management fee.
This is the owner of the company writing this blog and I intend to remain the owner. I have no intention of selling to a larger company and we since we run an efficient business make a sufficient profit. We are in this business to provide stable income to our managers, a higher level of service to our boards and owners, and offer a healthy work environment for our team members. That is Progressive.