One thing that I have learned from travelling Australia and educating real estate business owners and managers on fees, is that every marketplace has an agency that has decided to charge unsustainably low fees.

There always seems to be some business owner out there who feels that they will eventually get the biggest rent roll faster by charging the cheapest fees in town. That’s where they hit the pitfalls.

pitfalls

By Darren Hunter – DarrenHunter.com

Avoiding the pitfalls

Even though we may not make that same mistake and think ‘well at least we are not the cheapest’, what we charge could still be unsustainable in achieving the company goals, lacking justification for having a rent roll in the first place.

Yes, prospective landlords these days all seem to be very fee focused, more than ever before. But we are finding that agencies that charge quality fees are still getting them, as they are competing on service and quality, using effective points of difference to win the business rather than simply dropping their fees and eliminating their business viability.

I have witnessed a number of real problems and pitfalls with the ‘cheap fee’ mindset, and it is my hope that after reading this article that your mindset may be altered enough to want to change your situation!

IMPORTANT- if you know of a real estate business owner or manager that needs to read this article, please forward it on.

Here are problems and pitfalls with charging cheap fees.

1. Under-Valued Business

A big part of the determination of the value of your business and the health of the multiplier rests in the quality of your fees. If your fees are too low, too many ancillary fees are missing or are simply too low for your marketplace, your business will be valued accordingly. This ‘cheap fee mindset’ could cost you a fortune in the price that you could have achieved if your fees were a lot better across the board, when it comes to your business exit.

2. Less Desirability from Buyers

Though I am not a qualified business broker, I have had numerous calls from principals calling me for my opinion. They were all looking at a rent roll for sale, and seemed to be put off by cheap fees, or the lack of fees being charged. Potential purchasers are all just looking at a spreadsheet of all of your fees property by property, row by row. When all they have to go on is this before deciding to go the next step, cheap fees often put buyers off at this very early stage.

3. Attracting the Wrong Type of Client

When you have cheap fees, you are attracting a type of client that can be deemed ‘bad for business’. In summary, they tend to be unreasonable and over-demanding, take up a lot of your time, want unreasonably high rents and do not want to spend on repairs. Basically you get a bad property that just attracts a bad tenant. They can give you two to three times the workload of other properties and in all, are just unprofitable and wear down your staff. And after all that, they still will demand a discount!

4. Inability to Pay Good Property Managers

We all agree that it is getting harder and harder to find good, experienced property managers and as far as I can see, it is only going to get harder! Good property managers are demanding higher salaries and this all needs to be funded by revenue. If your fee income is low and your cost base is increasing, it is easy to see that you have a real problem and could run out of options! I do believe that low fee charging agencies in the future will need to look at other options as they simply will not be able to attract quality property managers at all!

5. Problems with Resourcing

I read an article recently stating that our Y-Gen staff and our upcoming Z Gen (18 and under) are all tech savvy and are used to modern technology like iPhones, iPads and Apple Mac Computers.
This is no secret, but if these tech savvy workers come into a working environment that has ancient computers and old software, the article suggested that this could be enough in some cases to drive them out of a business and into one that is keeping up with technology.
Having cheap fees means that you cannot resource well as you simply cannot afford to keep up. This is a point really worth considering!

6. Overloading Property Managers

It makes sense that to try and maintain a profit margin with a cheap fee base simply means you need to have property managers managing by sheer volume.
Other than this affecting service levels that just creates landlord dissatisfaction, it also creates burnout with staff resulting in a greater turnover of staff and resignations, adding a lot more expense and churn. I cannot see how this is helpful for any business!

7. Creates Greater Business Owner Dis-interest

Naturally when a real estate principal compares their earning potential between sales and their rental department, in most cases the sales usually wins as the ‘cash cow’, and therefore gets more focus. Even worse is when the rental department seemingly does not earn anything more than just enough to pay property management staff salaries and expenses.
The principal may simply dismiss their department as a ‘necessary evil’, a bi-product to the sales process and a baby sitting service to provide them sales leads. If a rental department is reduced to this level, the results can only mean dissatisfied staff and upset landlords.

8. Inability to Ride out Tough Times

At the time of writing this article, the housing sales market appears to be struggling in most cities and areas across Australia. We would all agree that when sales are tough and hard to come by, the survivability of the company really depends on a strong property management fee income.

I know that when I hear of a real estate office closing my question is, ‘did they have no rental department or acheap fee department?’ because a good rental department has the potential to allow a sales department to ride through tough times.

 

Did you relate to anything in the above list?
If perhaps you could relate to one or more points in our list, there is something that you can do about it.
Up until now, you relied upon the fact that you could win new business, using discounting and cheap fees as your point of difference. This gave you confidence and your ‘edge’ to win the business.
All you need to do is to come up with a new point of difference that still impresses new owners, but will not impair your ability to earn profit and remain financially healthy. But be willing to throw this discounting and cheap fees ‘ace up your sleeve’ into the bin!
So I challenge you to adjust your mindset and move to a new level of profitability today!
All the best!
Darren Hunter
Property Management Trainer, Speaker & Consultant at | darren@darrenhunter.com

Darren Hunter - of darrenhunter.com is a national and international property management trainer, speaker, consultant and authority on property management, specialising in fee maximisation and profitability as well as time and stress management and property management productivity.


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