Property Performance Improvement
Background
Not all properties are performing as was promised in the exposé. There is a wide variety of reasons why this could be the case.
Some examples:
- Incorrect information at the purchase (most frequent occurrence);
- Pressure pre-sale renting with incentives and collapsing results a short period after sale;
- Non-performing property management.
The result of these factors are yield erosion and a deterioration of the financial position.
It will be part of the review to determine the reason or most likely combination of reasons for the failure of the property investment to deliver the planned results.
Our Services
We apply various approaches to get to the bottom of the issues of non-performance. Where applicable we check for claim opportunities against the vendor with a forensic approach.
At the beginning of a Performance Improvement Review stands a Property Health Check. We apply our proven check lists and deliver an Opportunities Report that covers areas like rent level, cost management, vacancy management, maintenance etc.. Based on the opportunities and their respective value potential on one side and the estimated time to achieve first results, "Quick Wins", we then agree an action plan to achieve
Property Performance Improvement.
As a result of many requests for such services we are offering small packages of specific
Property Health Check Services
Rent level benchmark
The rent level benchmark compares the actual contract rent to the rent table and market rent detailed down to the size categories and prevailing standard of the majority of the units. In a second step the contract rent is compared to the actual rent payments. Major shortcomings can then be investigated and tracked down to the underlying problem, e.g. problems in the building fabric, tenant mix or plain bad management, to mention just a few possibilities.
Utilities charges benchmark
Utilities charges (“Betriebskosten”) are named “second rent” for a good reason. As a property owner you can re-claim these cost items from your tenants but in the end the sum of the rent plus utilities charges plus heating cost determine what your tenants can afford. The more they pay for utilities and heating the smaller is their budget for the actual rent that ends up in your account. On top of this argument you have to cover this cost for any vacancy period or non-payment of a tenant until you might be able to claim it in court. So the popular argument used by many property managers that the level of the utilities charges is not your problem is simply not true.
“Ready for Selling” audit
When we check those properties on behalf of potential buyers, time and again we experience poor preparation causing price reductions on properties brought to market. The shortcomings here are various and begin at the actual state of the property through to the state of the tenant files and the financial documentation of rent collection and expenses. A well-organized property management should be ready to present all necessary documents for a sale at any time, not only for a sale but also for the information needs of the owner. Where we support the search and contracting of a property management we always make sure that this is part of the contract obligations.
Property Management Case Studies
In Germany there are no qualifications or permits required to call yourself "Property Manager". There are actually Property Management businesses literally operated from the kitchen table at home. But even going with ISO certified Property Management Companies is no guarantee for professional management and desired outcome of the investment. In the course of our consultancy activities we have encountered many "interesting" situations some of which we are sharing with you in these Case Studies. If you feel you might be in a similar situation or have other doubts about your Property Management feel free to contact us using our feedback facility or just give us a call.
Property Management Case Study 1
Regular rent increases forgotten!
Ray, a UK based investor bought a residential property in Berlin about 8 years ago.
The building is a former social housing project and there are still some limitations on what you can do with the rent. The advantage is that the annual increase is determined by regulations and not subject to the Berlin rent table. The tenant owes the higher rent from the date set in the regulations all you have to do is tell them what the new rent is. Sounds easy enough!
But here is what happened, even though the previous Property Management Company (PMC) continued to manage this property, over time more and more apartments dropped out of the process and quite a few apartments had never had a rent increase since the Ray's purchase of the building. Damage over 8 years for 20 apartments close to 50,000 € and we have not finished our work yet.
Because there were some rent increases questions were not asked for a while. As the gap between expectation and reality grew inquiries were made but they were stonewalled and brushed off: "That's the market situation in Berlin". After some frustration about the cost management side as well we were brought in and uncovered a costly combination of inexperience, incompetence and stubbornness. Communication problems due to language capabilities amplified the issues.
Property Management Case Study 2
Trouble with re-renting process.
Brendan, an Irish investor purchased an apartment block with 14 apartments 6 years ago.
He is earning some return on the investment but not quite fulfilling expectations. We did a rent level audit and the property is where it should be expected according to the table of monthly contract rents. One apartment is currently vacant and we asked to inspect it and here came the first surprise: "We don't know where the keys are"! You don't know what?
So we started digging and found out that the entire renting process is flawed in this Property Management Company. We found that apartments were vacant for up to 14 months. In one case nobody bothered to decide on the renovations needed and to discuss it with Brendan. They then went ahead and spent 4,500 € on a 65 m² apartment without even consulting him. Calculated damage without overspend on the renovation 9,500 € and this process repeated itself on almost every re-rental of an apartment, ca. one per year with an average vacancy of 6 months. Total ca. 30,000 €.
Brendan had stayed with the property manager used by the previous owner – we have now helped him find a better fit.
Property Management Case Study 3
Property Manager with criminal energy.
Fergus, an Investor from Dublin had an apartment block with 18 apartments.
Fergus was hit really hard. He had agreed that the property agent who sold the building to him should do the property management. The agent had a management company registered in Mallorca, Spain (how could he not hear the alarm bells? it is almost impossible to file a case with the courts there, every document has to be translated.) The criminal energy was there at the set-up and sure enough problems followed: The Property Manager rented to his friends at very favourable conditions but worst of all he embezzled all the securities the tenants had paid.
Fergus was frustrated and wanted to sell, so we were called in to assess the situation and calculate how much he would have to pay from his sales price to refill the securities, including interest for the duration of the rental contracts. The damage from this alone was 16,200 €. On top of this the annual rent was about 22,000 below the possible rent level which at the sale meant a capital damage of 440.000 at a multiplier of 20.
Property Management Case Study 4
No documentation of the building and investments made.
Adam from London owned an apartment block with 38 apartments.
He had renovated some apartments and the heating system. He decided that he wanted to take advantage of the market situation and the fact that his financing was due for renewal. When the fist prospective buyers came he was in for a surprise: Wanting to see any documentation of the works done and guarantee periods the Property Management Company (PMC) could not deliver anything. The property files and even the tenant files were incomplete and in a poor state.
There were rent reductions in some apartments which were not challenged by the PMC and the rent collected was significantly lower than the table of contracts showed. Naturally the buyers took advantage of this situation and negotiated the price down. So Adam had the choice of accepting a reduced price or postponing the sale to have the property sorted out and try again. The second choice also meant setting up new financing with possible cost for early repayment at the sale.
Adam sold for what we estimated to be a reduction of 200,000 € directly caused by mismanagement. We got a pat on the shoulder because in this case we were instructed by the buyer.
For translations of the German terminology an investor will inevitably come across in this process please refer to our Glossary of German Property terms and abbreviations on this website.