Acquisition of property management companies: financing agreements, finding deals and integrating processes | Half past four (2023)

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Mike Kalis is CEO and President of Marketplace Homes. He joined us on the Property Management Show podcast to talk about his growth plans and the challenges of acquiring property management companies.

Marketplace Houses - 19 markets and 3,100 doors

Marketplace Homes was born 11 years ago in metropolitan Detroit during the housing market crash. The idea was to help people move from their existing home to a new one. Back then, the only way to do it successfully was to rent the existing property.

The company grew quickly and they were featured in Inc. four years in a row. 500 list as one of the fastest growing companies to watch. Marketplace Homes has grown to 19 markets and currently manages 3,100 doors. They add 150 to 200 doors per month.

Marketplace Homes' goal is to give the property management industry the multiples it deserves. They want to manage 30,000 homes and be the first public property management company in the world.

As a company, Marketplace Homes has made many acquisitions and they want to do more.

Some people become property managers by mistake just like othersoccasional owners. The market is pretty hot right now and real estate agents who used to make money selling houses full time are no longer so enamored with the property management business. They sell out with this company, so Marketplace Homes targets the wallets of people who are ready to retire or look for other opportunities.

Marketplace Homes plans to reach 30,000 homes in five years. They currently employ 85 people, so they are ready and staffed to handle this growth.

The reverse of castle development and management

The previous podcast was about the lessons learned from its completionCastle property managementand Mike's presence in the Detroit market, it was hard not to talk about what went wrong with Castle. Like Alex, Mike thinks they've run out of money. He also believes that people should come first and technology second.

Great people will fix crappy processes and inefficient technology. However, great technology will not fix useless people. The Castle team was excellent. But in a service-oriented industry, it's very difficult to focus on technology and succeed.

The challenges of acquiring property management companies

Acquisition of property management companiescomes with some challenges. Three of them are pretty obvious and hard to overcome. They are:

  • Financing the market.
  • Find companies that want to be bought.
  • Integrating the companies into your own business activities.

How do companies like Marketplace Homes finance their acquisitions?

It's a lot like buying real estate. Pay in cash or settle for installments. Cash can come in through investor money, operating money, or other types of income. If you're trying to close a lot of deals and have the cash flow to back them up, consider an SBA loan. Otherwise, you can rely on outside investors, bank loans and your own funds.

The other option is to buy a company on terms. You know that each door you buy will bring in a certain amount of dollars each month. In a buyout, you take a percentage of that income and return the rest to the owner.

It depends on what the sellers want and what the buyers agree to. Some want a big paycheck so they can go out and explore different opportunities. Others like to receive a monthly payment from these properties.

The key is good cooperation. Sellers need to be sure they will get their payment if the deal is terms and not cash. To offset this risk, sellers often earn two or three times more than they would in a cash deal. Otherwise you have to trust the buyers. If you're worried about not getting paid, you probably shouldn't take the deal.

Offers are not closed if there is a lack of confidence. Face-to-face meetings can make a big difference. Meeting each other and getting a sense of what each company is about can inspire a better business relationship. Physical connections are useful when acquiring a business. So is the exit strategy. If the seller doesn't have a clear exit strategy, chances are the deal won't close.

So cash, loan or terms are the best ways to finance a buyout. Or a combination of all these things. And meet someone face-to-face when you buy or sell. Be honest and talk about exit strategies.

Why Sell a Property Management Company: Responding to Industry Changes

Property managers who were once brokers know that there is now more money to be made on the brokerage side, which is a good reason to sell their business. The industry has shifted. There aren't that many casual owners right now. So if you build your business from these customers, you have a shrinking portfolio.

The property management industry is in a state of suspension. Property managers do well in a down market like the one in 2011 and 2012. Property managers also do quite well in a hot market. Just look at 2015 and 2016.

Currently, the industry is in between cycles. The next few years are likely to be quiet, especially when it comes to occasional owners. The accidental owner customer has been reduced by about 70 percent. This will continue to decrease as the investor client emerges.

There is also a geographical difference. In Atlanta, it's easy for investors to put money into real estate. It is reasonable. But in New Jersey it's hard to get the same results. Investors are valued in markets such as San Francisco. So depending on where your business is, the next few years will make all the difference if you can grow.

Take a look at your portfolio. Is it made up of investors who are still acquiring real estate or is it made up of casual owners? Investors will increase. Those profits will happen, and hopefully those profits will go to other properties.

Property management is a countercyclical business. This may be the biggest real estate bull run in 100 years. So if you choose to be a property manager rather than a broker during this time, you better be the best property manager in your market. You can survive, even in a competitive market, if you are good at what you do.

But if you're a mom and pop shop that manages 70 homes, you might need to think about whether you're the best in your market. With the trend of the market as it is; if you are not currently the absolute dominant in your market, it may not be a mistake to sell while there is still some value in your business. This is Marketplace Homes' thought process.

How do companies like Marketplace Homes find businesses to buy?

To grow through an acquisition, you need to know where to find the smaller companies with a portfolio of 70 to 100 units with people who are burned out. You also need to find larger companies that are ready to transition. Sometimes it's as simple as picking up the phone.

An acquisitions team can provide support by contacting and maintaining contact with companies that may inquire years before they are actually ready to sell. This is a longer sales cycle.

Networking is an important part of the acquisition process. It is critical to attend events like the PM Grow Summit and NARPM conferences. Be open and willing to speak frankly. It's not that hard to get lists of property managers from organizations like NARPM. Emailing and seeking constant contact is the best way to acquire these qualities.

It's hard to think about quitting or quitting when you're building a business. If you have an end goal in mind as you get older, that's great. It's about building an institution, not an individual business. It's not about you and it's not even about your business. It's about knowing how to build something of real value. You create something that produces financial results. Marketplace Homes wants to take what you built to the next level.

How do companies like Marketplace Homes integrate the companies they buy?

Once the acquisition is found and funded, it's time to integrate the new company into the established company. This can be difficult.

The goal is that no owner is lost. Marketplace Homes has an on-boarding team where specific people are assigned to the portfolio by department. There's also a solutions team talking to homeowners about working together. Each client acquired will be contacted. They introduce themselves and explain what's going on.

The exact interest rate structure is maintained. You could argue that this is pointless and may even cost money, but it can be an important way to build trust and maintain stability.

Otherwise, most of the procedures may remain the same. Some operational things may change, such as contact information for emergency repairs. These are the things that owners are guided through step by step. There is also a team that communicates with tenants. Similar to the onboarding process with landlords, things are explained to tenants so they know what is changing and what isn't.

Branding depends on the acquired company.

It is common practice for Marketplace Homes to include all acquired companies under their umbrella. It makes the most sense and keeps the business simple. The exception is when there is an equity brand. And that may change in the future. Staying open and flexible is a good way to succeed.

It wouldn't be a Property Management Show podcast if Alex didn't ask his guest about the cost of customer acquisition. For Mike and Marketplace Homes, it changes for every funnel and every market. They are generally between $400 and $700.

The best way to reach Mike Kalis is And if you have questions about property management marketing, you can always askcontact Fourandhalf.

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