Saturday, April 14, 2012

A Nightmare Due to Management!

I just got back from a very productive business trip to Chicago and Atlanta.  Among one of the projects we're working on at the moment is an apartment complex in Texas that is stabilized with excellent occupancy numbers.  Not only is it occupied and almost completely full, the economic occupancy is also near 100%.  When reviewing an apartment complex for potential purchase, we need to know the physical occupancy (the ratio of occupied units to total units), and the economic occupancy (the number of tenants that are actually paying regularly and on-time).  It makes no sense to do your due diligence based solely on physical occupancy as we do need to know who's paying and how much.  Bear in mind the difference between those two occupancy figures.

What we found in this complex is that expenses are running nearly 80% of gross collected rents.  This is a sure sign of a bad management company.  We also found that the management fee is more than double that which it should be for this type of property.  This is bad news for the current owner, but it's great news for us because we know how to solve this problem, and that's why we're solve other people's problems and make money in the process.

Note the following 10 no-no's to identify a bad management company:

1.   Not able to collect rents
2.   Higher than normal expenses
3.   Not able to keep property full to local market levels
4.   High rate of evictions
5.   Poor tenant screening
6.   Slow turn-around getting units re-rented
7.   Property not maintained / clean
8.   Unattended leasing office
9.   Poor reporting regarding expenses
10. Tenant relations are not working properly

The top three above are the biggest flags to identify a bad management company.  Note that what we found on the above property is in the top three.  What does that mean?  We have an acquisition target and the numbers told us this before we ever set foot on the property more than a thousand miles away.  What's more about this project is that we have identified an under-valued property as well with a number of options for us to increase the property value.

Keep in mind that much of determining a viable project lies in the numbers.  If you understand the numbers and the flags, you can quickly reject the vast majority of projects that come across your desk and zoom in on those few that make sense.

Until next to you.

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