Broker/Owner Week: Fees, Frustrations, and Fresh Insights

What a thought experiment on ancillary revenue reveals about our industry—and why sleep > keynotes.

It’s NARPM Broker/Owner Conference week, so my newsletters this week will be a little shorter and focus on takeaways from the conference. If you’ve never attended Broker/Owner, I highly recommend it for next year.

The Fee Debate (Again)

I know I’ve covered this before in this publication, but let’s be honest, the ability of property managers to charge ancillary fees is constantly under attack, even by our fellow property managers. So while we’ve touched on this ground before, it’s worth talking about it again, especially in light of a great discussion between Peter Lohmann and Mark Brower during a session yesterday at the conference.

Mark started off by making it clear that he would be taking a position against much of the ancillary revenue, but only as a thought exercise. Mark’s general thesis (which is a good one) is that property managers need to be taking on more of a role as an asset manager rather than just a task monkey collecting rent and getting repairs done. If you saw our recent webinar with Lior of Blanket, you know that I generally support this sort of idea, and PMs would be much better off with lower churn if they viewed themselves more as asset managers and advisors. That said, the place where Mark takes that thesis when it comes to fees is where we definitely disagree.

Mark’s view (again, as a thought exercise only) is that property managers shouldn’t be making the most money when our owner clients are having the worst time. For example, PMs who keep 100% of the late fees are making more money when the tenant is paying late, and PMs who charge commission or markup on repairs are making more money when owners are having to pay for repairs. Mark’s assertion was that this represents a lack of alignment between the owner’s interests and the PM.

My first objection to this (which I voiced at the Q&A mic) is that this isn’t unique to property managers, and isn’t even unique among other professions wherein you act as a fiduciary. My lawyers are making money when I’m having a bad day, and they’re making nothing from me when I’m having a good day. Likewise, my doctor certainly isn’t making any money from me when I’m healthy (aside from a once-a-year physical), he’s making money from me when I’m sick. The list goes on and on here, and it includes pretty much every industry where the service provider is a fiduciary, just as we are.

But to take it further, and I didn’t get a chance to cover this in my remarks at the mic yesterday, this is also a complete misinterpretation of incentive structures. Let’s look specifically at late fees, for example. Yes, it’s true that when I’m keeping 100% of the late fees that I’m making money when the tenant is late on their rent. However, that doesn’t mean that the incentive structures are misaligned, because I’m not in control of when the tenant pays the rent, and I’m also wasting an enormous amount of resources on collecting that late rent when that happens. Do you know any property manager who wants more tenants to pay late? I don’t. Sure, we make money on late fees, but I’d much rather not make that money and never have to chase anyone down for their rent payment. I’m sure you feel the same, which is why this claim that incentive structures are misaligned just falls flat.

Rather than viewing this as “the property manager is making the most money when the owner is not having a good time,” the right way to view it is “the property manager is making the most money when the property manager has the most work to do.” If you manage a pristine portfolio of A-Class properties where no one ever pays the rent late, and repairs are almost never necessary, and lease renewals get immediately signed with rent increases every year, and lollipops grow on the tree outside your window, then you’re not having to work very hard, and it makes sense that you wouldn’t be making as much money in that scenario. But if you’re managing the portfolios that most of are managing where repairs are a constant reality, some people pay late, and tenants need to be called a dozen times to get a lease renewal signed, then it just makes sense that you’re getting compensated for that work. This isn’t a misalignment of incentives anymore than it is when your car mechanic gets paid when your transmission goes out. You get paid for work that you do, not work that you don’t do.

The primary problem with this view of trying to align PM compensation with owner success is that it views the PM more as a general partner than it does as a service provider, and PMs simply are not general partners. There are certainly business structures out there like that. There are PMs here at Broker/Owner who run syndications on the side as a general partner and their clients are limited partners in the syndication. In that case, the PM makes most of their money as the limited partners do, profiting right along with the investors, and taking losses right along with the investors. But the PM has equity in that structure. The average PM just running a typical PM company has no equity in the owner’s property. The PM is simply providing a service. Now, that service can (and probably should) include some asset management functions, but that certainly does not mean that the PM should view themselves as a partner in that rental property anymore than the car mechanic views themselves as a partner in your car just because they’re providing repair services. If you want to provide syndications where you profit right along with the investors, then by all means, that’s a fantastic business model. It’s just not property management, and shouldn’t be lumped in with property management. This is a service industry. That’s what we do. I know some PMs have some delusions of grandeur and like to view themselves as being above a basic service business, but that’s simply that: delusion.

We should also look at how ancillary tenant fees greatly advantage owners, because it allows PMs to be more competitive on the management fees charged to owners. Sure, I could stop making money on all of these ancillary fees charged to tenants, but if I’m going to maintain the same service level for both clients and residents, then that means I’ll need to radically increase prices on my clients, because right now management fees are only making up less than 40% of total revenue. If I need to make up that other 60% of revenue, it means the management fee has to go way up. Now the owner is paying for more of my service instead of it being paid by the residents. How exactly is this supposed to be in the owner’s best interests again?

But there’s another area where I think Mark is, forgive the pun, missing the mark. Not only is ancillary revenue not misaligning incentives, it’s actually aligning incentives in many cases. Let’s look at a few examples:

1. Lease Renewal Fees - we’ve all taken over management of properties from less organized PMs who have allowed leases to lapse and go month-to-month, and almost universally these are cases of PMs who either don’t charge lease renewal fees at all, or are so disorganized with bad systems that they usually forget to charge them. Because they aren’t making money on lease renewals, they aren’t getting them done. This is certainly NOT in the owner’s best interests.

2. Maintenance Markups - PMs who don’t charge on maintenance have no built-in incentive to make sure that preventative maintenance is getting done, and if you know anything about maintenance, you should know that preventative maintenance will always save an owner money over reactive maintenance.

3. Late Fees - PMs who keep the late fees have an incentive to collect that rent ASAP, because they’re getting paid as soon as they collect.

4. Pet Fees - PMs who keep the pet fees are able to provide owners a pet damage guarantee. Sending “pet rent” to an owner is never providing as much protection ot that owner as a real pet damage guarantee. For example, I provide owners a $3,000 Pet Damage Guarantee at my PM company, but if an owner was receiving say $25/mo in pet rent over the course of an average 36 month tenancy, they’re only getting $900 total. If the pet causes damage, the owner is far better off with the guarantee than the pet rent.

I could keep going with just about any fees that we charge. It simply isn’t the case that ancillary revenue creates misaligned incentive structures. In fact, it does the opposite more often than not.

I’m a philosophy nerd, so I certainly embrace Mark’s desire to engage in thought experiments. We can only suss out new ideas and problems existing in our current structures if we engage in these sorts of thought exercises to challenge our own preconceptions. So I think this was an excellent session (even though it left quite a few people in the audience pretty frustrated), and I’m glad the discussion took place. I just think Peter walked away with a pretty clear “win” in the debate, and the thought exercise simply reaffirms our prior policies and procedures. But every now and then, examining things and getting a reaffirmation is worthwhile.

What I’m Interested in Today & Tomorrow

• Not the opening keynote. NEVER the opening keynote. These things are worthless and need to die an ugly death, especially at a conference like Broker/Owner where the focus is on business owners and key decision makers. We need actionable content. Not motivational fluff. Nobody is paying thousands of dollars to go to a conference just for a pep talk. But on the bright side, this means we get to sleep in.

• AI - Wolfgang Croskey, Kyle Triplett, and Stacy Holden will be talking about how implementing AI solutions can allow our teams to focus more on direct customer-facing interactions rather than rote busy-work that can be automated. AI is one of the key topics in our industry at this point, so this is a must-see session.

• Vendor Trade Show - NARPM royally screwed up the schedule this year. Not opening the trade show until the afternoon on the second day of the conference is not only disrespectful to the vendors who literally pay for our conference, it also isn’t serving the best interests of the PMs attending. We want to talk to the vendors. Open the trade show ASAP, and if you want a day without the trade show, make it the final day when some people are starting to filter out and the crowd thins anyway. Aaaaanyway, the trade show opens this afternoon, and I’m very much looking forward to talking to some new vendors and some of my old favorites.

• The Real Estate Crystal Ball - Justin Anderson is giving this talk, and having already had him at the Southern States Conference last year in Florida, I can say that he’ll probably have some fantastic content discussing where the market is likely heading over the next few years.

• Second Nature Party & Appfolio Party - If you’re attending the conference as you read this, don’t forget the parties tonight! Obviously Second Nature always throws a banger, but Appfolio is also having a slightly more low-key event, so whether you love a raucous party or a more relaxed networking gathering, there’s something for you tonight! Don’t forget that the networking after the official sessions is frequently even more valuable than the conference content itself.

• Rob Hahn - You know I frequently recommend his own Substack newsletter, so I’m a fan (even though we definitely disagree on a fair amount). He’ll be doing the final presentation of the conference tomorrow, and if you were thinking of bailing out early, this should be enough to change your mind. Rob always has great insights on the industry and looking ahead to what’s coming in the near future.

Have a great rest of the conference, and I’ll be back on Friday with more takeaways from the rest of the week!