Five Ways Third-Party Managers Can Vet Clients

Taking on clients for your property management business isn’t as easy as it used to be. With many owners crushed under the weight of burdensome loans, they don’t have the money for property improvements or even vital services. That can leave their managers in a bind.

“It’s something you have to look at because so many owners are cash-strapped,” says Cindy Clare, president of McLean, Va.-based Kettler Management. “We certainly ask a few more questions [than we used to].”

Clare isn’t alone. “We’re all going through this process,” says Rick Graf, president of Dallas-based Pinnacle, an American Management Services Co., the country’s largest third-party management firm. “[A bad owner that isn’t paying bills] taints our name as a company.”

As managers are finding out, the best way to eliminate these dire circumstances is to avoid the situation in the first place. Here are five ways third-party managers are vetting potential owner clients.

1.Know as much as possible about their finances.

With private owners, it’s really difficult to find out what’s happening at a property, but one look at financial statements, including the list of payables and lender inspections, can help a manager know what it’s getting into.

Dennis Treadaway, president of Folsom, Calif.-based FPI Management specifically focuses on all balance sheet items, as well as historical income and expense. “Whenever FPI Management takes on a property, we assess the property’s ability to pay all operating costs and debt service,” Treadway says. “The total of outstanding accounts payable is a very good indicator of the financial status of the property. If the property remains current on all amounts due to service providers, that is a good sign.”

Mark Fogelman, president and COO of Memphis, Tenn.-based Fogelman Management Group, says the current vendor payable balances—and whether the level of payables increases or decreases—also sheds a lot of light on the owner’s stability. “If the payables go beyond 60 days, is there a plan in place to reduce payables?” he says. “I think it is important to project net operating incomes for the property under your company’s management structure and determine if there is enough money flowing to at least keep the currently payable levels stable.”

Determining the status of the property mortgage, including whether the mortgage is current, is also very important. Fogelman uses attorneys and accountants to help out, if needed. “I know of property managers who have put forth tremendous effort securing the business and integrating the property/portfolio into their system, only to find out that the lender ultimately controls the asset and they only want to utilize their preferred management company,” Fogelman says.

2. Talk to the owner directly.

Without digging through financials or burning up the phone lines, managers can go a long way by simply talking to their potential clients face-to-face. “If you are asking questions as to what their goals are, you’re going to get a good feel for whether they fit your strategy as a management company,” Clare says.

The property manager can also determine what their role will be. “You can find out what their goals and objectives,” Clare says. “Are they just trying to maintain the property, or are they trying to reposition it?”

Graf agrees. “Through our conversations, if we determine they have problems, we suggest they find another manager who might be better suited to manage the asset given its challenges,” he says.

But sometimes, these conversations can also lead to a better turnaround plan, even if the owner is troubled. “Is it something they can resolve or is it something bigger?” Graf asks.

Sometimes, a financial issue alone may not eliminate Pinnacle’s interest. “A lot of it has to do with the financial structure of the ownership or the property,” Graf says. “We view ourselves as part of the solution to help work through those issues.”

3.Keep your ears open.

Sometimes, management companies don’t have to go to a state government or ask owners for the financial information about a troubled property. They simply ask their peers.

“This industry is a tight-knit industry,” Graf says. “If there is a client out there who is a bad actor, we pretty much know about it.”

FPI Management checks in with colleagues as well. “The unique ownership style of each multifamily property owner is fairly common knowledge in the industry,” Treadaway says. “We would evaluate the owner’s historical practices, in the operation of their properties, and prior to engagement of management services.”

It’s also important to know how quickly they go through managers. Sometimes it may just be that a group is taking over the property. But other times, there could be deeper issues. “If they’ve had three or four management companies in a short period of time, you have to find out why that is,” Clare says.

Fogelman agrees. “You can verify within the market that these changes aren’t taking place because the current management company resigned or wasn’t getting paid,” he says.

4. Use outside resources.

Some larger managers will also take on the management of affordable properties. If they do, there’s another source of information that they can tap into to find out what’s going on with troubled owners.

Graf says Pinnacle will go to various affordable housing state administrative agencies to unearth what’s happening at a property that’s it’s considering taking on. This work can prevent problems later on. “We find that once we take over a property, any problems are our issues,” he says.

Graf says these audits can indicate whether there are problems doing the proper income certification or residents or if the property has physical issues. “We want to get as much information as possible about the property before we step onto it,” Graf says.

Managers can also learn something from the local tax department. “Are there any delinquent taxes?” Treadaway asks.

5.Change your targets.

For Pinnacle, the problem of troubled apartment owners has forced the third-party manager to change its focus. “We’ve had a strong push for more institutional owners,” Graf says. “Typically, they’re stronger. The key is to gear your business to institutional clients.”

Making a strategic shift to preferring stronger owners may limit the pool of potential clients, but it can be well worth it in the long run. “These days, proper due diligence on potential management account/clients is extremely important as there is much more at risk here than just ‘losing the business’ or the potential revenue stream,” Fogelman says. “In fact, there is real financial risk—the property manager can be on the hook for employee payroll and other costs if they do not position themselves correctly.”