Pump up your fees

However, in the same time, inflation caused the cost of living to increase by 6.3 per cent, creating insurmountable pressure on real estate companies.

As these everyday living expenses increase, the director at TNQ Rentals, Malcolm Riley, believes that property managers who don’t revise their fees to keep up with inflation are undermining their long-term viability.

“To me, it’s just good business sense to keep up with the rising cost of everything,” he says. “Wages, food and petrol all go up. If you’re not raising your fees in line with inflation at least, you’re actually just getting a pay cut year after year,” he said.

According to the Macquarie Relationship Banking 2012 Real Estate Benchmarking Report, the average fee nationally is 7.6 per cent, with Western Australia leading the pack with PMs charging an average of 10.8 per cent; a two per cent increase since 2009.

The report reads: “While NSW agencies have amongst the lowest commission rates, they manage properties more efficiently than their peers (properties managed per FTE), benefit from higher average rents than all other states and enjoy higher multiples on exit of their business.

“Vic agencies sit at the low end of the scale but benefit from larger average rent rolls and manage them more efficiently (properties managed per FTE) than all other states except NSW.”

Shaun Bassett, head of the residential real estate segment at Macquarie Relationship Banking, said upon the release of the report earlier this year that property managers who offer heavily discounted commissions won’t survive.

“When we entered hard times, there were a lot of people heavily discounting,” he said. “What we’ve seen is those who charge a commission rate considerably lower than the average simply can’t survive.

“Those who protect what they charge consider it a reflection of the service you provide,” said Mr Bassett.

Mr Riley believes that the responsibility for property manager’s commissions lies with the principal, who is often afraid of upsetting clients.

“Quite a few people have gone the other way and discounted their fees and are virtually working for nothing. Over the past five to eight years, legislation has just grown exponentially and responsibilities for property managers have had to keep up, which is why I travel the country spruiking for principals to raise their fees.

“Keeping the fees at the same level as eight years ago is just putting the business further behind the eight-ball. Years ago, we never had to do routine inspections, so we didn’t need to drive around inspecting properties.

“Now it’s part of legislation to conduct these inspections, so the principal has had the added cost of a car, registration, insurance, staff and petrol as well as equipment like iPads, which some people use. They also need to manage the time it takes to do these inspections, which are all additional overheads a principal has to juggle.”

In Mr Riley’s office, he charges clients for each routine inspection.

SURVEYING CLIENTS
Laura Levisohn, director of M Residential in Western Australia, was pleasantly surprised at the reaction from her clients after increasing her fees.
After having a ‘health check’ on the property management department, Ms Levisohn realised that the company needed to introduce new fees.

“Before we launched, we surveyed all our clients about our performance and asked their thoughts on our work ethic. That was more to comfort myself, so we could know that if we increased fees that we wouldn’t have a mass exodus.

“The feedback showed that our clients thought very highly of us and gave us the confidence to move forward and add and increase fees.”

Ms Levisohn spoke at the Leading Property Managers of Australia (LPMA) conference in April this year about her success in raising rents.

“We increased management fees and introduced a lease renewal fee which we never used to charge for,” she continues.

“Some of our clients had been with us for many years and were still on very low fees, so we lifted them all up to the fee schedule we promote to new clients.

“We were really surprised with the reaction, we didn’t get any angry phone calls. We did talk with a few clients who had some questions but overall we had a smooth transition.

“We had a few phone calls, but it was more of a clarification of the new renewal fee that we charged. A few said, ‘you used to do this before free of charge, why are we now being charged?

“One person brought up the fact that we get our fee increases when the rent goes up, so we had to explain the reasoning behind the change.

“After giving our clients an explanation, they all seemed to be ok with the new setup. In total we lost three clients over the issue.

“It was a bit of a shock; we actually split our rent roll in two and made the announcement at different times to each half, so we could cope with the angry calls and expecting everyone to be challenging us on the fees.”

FRESH THINKING
But there are better ways to generate more income than to simply raise the commission rate.

Mr Riley suggests that principals consider charging for end of financial year statements for investors. The breakup for the entire year, which is needed by the client’s accountant, is simple to produce but a small fee could be added on.

“I had a lady who has been managing her own rent roll of 795 properties. And she’s had that for 15 years and never increased her fees once. I told her to put her end of month statement fees up by two dollars. She started saying that she would lose clients and properties, but I got her to do it anyway.

“She had one phone call come in, and after explaining that she was only putting her monthly fee up by two dollars the caller said he was fine. ‘Not a problem’ he said, and even thought it was still too cheap.

“So imagine 795 properties being charged two dollars extra a month for a year. She made almost $20,000 more a year, and did no additional work.”

And while some principals might think that clients could feel ‘ripped off’, Mr Riley said providing great service and simple explanations will avoid conflict with landlords.

“Principals need to train their property managers to use scripts for the dialogue, like they do for sales agents. The script would be used to justify why they need to raise fees.

“But before that, they need to look at two things.  Firstly their original existing agreements need to be audited. And they also need to sit down with their teams and discuss where their fees are at the moment, what they’re doing, and what they can charge more for.”

The script can be developed from the discussions of which areas have created increased overheads for the business, and expectations of where these costs are heading.

“They need to look at deficiencies so that when any new properties come into their rent roll, they will be charged at the new higher figure.

“With the consulting work I’ve done around the country, and from what I've found in my own office, you don’t come across people leaving your property managers that often.”