I have a unique perspective in this industry because I am an active real estate agent. a managing broker and also deeply involved with both the Pacific West Association of Realtors (PWR) and the California Association of Realtors (CAR); we manage over 1,000 residential doors so I am a frequent speaker and an industry leader at the National Association of Residential Property Managers (NARPM); and we also manage over 150 homeowner associations and 7,500 owners so I am starting to get far more active at the California Association of Community Managers (CACM). I am at the intersection of a few real estate related industries and more readily see the trends more so than others. Here are the trends in the association management industry:
The Big Get Bigger (in Size)
This industry is increasingly being dominated by a handful of large management companies. Since there is a finite number of associations requiring management, approximately 20,000 in Southern California, if one company adds associations, it is at the expense of another company. It is a zero-sum game. It seems for every association who is calling us to consider our services, they are currently working with First Service, Powerstone, Keystone, Seabreeze, Lordon, Real Manage, Associa, and The Management Trust to name a few. In residential management, there are hundreds of companies, usually small managing 200 to 300 properties while in association management there are 10 to 20 companies each managing thousands of associations. What explains the difference?
Growth Through Acquisitions
These big companies are not getting bigger organically, they do so through the acquisition of smaller companies. They have the capacity and financial wherewithal to buy almost any competitor at any reasonable price. Since few companies are entering the association management business because 1) it is expensive to be able to adequately manage associations because you must handle payables, receivables, collections, financials and overall operations and Community Managers are not cheap and 2) it is not easy to grow a business with this stiff competition; by buying competitors you increase market share. As the management business becomes ever more complex due to the ever-growing number of laws, the small “mom and pop” companies don’t have the resources to adequate manage communities. In addition, mid-sized companies, those managing 50 to 200 associations and who are more local in nature, have had their margins eroded by inflation and skyrocketing labor costs and have been looking to liquidate and sell.
The Big Reject Smaller (Associations)
Since the cost of doing business for these large companies is so high by paying Community Manager peak wages, having layers of management and high overhead, it is increasingly difficult for them to manage smaller communities. I am not referring to associations with only 10 to 20 owners, I am talking about communities with 30 to 100 owners. They have two stark choices: charge a much higher management fee or provide much lower customer service by having their managers manage more of them. It is not unusual to find a Community Manager managing 25 to 35 communities with an average of 50 owners. It is my guess that many of these large companies will cease altogether managing any community below 75 owners because they simply can’t make a profit doing so.
All Companies Discover RTMs
The residential management industry discovered the benefit of using Remote Team Members (RTMs) about 7 years ago. This occurred out of necessity: the profit margins for the typical residential management company was running at 5% and the use of RTMs increased this margin. The reason is simple: cost. In California, the fully loaded (social security, insurance, retirement, taxes, etc.) cost of an exempt employee is about $80,000 (or almost $40 an hour). The cost for an RTM, whether they are in Mexico or the Philippines, is less than $20,000 ($7 to $10 an hour). Anything that can be done at a desk in Anaheim can be done at the desk of an RTM overseas or over the border. For association management, they can take owner calls, assist a Community Manager, do account payables and receivables and even work with the financials. This person does not replace a Community Manager, who will always be the “boots on the ground” and the key contact for the board, but they can help the company provide a higher level of service at a lower cost. At Progressive we have 35 Community Managers who manage from their home and are legally “Independent Contractors”, 15 in house salaried staff, and 15 Remote Team Members. Without RTMs we could not offer our business model, pay our Community Managers what we do and provide the level of service we demonstrate.
Residential Management Discovers Association Management
I was one of the first (but not the first) residential management companies that took dive into association management. I am glad I did, but 99% of the operators in residential management, many who are close friends and excellent business owners, told me it was a terrible idea. But when I looked at the market dynamics, I knew embracing association management was a good business decision. It is easy to join the residential management business: you just tell the Department of Real Estate (DRE), build a quick website and start managing properties. It is possible for one person to handle most of the “jobs” and with proper systems, it is not very taxing. But conversely, because it is easy to start a residential management company, there are too many companies chasing too few landlords. Currently, investors are not snapping up homes in Southern California given the high prices and equally high rates, so growth is anemic. Even though the association management business is more difficult to enter because most boards don’t want to be managed by an inexperienced and under-resourced company; once you have established yourself, it is much easier to grow. It may take a residential management company 6 months and $30,000 in marketing dollars to add 50 properties to manage, but our average sized community under management is 50 owners. We may make far less per owner, but it is far easier to add those owners to manage at a lower cost. In residential management, you learn to turn nickels into dollars; in association management, you learn how to turn pennies into nickels and then into dollars.
