You’ve probably heard of the 80/20 Rule (FUN FACT – also called the Pareto Principle, after the Italian sociologist and economist Vilfredo Pareto, who wrote about it in 1906), which states that in almost any situation you can name, 80% of the consequences come from 20% of the causes. For example, you tend to wear 20% of your wardrobe 80% of the time, or a little closer to home for PM’s, 80% of a company’s sales are generated by 20% of its clients.
And, most likely, 80% of your everyday headaches are caused by 20% of your property portfolio. What if we told you that could be fixed? It can, and we can help.
Your Options
You have a couple of options. One is to fire your bottom 20%. The problem is that you get nothing in return and that 20% might be what makes you “profitable”. Another option is to identify and SELL them for an instant monetary injection, more available time for your other clients, and maybe even to reinvest to take your business to the next level.
First, you must be able to define the “bottom” 20% of your portfolio. Many factors could make them ones you’d rather not deal with: difficult owners, difficult tenants, properties that aren’t profitable, aren’t geographically favorable, or don’t fit into your core property profile.
Difficult owners make more work for you and your staff. They might be micromanagers or penny-pinchers. They might take up too much of your time for the money you’re making from their properties. Similarly, difficult tenants might also take up time with petty complaints, causing damage to units, breaking rules, or paying rent routinely late. Not all PM’s want to handle student properties, for instance, but they can find their way into your portfolio.
You might sort your properties by revenue and analyze where you’re spending your resources. Are you spending too much time, energy, and staff hours on unprofitable outlier properties? You should be utilizing resources where your return is optimal. But it’s easy to get so busy that you haven’t really thought about it.
You may also be spending time and energy on properties that don’t fit your expertise, core location, type of property, or vision for the future. You can define your “bottom” in any way that makes sense, but it’s important that you define it and track it as you operate and direct your business.
Sell the bottom 20%?
Although they might not be the best fit for you, your defined 20% still has value. They may be very attractive to another company that has a slightly different focus or someone just getting into the business. To put it in a slightly rough and recognized way, it’s true that one man’s (or woman’s) trash can be another’s treasure.
However you define it: by units, revenue, owner mix, or labor costs, selling off your “bottom” 20% may make a big difference in your company. You may need less staff, or the staff you retain may become more efficient since they’re working on what matters most. It can really grow your bottom line.
It’s almost a guarantee that someone is interested in buying your identified properties, but don’t forget that your client mix matters too. The value of an appropriate “properties per owner” ratio is an important thing to keep in mind. If you have just one owner with 20 properties, that’s a significant risk to a buyer because that one owner could represent a big portion of the management contracts they just purchased. It’s much better if this package of properties has multiple owners, and a PPO between 2-5 units. This way, if one or more decide not to do business with the new owner, it’s not devastating.
Another bonus of selling the bottom 20% of your portfolio is that you may find more buyers for a smaller group of properties. The price will be affordable for smaller companies trying to grow or individuals who want to get into the business. That’s good news for the seller because it drives the price up and can result in getting better terms.
The only question left is what to do with the proceeds. Reinvest in your company or put them in your pocket? Only you can answer that question, but it sure would be nice to cash that check and have fewer headaches, wouldn’t it?
If I can help speak with you about analyzing your bottom 20% and how to determine their worth, let us know. I look forward to hearing from you.
About the author: Patrick Hurley
He’s a Tallahassee native with almost 20 years of experience in the property management, real estate, construction, and business brokerage worlds. Having owned, operated, bought, and sold property management companies in the past, Hurley is uniquely positioned to help others in the industry find their exit. He’s been described as dependable, highly efficient, effective, and hard-working with a no-nonsense attitude. He takes pride in his professionalism and attention to detail and focuses on his client’s desired outcome.
Patrick still meets with every client and passes along as much knowledge as possible. He frequently gives back to the property management community through professional speaking and value-packed article content. When he’s not helping others with a business transition, you can find him adventure-seeking with his young family.