What’s the current state of the property management market? Why is 2023 looking to be a great year for property managers? The state of the property management market is looking good for 2023! Scott Brady joins Brad on this episode to discuss the state of the industry and what factors lie ahead. They analyze the opportunities and potential, changes in tenant demand, digital transformation tools and more, that have set up a great year for those in property management.
Want to know more about the market? Link up with Scott: https://www.linkedin.com/in/scott-brady-b261a264/
Connect with Brad's team at www.rentwerx.com!
Brad Larsen: Hey, everybody. On today's episode, I've got Scott Brady coming on talking about the state of the property management market.
Announcer: Welcome to the Property Management Mastermind show with your host, Brad Larsen. Brad owns one of the fastest growing property management companies in San Antonio, Texas. This podcast is for property managers. By property managers, you'll hear from industry leading professionals on best practices, new ideas, success stories and lessons learned. This is your opportunity to learn about the latest industry buzz surrounding property management, as well as tips and strategies to improve your business.
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Brad Larsen: Welcome, everybody, to another edition of the Property Management Mastermind show. I'm your host, Brad Larson. Now today's guest, I'm going to be bringing on Scott Brady and he is a big time property management company owner out of Southern California. And this is going to be a long intro because I want to talk about what we're going to discuss at detail here. Now, Scott's been putting together a presentation and and it's roughly the seven reasons why it's such a great time to be in the property management world. And we're going to detail this out in length because we talk about some of the things that have gone on in the past. We talk about the market, we talk about agency, we talk a lot about property management getting lean. It really is a fantastic episode on what to do and be excited about being in the property management world right now. And so it's a really good point to talk through. And without further ado, I'm going to bring on Scott. Let's go ahead. Scott, welcome to the Property Management Mastermind podcast. How are you doing today?
Scott Brady: I'm doing well and it's glad to be here with you, Brad.
Brad Larsen: This is my new intro where I'm going to do a long monologue which you just listened to, and then we're going to jump right into the conversation. I've got Scott Brady here, and I want you to give us a few minutes to introduce yourself.
Scott Brady: Sure. My name is Scott Brady. I own a property management company, real estate company and association manager company in Southern California. Been doing this for about ten years. Joined the Naropa Group about six years ago, eight years ago, and I managed about 100 residential doors. We manage about 85 associations and we have about 55 agents here.
Brad Larsen: Pretty good experience in all realms of the property management world, which is why this is such a fun discussion. In the monologue, I'm going to talk about the seven reasons why the next five years could be the Best five Years, which is the title of one of the presentations you're putting together. I thought it was so poignant and spot on that we just needed to jump on a podcast and talk through it because there's a lot of good points with the bottom line up front. It's a very good time to be an established property management company for the foreseeable future. We've been saying for years and years that it's recession proof. Well, now is the time to prove it. And here we go. Let's start with number one. What are your first what's the first bullet point at the top of your head that you think you want to discuss on this?
Scott Brady: Well, I think the obvious one we're all very familiar right now is the current real estate recession. In my marketplace, sales are down 45%. Think of that, 45%, the lowest level of sales in, I think, since 2008. Even worse, they're going back to 90, 1997 now. So what we've got is far fewer sales and we've only been in this market for a few months. So I'm anticipating this year when an agent goes out to take a list and go to a listing appointment and tells the seller, well, I know you think it was worth a million, it's it's really worth 800,000. That seller is going to do what they have done in previous recessions. You and I both know is I'll just keep it as a rental. I'm sitting on 3% interest rate. Rents here are going through the roof. It's a great asset to keep. And I'll I'll I'll just hire property management company to take care of this property till prices come back up again. And at some point in my future I might sell. So we are countercyclical to recessions where the real estate industry suffers mightily during these recessions and they they are going to suffer. It's really we should be adding doors. We we we went the last five years losing doors because every investor wanted to sell and reap a big profit. We're not going to lose any doors to sales in the next 12 months or 24 months or longer than that.
Brad Larsen: Yeah, one of the slides, you had a really good outlay of 47 recessions since 79 1790, and it looks like just an up and down going through the hills and dales of the timeline through there. It's some really good stuff because you make bullet points where interest rates climb to 18% in the early eighties and you have an energy crisis and here you got the oil price shock stuff going on. We've got the Great Recession, mortgage crisis, bank crisis. I mean, all those things have contributed to this up and down roller coaster. But I think we're going into a recession, as we can clearly see. And agents are going to have some issues. They're going to have some issues in selling some homes. A recent tidbit, little story is I saw a very similarly priced built home as to what I live in. And the agent walked in and basically bought their listing. And so if you don't know what that means in the real estate world, they tell them whatever they want to hear. And so the listing went up for 1.2 and 30 days later they reduced to 9.75 and they sold with one bidder at 950 and one bidding process. So the agent was only off a quarter million in 60 days in the market. And so that's the true definition of buying your listings.
Brad Larsen: That's only going to only going to go so far because agents are going to have that persona of just telling people to sell for whatever they want to hear. And that's going to quickly be ostracized in this world, because when you have a listing that goes for four or five, six, seven months of vacancy, now you have consumers that are seriously ticked off that their agent lied to them. Right. Or their agent did a sales tactic where they just bought their listing and then hit them with price to. Increases from day one, day two. Oh, it's overpriced. You've got to decrease. You've got to decrease. So, yeah, they only missed the mark by 25%. No big deal. But hey, they got the business right. And that's just that's a bad realm to be in for agents. And that's just one of the things we want to talk about, because in the agency side, you had talked about some of the major things going on with agency. And this is this is one of the things we touch on, but it has to do with the real estate recession because the recession is part of agency. And I want you to talk a little bit about the pending lawsuits that are potentially going on, which could potentially factor into the real estate market as a whole.
Scott Brady: Yeah, there are three big trends going on in the real estate side of things. The first is, of course, the real estate recession. And this recession is going to be unique because we never had 3% interest rates before a recession. All the other recessions, rates were at six or 7%. This one's going to make it, I think, a little more severe because of that. Also, the longer recovery, the longer recession. Our last recession was 2010. We had 12 years. Usually recessions happen every seven or eight. So I think this one's going to be particularly tough. But the second big trend, of course, is the removal of buyer commission. So there's a couple of lawsuits that are class action lawsuits. One one's been pushed to October. There's also the FTC, and already states are buckling. So state of Washington has removed buyers compensation from the multiple multiple listing service. And we already know what's going on up there, and I'll share that with you. But bottom line is what these lawsuits contend, and it's hard to argue, if you will, that if you're offering a lower commission, people steer you away from that listing. If somebody is offering $500 and wins, offering 3% or $1,000,000 sale, gee, let's go look at the one that's 3%. The other issue is that really buyers don't have the right to negotiate commission. So when you go to a listing appointment, seller talks about commission and you're I'm charging this much because I do this and I'm wonderful and somebody must be charging a lot less because they're a discount brokerage, whatever. You don't have that option right now in the buyer side. So already in California, they're changing the forms, they're changing the purchase agreement like they did in Washington. So you're going to have to get a buyer representation agreement signed up front saying, hey, even if the seller's not paying commission, you're paying me buyer.
Scott Brady: And and then once you make an offer, you can negotiate the commission back and forth and see what happens. The bottom line is what they've seen in Washington State is that they've saw a bunch of new business models pop up that charged buyers less. What a surprise. So, for example, we're already talking about a flat fee buyer brokerage here. We only charge $5,000 to help a buyer find a property. So effectively, you know, you and I, I've been in this industry a long time. The first thing you do when you get a real estate school is work with buyers, right? Because they don't they don't I don't care how long you been in the business, just get me that house over there. Right. Well, that's going to change significantly. And so we think that's going to have a major impact on the number of agents in the business. The third trend we can talk about it is particularly California. You've had a huge trend going away from brokerage brand to team or agent brand. There's a company here called Side Inc, and if you're a top producer, they'll help you set up your own brokerage. And so the brokerage is, which traditionally lived on escrow income from their top agents and then the commission from the buyer's agents, they're going to see their profits absolutely devastated between these the teams getting bigger, individual brands getting bigger, brokerage becoming less important, the removal of compensation from the buyer side, plus a real estate recession, which already would have knocked 10 to 20% of the agents out of the system. So we could see 40 to 50% of the agents leave the industry in the next three years.
Brad Larsen: Which does kind of make it it makes it a little bit healthy, healthier, let's say. But it also it's a little scary because they're all going to go potentially into property management with the low barrier of entry that is known for this industry. So that could make it healthier, that could that could dilute the waters, that could cause more further legislation to further regulate the property management industry. We don't really know where this is going to go, but it is a trend and I got to believe it. You know, it's kind of a fair deal that the buyer's agency is going to be, I guess, put in check a little bit because, you know, on that you give a good example on an 800,000 purchase price, the buyer's agents making 20 or 25 grand. And you look at that and you're like, you know, what did they do? They sent me some listings online. They wrote up an offer. And because it was it was not that hard. Now all the agents out there are screaming at me, Oh, we worked so hard for our money. Och, yep. Well then it's going to see a trend to where it's going to regulate a bit more and we'll have to just kind of see how that turns out. It's an interesting talking point because what happens is. Very scary. You and I have talked about this a couple of times before. All of them are going to going to go towards property management with you being positioned very well to take that on, because in your particular business model, you employ agents that may not be making 100 sales a year, they're making ten sales a year and they want to augment their production. They all want to augment their income with doing property management at the portfolio level. And that's a really neat concept. So spend a few minutes talking about that because I think that's that's unique to you and some of the things you put together.
Scott Brady: Well, I think it's I think everybody out there listening who's got a management company should think about how can I take advantage of these realtors falling out of the real estate tree. So in my business model, you're right. We hire real estate agents to be both property managers and association managers. They're independent contractors, They work, they're working remotely, and then we provide the doors for them to manage and the community has them to manage. But for example, in Southern California, we can own an escrow company. It's different all over the country. Some are titles, some are attorneys, whatever might be here, a broker can own an escrow company and then profit from the escrows that their agents generate. So what I've decided to do is we started another escrow company and it's owned by other top agents. So that trend, once again, since people are setting up their own brokerages and their own teams and they're not no longer really listening to what their brokerage has to tell them, they're happy to own a piece of an escrow company. They make a profit from their escrows, and I make a profit from developing it. Right. You might want to joint venture out there with a real estate company that's I'll send. Their profits are dwindling. They're looking for a way to make money. And you come in and say, Well, I'll JV with you unless you give me access to your agents and your doors and we'll create some kind of a compensation plan or like many of us have done, is work with the real estate community and say, Hey, I want to get your investment properties and I'll give it back to you when it goes to sell.
Scott Brady: But I want everybody to start thinking about as a real estate industry implodes. Here's the nice way of be saying it as it implodes financially in just the numbers. How can we that have subscription income, that have stable income, that are countercyclical, that have longevity? How can we take advantage of that? How can you take advantage of, you know, I think over 2 million realtors in the United States and if also in 600,000, how to leave the real estate industry. But they really what are they qualified to do when we've been a real estate agent for three years? What are you qualified to do? Well, you know, maybe you're qualified to be a community manager or a property manager. I don't know. But as they're as they're leaving this industry before they leave, they they try to reach out. I just hired ten agents in the last three weeks for our business model, and they were happy to let go where they're working for the chance to stay in this industry, retain the lifestyle, independent contractor to work from home and still sell homes, if you know, but have some stable income. So I just think as we as an industry, we have to look at that as an opportunity as these agents are forced to leave the industry.
Brad Larsen: It's an opportunity for both sides. So don't don't feel like we're hawking it. You know, we are offering you a very good solution to maintain the lifestyle and actually raise the level of your income that you can produce for yourselves. Now, I want you to spend a few minutes and talk about some of the correlations between the debt and the interest rates and kind of your synopsis of the analysis you did, because that was pretty, pretty spot on. I think it's a it's worth being mentioned because we're talking about the state of the market and this is a big part of it.
Scott Brady: Yeah. This whole thing, this recession where we are right now and we're going to be the next few years was caused by the feds. And the feds decided starting in zero eight. And then, of course, when COVID hit, to have a zero interest rate policy and they drove rates below zero or at zero and everybody was chasing yields and a lot of people put in corporate and stock market and real estate, of course, and corporate debt. And, you know, that was just not tenable. The federal government bought over $3 trillion of mortgage backed securities over the last six years. And and bottom line is, the entire mortgage backed security market in one year is only 2 trillion. So, you know, they they I get it. I think they're afraid that zombies be walking the streets during COVID. And let's just throw it the kitchen sink at it. But this is the price you pay for a zero interest rate policy for asset inflation, for rates at 2% to 3% for over a year. And and the real estate industry is going to take it on the chin, because as you and I both know, home prices went up 40% in less than two years, two and one half years. And so if you give back ten or 15, so what, you're still way ahead. So in California, all you've done is the first time homebuyers is in can't buy. It's just it's financially not feasible. And the only people selling right now are people that divorce, death, diamonds. You know, the four D's, if you have to sell your selling, nobody's choosing. Very few people are choosing to sell and move up. They're going to come out feet first. Now, that's why the sales are so down and there's nothing a realtor can do.
Scott Brady: Door knocking is not going to get more people to sell. It's a zero sum game. I was listening to Tom Ferry's podcast the other day and he was selling. He's telling all his people that pay him 1500 bucks a month, plus you're going to work twice as hard. That was his that was his words of wisdom to his his industry. And, you know, we have this great opportunity with this recession because our competition is not the property management company down the street. My competition, the people who are self managing, which we think is 60 to 70%. And really what we have companies helping them, technology companies are Zillow making it easier to self manage. But as we talk about what's happening here, of course with the California renter state, it's just becoming harder and harder to self manage. And we all believe that the future of the United States is what happened in Australia, where only 30% of people self manage and we're only one bad law away in California. There's a proposal now in California to have a statewide rental registry that if you have a rental property, you've got to put in what your rent is, who your tenants are, or who you are. How can we contact you? And of course, the long arm the law will get you. Well, that's great. You know, there's also a they're talking about mandatory education for rental property owners. So you're in Colorado, you're going to fly in for the day for your four hour presentation is not going to happen. So, you know, it all all this bodes well for us. You know, renter state's terrible renter nation's not good for private property rights, but it's definitely good for property management.
Brad Larsen: And one of the things you you did in this analysis was you broke it down to how much down, how much a month. And that really kind of explains it to me in my mind, because you look at, okay, well, I'm a first time homebuyer or a third time homebuyer, and how much is it on that particular home that I like over there? Oh, my God, it's that much down. And then it's that much a month that's just unaffordable. It used to be, you know, a third of that, let's say it was used to be 3000 last month, you know, six months ago, a year ago when the interest rates were different. Now it's 4500 a month. Well, that's just outside of my budget. I might have the down payment, but the budget wise, when you start talking that monthly payment because of the interest rate hike, because of the inflated prices, that puts people out of the market. And you touched on a nail on the head there with the sellers. The sellers are going to look at that and say, well, I can't replace this interest rate that I got a year ago, three or 4%, because what am I going to do with that money I make? If I make it, I'm just not going to enter the sales market, which creates more opportunities for renters because if those folks want to move or relocate, they may never want to sell, They may rent it out for five years, ten years, and come back or wait till the market improves. And so this gives our pool of customers, clients that much more of an influx of people coming in to say, you know what, I kind of like this whole rental thing.
Brad Larsen: How does this work? And then I was talking about this on a previous podcast. Well, you remember the whole renter's warehouse. They were doing all their radio commercials. Well, that benefited the industry as a whole because it made people aware of like, what is this property management thing? You can hire a property manager. I didn't know that. Google, Google, Google. And then next thing you know, our companies, yours and mine, would pop up and potentially we get a lead on behalf of Renters warehouse. And because that pool of potential people are going that much more, we're prepared for an influx of clients this year more than we ever have in the past. And I mean I can throw a numbers at you, but it's all just pie in the sky until it's actually done. I hate to even make projections, but we are beefing up operations to be able to bring on those homes. We're prepared for less homes to leave the inventory and we're prepared for more homes to enter. So operationally wise, you have to beef up and get ready, which is why behind me you'll see the dump truck. You remember my dump truck story where you have to be ready for 100 contracts to fall on your your front step that day. And if you're not ready for that, then you need to be ready for that grow operationally. So back to some of the points that we don't talk about here is you mentioned being lean and mean. And so why don't you kind of elaborate on that a little bit?
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Scott Brady: Yeah, this industry has gone through so many changes in the last ten years and I've been able to experience it. And I think the one, you know, you and I have talked for many years about this, but the one thing this industry has done really well because I now I'm an association management. I see they don't do this at all very well is we've gotten very lean the last, I would say, particularly five years. And specifically what we've done as an industry have really embraced remote team members, We've embraced technology, we've embraced outsourcing, we've embraced anything that makes us, you know, reducing our costs. When there was that famous study that they did about seven years ago, the average profit margin of an operator industry was down to like 5%. It was. It was. And I think that was a wake up call for our industry that we've got to do better. And we did better by both growing revenue, which we'll talk about, but by reducing costs. So I don't know about you, but not only do I have remote team members that take all our phone calls and I hear that we take something like 500 calls a day, 600 calls a day, but they do a my accounts payable accounts receivables.
Scott Brady: They're doing financials for us. Of course, they take all the owner calls on the HOA side, they take the tentacles on the residential side in California, an exempt employee. So that's somebody that can work overtime evenings, which are most of our community managers, the minimum pay. Now if you add in all the benefits is 75,000. That works out to almost $40 an hour. And I can hire an TM for about seven bucks an hour. And and and they do an amazing job. So it's making us as an industry and really in the service level goes up to right. So not only are we saving money providing higher level of service and and we're ahead of the curve because real estate residential real estate doesn't do anything with our TMS and very little with technology. And of course now association management is starting to get into it. So, you know, I think you and another people have been very open about getting lean. And now that we're lean, we're more profitable for sure.
Brad Larsen: And of course we adopt an accounting standards and we really watch all the nickels in and out. And the remote team member is no secret any longer. I mean, we're not telling people that they something they haven't heard of. I am shocked when people like all of a sudden decide they want to hire a remote team member and it's like, where have you been for the last four or five, six years? Yeah, I mean, this is a pretty good idea and it's substantial in our business and that really made the help us turn the corner and a really good method of becoming very profitable versus just kind of average profitable. And the other side of that I want to talk about too, is the technology side and the showing side. That's that's been significant. If you're able to leverage technology to do unaccompanied vacant home showings, you don't have to pay as high commissions. You don't have to hire a leasing agent to open doors. I mean, that's a big chunk. Then of course, you want a revenue generate, you want to generate all the revenue you can buy fee revenue, MAXINE, whatever you want to call it. I mean, implementing different programs that, of course are going to generate more top line revenue. But the remote team members being lean that is a big expense because, you know, the old saying for every dollar you save, you dollar you earn, Well, that's part of it. And how to exactly get to that point got to pay attention. Number one, monthly reviews. Quarterly reviews. Why did we spend this much on this? Don't we have that redundant software somewhere else and start taking a look at your pal on a monthly and weekly and quarterly basis? And don't be afraid to implement new things because it could be a staircase, it could level you off at first, but then once it's fully implemented, it could be a straight up tick and like a hockey stick as far as revenue generation from that. So any other points on the getting lean scenario?
Scott Brady: Well, I'll tell you how important our RTMs are to us that we're going to hopefully add this year about 50 associations, probably about 3000 owners without adding one staff member here. It will be all additional RTMs. You know, that's what's also, for example, in my market, the big association management companies will not manage communities of 50 owners or less. They can't make a profit paying these people 75,000 where I can. And I think on the residential side, I think what we've learned is because we've gotten leaner, I don't see people taking the property management fees up their base management fee. Now we're taking fees up in other areas, which we'll talk about, but we're not. We haven't gone from 7% to 12%. That's not how we increased our margins. We got leaner and then we introduce programs and fees, programs to better protect our owners asset and fees for doing additional work that's outside of the core contract. And between those two getting leaner and then adding fee maximization. I would just say we should have been doing this from day one. We just for some reason weren't doing it and that was it.
Scott Brady: We've we've embraced it and now our margins, I think you know better than I think, you know, an average margin, as you know OC is 10 to 15%. Middle people are doing 15 to 20 to 25%. We've got some people at 30% margin. You know, we've gone from the penny business to the nickel business and soon we might be in the dime business and. And that's great. And we've we've got a conference as we talk about this. Before I did got leaner and before I was dead fee maximization. I didn't have health insurance for my employees. I didn't have a retirement plan for employees. I'd probably say it was underinsured as an as a company and I'm well insured. I have retirement for my employees. We've not lost a staff member in two years, and they're excited to be in an industry which is a company that's growing in an industry that's secure. And and that's what I think really helps us keep our employees is is these these those two things we've done get leaner and we maximize.
Brad Larsen: You know, it's funny that one of our last iOS quarterly meetings, I stood up and was like arms wide open and yelled in our meeting with like five, six people in it. The recession is here. And I'm so excited because, you know, I've been telling everybody for ten years that, hey, once the next recession rolls around, be ready. You could add 500 to 1000 doors in a minute because if people can't sell, it's pretty freaking common sense they're going to rent. And with the population influx that we've seen in our market in the state of Texas, for sure, they're all leaving from your state. No wonder. But there's crazy population growth and it has it's not going to slow down. And so everyone's got to have a place to live.
Scott Brady: Yeah, there's old saying that when it's cheaper to buy than it is to rent, you buy. But when it's cheaper to rent than it is to buy you rent, well, it ain't cheaper to buy than it is to rent in Southern California. So we're creating a whole new generation of renters. I think there's a whole population group are not going to be buying in the next 5 to 10 years. I think it's going to become inherited. You inherit a property, you don't buy a property. Kind of how it is in Europe. Yeah, this is our time to shine for all these seven reasons, things that we've done in the past that prepared us for this moment and things are ahead of us. They're going to allow us to really as an industry, take advantage of it. And we're having this podcast, this talk, because, you know, we go to conferences. I love going to your conference and speaking to other conferences, and we're trying to tell people this could be a once in a lifetime opportunity. When I first got in the industry, I got I started my company in 2012. I ran to a guy I was managing like 30 doors and he managed 600 doors. And I said, Can you tell me how you did? How did you get to your 600 doors? He goes, He goes really easy. You can write this down. I put open for business over my door in 2008 and I got 600 doors in less than three years. And I think it's more be that as as as good as it was in oh eight with that recession. But it's going to be very good. It's going to be a time for us to grow our businesses and grow our business profitably. You know, I think the last time a lot of people growing their business profitably, you know, if you're losing money, it's six, $400. You're losing more money at six, $700. And I think this time as an industry, we're growing profitably.
Brad Larsen: And they had the area and right properties where you're handed three, four, 500 homes in a minute by some giant organization. They employ you for a year and they give you a 30 day notice and fire you. I remember one of our big property managers here in town went through that, and that was kind of a side effect of the recession. I think most of us now are smart enough to know that, hey, we're not going to go help those big REITs any longer raise because they'll they'll employ you and yank it out from underneath you once they steal all your knowledge. Yeah. So interestingly enough, let's switch gears. I want to talk about the VCs, our own. And you and I have been going back and forth a couple of weeks now on just good points of what's going on in the state of the world with venture capital getting into property management. Now, first off, I got to say it's a good thing that Wall Street looked at our industry and said, You know what, I really like your industry. I got all these billions of dollars. We're going to start investing into the the residential property management industry because we suddenly realized it's the core center of all real estate and it's in the property management world. So let's talk through some of this and see what you got.
Scott Brady: Well, I think we have to give some background. There might be people listening. We're like, What are you talking about? Vc So when I got in the industry, when I joined Naropa Malays, there was a talk that the VCs were coming, Venture capital is coming. They're going to come to your market and crush you. They're going to destroy you. Mine's going to come in and they're going to start spending money on radio ads and TV ads, and they're going to charge 95 bucks a month with no leasing fee and they're going to put you out of business. And this was our conference as people walked around going, Oh my God, mine has $200 Million. And they're going to they're going to just get rid of the mom and pops are done. We're not going to survive this. Well, mine disappeared, didn't make it, and then renter's warehouse didn't make it. And the new VC money out there isn't out to crush us. It's out to acquire us or consolidate us. Take your pick and you've got opinions on that. If that's a good or a bad thing for you to do. But now it's an option, so it's not a bad thing. Your operator get to say, Well, yeah, I want to sell and give me this much money. But they're not out there to dismantle our industry. They're trying to, in a sense, make it better. And, and yeah, I don't think we have to fear we walked around in fear of venture capital and I think now we realize, hey, they see us as a good place to put some money.
Brad Larsen: Yeah. Part of my yeah, part of my presentation at the PMMCON is going. Be how to build your company and then never sell it. And it really is right down the middle. 5050. I can show you the left side. I can show you the right side if you decide to sell. And a lot of these acquirers that are coming in, they're good folks, right? I have no problem with them. I think they're doing good stuff. But what's interesting is you broke this down to amount of the per door per acquisition. And I mean, just throw some numbers out there. You don't have to mention names, but some of it's like pretty appalling because you and I would never spend that on a what do we call that? The customer acquisition costs. The client acquisition costs. Our client acquisition costs in the PPM world is 500, 800 bucks, whatever. I mean, it's it's well south of this, I mean, throw me some numbers that you're looking at in their client acquisition cost.
Scott Brady: Oh, there were some in the 20,000 a door they were buying these doors before they went under. And you and I both know that a good operator is doing their client acquisition at 600 to 1000 a door. That's kind of a depending on how good you are in your marketplace. And and I think what they found was they couldn't grow organically. Mine just couldn't. You know, a good analogy I'll give you is there's something called the Chi, which is a community association institute. It's it's where all the association management companies come together. It's national. And when you go to the conference, you're not there to learn anything. It's just a place for them to try to acquire you. It's an acquisition convention. It's not a not a learning convention and kind of what's happening with broker owner and our conventions becoming a little bit more like an acquisition convention. Right. That they they see that as that's where all the ducks are floating in the pond together and let's go shoot a few. But yeah, they they've learned that it's for whatever they cannot grow organically so they're going to grow through acquisition and that means buying you or me or anybody else out there. I would say the property management is an easy business to get into. It's a hard business to be successful at. That's what they learned. You know, it's easy to spend $60 million and not but not know how to really we're still in the customer service business. We're in a pride swallowing customer service business where boots on the ground, belly to belly business. And I don't think for the most part, people hire us because of price, the hires, because of our ability, our reputation.
Scott Brady: In my marketplace, the average sales price is 850,000. They care about the asset. The cash flow is nice. They like the 3000 a month, but they want to make sure that asset is absolutely protected by me and by the management company. And that's what I think the VCs didn't learn seven years ago. They thought it was all about price and we know it's not. It's about all the other stuff we do, the programs we offer and and the tools we have. So and I agree with you, I think some of our people are selling and they're selling right before these. This market is going to boom. If you're selling right now, you're leaving a lot of money on, in my opinion, leaving a lot of money on the table. My growth rate is 20%. So in five years, I'll be twice as big. I'll be leaving a lot of money on the table. And then, of course, if you sell, there's tax ramifications and a bunch of other stuff you've got to you've got to sort through. But I think the VC thing now, there's some big ones out there. There's belong has got $80 million. They're now going from California, the rest of the country looking to acquire anybody they can. You've got, of course, pure, which is there are consolidator which they have their pitch. So they're all coming out with different pitches, just buying, get rid of you, bring you into the fold. You know, here's our technology, whatever it might be, but that's good. It's saying to the world that our industry is attractive.
Brad Larsen: I agree with that now. I'd hate to say that you and I were right, because we you know, we don't want to be, you know, spiking the football necessarily. But when we first started here about this, you know, you and I had conversation that basically we said they're never going to replace a small mom and pop operator because they're super hyper local market knowledgeable. They went to the local university, their kids go to the local high schools and they're there in that market. You get that sense from the very beginning. The same thing. If you go to our website, you get the very sense that we are rooted in the San Antonio to Austin, Texas region. Like this is our stomping ground. We are not trying to be some national player. Here's a picture of the American map, the lower 48 and all these stars dotted all over the place and these different states. I don't know if that impresses somebody locally in San Antonio, nor does a New York City address of your corporate headquarters. Right. So those things never really played well. And again, going back to that, you're never going to be able to replace the 200 to 500 to 1000 unit small local operators that are just absolute local experts. I just don't matter the price. I mean, the price is not that big a deal.
Scott Brady: Nobody's ever called here that I'm aware of and says, you know what, I want to work. I want I want to make sure my management company is the biggest management company in Southern California. Are you the biggest? That's what I want. I want to be lost in the in the shuffle. No, they call and they want the best. And and they they determine best by a lot of factors. Right. But yeah, I think that's where they got lost. I will say association management, they will say, ah, how big are you? Are you big enough? Can you handle us? You know, we're 500 owners. That's a different, I think, paradigm than residential. And yeah, I feel when mine was coming out it was trembling in their boots about mine. I, you know, mine would come here and they would, they would implode, they would, their business model would within a year they would, they would lose all their doors, all their contracts because they try to do too much is sold on technology. We're in the technology business. Yes, we use technology to run a better business, but we're not we're not in a technology business. We are in a we're in a we're in a business of protecting assets, of holding ten is accountable to contracts, to making sure the owners follow the law and the tenants follow the law. And but we're we're we're not in the technology business.
Brad Larsen: And that's a that's a poignant part to bring up because they're doing these valuations based on them being a tech type of a business and the tech valuation. They can go for ten x 15 X revenue, right? It's stupid high on the amount of revenue. So if you apply that to a management company, you and I would both be like, Sure, write me the check. You want to give me 15 X for what my what my company generates in revenue, bring it. But that's not reality. And so what's going on is these, these roll up conglomerations. They're doing good stuff. They're consolidating people that want to exit and they want to be part of the bigger play. But where I'm going with this is we don't know if the bigger play is going to flush out. We don't know that yet. Has anybody proven that model of rolling up 100 management companies into 100,000 doors and selling for ten X? You know, in conjecture, you could argue that it's been done before and like, like industries, but I haven't seen it yet in our industry. What are your thoughts?
Scott Brady: Yeah, I agree with you. I mean, you put anything tech on it and you get a valuations five or ten times higher. You know, we are we're a cash flow business. We are. We are. You bring in X and you spend a little bit less than that and you make a profit. That's not a tech business. And I think the only tech out there is replacing us. That's a tech business. You know what Zillow is trying to do that they can find the tenant for them and they do rent collection for them and and disperse for them. And I think I think that's tech. But we're not tech. And hey, if it happens, that's great. God bless our brethren who got on at the bottom, at the bottom, at the bottom floor and took advantage of it. We'll see in seven or eight years. But, you know, the thing about this industry, it changes a lot year to year, doesn't it? It doesn't seem to be a static industry. And what is appealing today could be unappealing a few years from now. So I agree with you. I think it's it's it's easy to call anything tech and get the valuation. But are we really a tech business?
Brad Larsen: I think the bottom line people should take just from that little snippet of this conversation is that don't fear, don't fear the big boys. You know, if they come in with this giant presence and they offer a little bit lesser price than what you're charging now, I don't think you should fear that because you said it in the very beginning are real competition is the local repo the self managing individual property owner as you've dubbed it, You're the only one that uses that term, by the way, the Smith Those are real competition because if they're able to rent out a home using Zillow and they sign a contract for a lease agreement on a napkin and the state allows that, that's very dangerous and that's our real competition. And so we're going to see potentially more of that. And I think that's only going to only going to lead down a. A slippery slope, a cascading staircase. People, consumers running to the state saying, this landlord screwed me over, this tenant did this. I mean, it's just they're going to say that the consumer needs to be protected. Here are more laws, here is more regulations. And that's either a good or bad thing. And I just hope they do it in the correct way. Like one of the things we're talking about in Texas was trying to allow. Excuse me, trying to disallow contracts outside of the promulgated state forms, which I totally disagree with. I mean, if you have an attorney approved form that's been tried and true, you should be able to use that. That's that's common sense, open market stuff. But if you want to regulate something, regulate the people getting into the industry, not the paperwork involved in the industry, what does that have to do with it? And it's a free market to a certain extent. So let's touch base a little bit on some of the other things going on. The.
Scott Brady: That dovetails into the last one. So, you know, we're in a real estate recession. One renter state coming to. We've used technology to be leaner. We're squeezing more out of our doors. Four agents are falling out of the tree. We don't have to worry about the VCs. And this leads to the biggest thing is that there's kind of a famous book. It's not well written, but it's a good book on Blue Ocean. And I think as an industry we have these blue oceans ahead of us. That's a self managing investment property owner going after that person, taking advantage of the agents falling out of the tree. How do I take advantage of that? Is that a joint venture? Is that having them work for me? Is that. Whatever that looks like. Right. And then for me, it's association management, which is just a complete mess. In Southern California. I've been able to grow AD 85 associations in less than two years. But as an industry we also have maintenance you can do. You can go out there and start a maintenance division, you can do fix and flips, you can do syndications that we have all these streams that we swim in and for me, I do escrow. I own a hazard disclosure company. I mean, that that. Too many people in our industry get really kind of myopic and they get in their silo and they manage their 100 doors in wherever it might be, not realizing there's so many other streams out there that be willing to pivot. Short term rentals is another one. People are playing in that, you know, the real estate industry has really not changed at all in 40 years.
Scott Brady: It's still the broker with a bunch of agents trying to add as many agents they can. The best splits they can is pretty much been it right. But we sit at the nexus, if you will, of all these other revenue streams, and I see more and more in our industry people taking advantage of that. And I certainly have. And it's and it's you know, I got to the management I think Brian knows this when the CO when COVID hit, we were all scared shitless that all of our tenants will stop paying and that and the state would come in and take care of the tenants. And we're like, Well, wait a minute, if I'm getting 7% of nothing, that equals nothing. So I was panicking. I don't remember the peep loan and I go run around trying to get our money and I start the management because we're on accrual accounting. I get paid regardless if they pay or not. Right? So I thought, okay, that's countercyclical to residential was association management association and the property management's countercyclical to real estate. So you want to get in those revenue streams that they're going to pay you no matter what, which is maintenance is a good one. You've got a couple of companies and and then and that's what's cool about our industry is that we're not just sitting on 100, some people are, which is great, but the people that are really innovating in this industry are really looking at other revenue streams.
Brad Larsen: And we always talk about the how, you know, I'm always a big guy about that. It's like, okay, we hear these great ideas, but how do I do that? So first thing is to get your house in order, meaning get your management company running to where it can run itself to a certain extent. So here's the old cliche work on your business, not in your business. If you can work to that point to where you can free up 50% of your time, you can take something like commercial management, commercial sales, construction syndications, mortgage lending, short term rentals, pick one of those and work on it on the side and create another silo of business revenue generation. So I always like to bring that up because you've got to get your house in order first, and that could be just following simple checklists and the CMC with NORTHAM, the certified residential management company checklist of how you get to that point following the accounting standards. Those are two big house on getting your home in order to grow those other silos that will take advantage of this market. What else you got?
Scott Brady: Well, you know, I remember when I first got in the industry, when you went to a conference. Yes. How many you do real estate? I think it was it was the minority. It was maybe 20 or 30% that I do is No, no, no. I don't do real estate. I get I don't want to compete with the people that give me referrals, you know, that be And I think if you go to a conference now, I would say it's 80 to 90% have a real estate division that they're capturing their clients the doors that want to sell, hey, I can sell that for you and take care of that, that revenue stream, even that small step. Because as agents fall out of this tree, you can offer a better split than Coldwell Banker Corporate. That's at a 7030 or. If 6040 for you is gravy. So start that real estate group and and have a reasonable split and know that you've got you know you can pay the bills and take care of them. So I think as an industry we've gravitated toward real estate. Now I see people gravitating to association management and short term rentals. We've always tried to dabble into maintenance, which has been kind of a thorn in our side, but we're doing that more. I just I just think that whatever your you're you're right.
Scott Brady: First make sure you're profitable and your property management business that it can run on its own without you being there for me. I hired my son about three years ago, four years ago, to run the residential division. I don't do anything with residential anymore, so I can focus, go big picture, do escrow, association management. We're we're we're doing the owner benefits package, which you and I have talked about because, for example, associate management, our profit margin is only about $5 a door. So if I can do an owner benefits package and get another $5, I'm going to double my profit margin. So I think once you get your your your your store and order your company in order, then you look out new other ways to generate more revenue even from the doors you manage. Right. You know, go get new doors. But then the doors you have, how can I squeeze out another five bucks, another ten bucks, You know, how can it kind of do a security deposit waiver program? How can I implement that? And by doing those things, if your profit margin on residential is running 20% and you're bringing in 200, you're making $40 a door. If you just bring in ten more dollars, that's a 20% increase in profit. So.
Brad Larsen: Yeah, one of the one of the challenges we talked about in our annual meeting just a week ago was the price of doing just the basic cleaning, the maid service and the carpet cleaning. And, you know, we're in there with eight or ten staff members and all our key leaders, and we're going through this program that we talk about our 695 cleaning service. Well, we'll handle all your cleaning top to bottom for 695 bucks. And anymore we're starting to like it's a flipper coin, whether we're going to go underwater or we're going to actually make 100 bucks. Right. And so we started talking about, okay, let's maybe we should buy our own carpet cleaning van. Right. And these are some of the ideas that come out of the maintenance side. And so we're looking at that. And I know this is a completely offshoot conversation, but, you know, you get to the point where if your business is somewhat stabilized and there's shifting in the market. So I'm talking about the shifting. The shifting is carpet cleaning is so dang expensive right now, we can't offer that service any longer. Right. And we can't rely on the dudes that do carpet cleaning because the labor market is so good, the unemployment market is so low that we're considering insourcing that and it really illustrates a point of like, everything changes, right? You're in flexing, you're out flexing, your insourcing one thing now, and then a year later, you're outsourcing it. And so you just have to kind of roll with the punches. But I just want to bring that up because it does kind of illustrate a few points down in the dirty weeds of things that are challenging us right now. This has been a really good conversation. I love it. What else you got going for me?
Scott Brady: Well, I would really exhort people. I know it costs money to go to a conference, but I think this is the year to go to conferences. This is the year to go to the mastermind conference. PMMCON, this is the year to go to broker owner. I think there's going to be there's such a bountiful amount of information you're going to hear there and what people are doing. We were we were in industry ten, 15 years ago in the corner of the real estate office, underfunded, under-resourced, bad reputation. We had we nickel and dime people. We had terrible customer service, terrible technology. Fast forward to 2023. Given everything we've talked about, we are sitting in the catbird seat and and what are you doing today to anticipate what's going to happen for the next 3 to 4 years? This recession is not 3 to 4 months. This recession is going to be a lot like 91 to 95 because there's a psychological term that people don't like. They avoid pain rather than gain. And nobody wants to lose their 3% interest rate. They want to hang on to it because they're never going to get that again. And so I think there's psychology involved here, too. So what are you doing today? What incremental improvements are you making today to anticipate with the renter state? Thing is, isn't just this month, it's the next ten years, the recession is the next four years. The technology is just going to continue to come down the pike. Rtms are going to become more important, not less important. The next five years. Agents are going to be falling out of that tree for the next three years, at least, maybe four years.
Scott Brady: Vcs, I think you're going to see more money go to the VCs because we're looking at our profit margins now at 15, 20, 25%. And and our opportunities are going to be out there in these other income streams. So this is the year to go to conferences, This is the year to talk to people, to listen to podcasts, to grow, because where everybody else is going to be storming wrong, it's terrible. The world is ending. What are we going to do? We're going to be it's our time to shine. As we talked before I got on the thing, this is our time. We suffered the last seven years as our portfolios dissipated because all these investors are selling left and right and we were just treading water, trying to keep our doors. And now we're going we're going to be able to enjoy. The next three to enjoy a recession, which is hard to say, but we get to enjoy this recession and grow. Your businesses get more profitable. And b, I would say I'm talking to doing a JV with a big real estate company here, 500 agents. And, you know, this is our time to take advantage of all the good things we've done in the past. And with all the trends are right now in the future, it's our time to be kind of a shining light in the industry because the real estate industry has not been that. But we we have been and we will continue to be. But get out of your silo, go to a conference, talk to other people, join your local Norfolk chapter, because there's a lot of good things happening out there.
Brad Larsen: Agreed. Now, one of the things I want to bring up kind of reverting back is those real estate agents, right? You had a stat in there. They're the highest paid commissions in the entire world.
Scott Brady: In the world.
Brad Larsen: Yeah. Yeah. That's that's the US economy right now. And then the average commission was like 4.9% or something crazy, correct.
Scott Brady: 4.92. Yeah. Yeah.
Brad Larsen: And the UK was like 1.8 or something.
Scott Brady: Australia, same thing, Australia same thing. They just have one side. We could see a future where you don't really have buyers agents anymore. There's there are some big players who want to make us an auction model. So you hire a listing agent, you put it out there, people look at it and then you sell it, right? I think the future of real estate, if I had to take a guess, is that the buy side is going to go down to 1%, one and one half percent and probably it will be done by teams or you're going to have all these new business models where you get paid hourly or you get paid a success fee, Right? So $1,000, I show you homes, 5000, I write offers 10,000. Once we closed escrow, you could see that. So the the real estate industry is is going to be in a world of hurt. But by the way, 50% of agents don't do a single deal. So once again, you don't have to feel too bad for them. It's an industry. I always tell people right now we don't have an inventory problem. We've got an agent problem. Too many goddamn agents. We we don't have enough sales, but we really have too many agents. And so all we do is get rid of those agents. Real estate will come balanced again, but that's going to take 2 to 3 years to squeeze these agents out of the system. And that's where the pain is going to be.
Brad Larsen: I kind of like this in a number of different ways. One, we've all know the big time agents. They are rolling their Mercedes and their their fancy cars and they wear nice clothes and they looked down upon their nose at our at our just feeble property management system. Oh, you guys are property managers. You're you know, I can't even look you in the eyes. I just you're not even on the same level as me. And we're going to see a little bit of leveling of that. You know, they're going to be they're going to be hurting here in the next few years, in addition to if we can make this a healthier real estate market because of this recession, because of this buyer's agency going away, it elevates the level of stature of the real estate industry, because right now it feels like a lot of shady ambulance chasing attorneys. I mean, that's the feel of the real estate industry. It's if you take polls of the most respected industry, real estate is near at the bottom. I mean, attorneys and realtors are like near the a