Sunday, November 22, 2009

Real Estate Review

My colleague is looking for a real estate agent to manage her house after downsizing to an apartment, choosing to keep the house as an investment.

She is facing a conundrum I have faced before. How does one go about comparing the performance of property managers before committing to a management contract?

Can the market for property management services be competitive without reasonable access to information?

I have written before about the lack competitiveness amongst real estate sales agents. A similar trend can be observed in the property management area of the business. I have never heard a property manager claim they can provide better services for a lower price. They all appear to have set a fee around 8.5% of the rental price, with $5.50 ($5 plus GST). Some divide their fee as 5% management, 3.5% rent collection, but in the end, I get the feeling there is some serious collusion, whether intentional or not.

One major piece of evidence for the lack of price competition is the fact that management fees have not declined in a period where rent increases have dramatically outpaced the costs of doing business. Surely in a competitive market one property management agency in an area would reduce their fee to 6% and attract a much larger market share (assuming they all provide the same level of service). This doesn’t happen.

Assuming there is no price competition, is there at least some competition for providing value – same price, better service. Well actually no. And the reason is that the quality of service cannot be measured, nor can reasonable impressions be gathered prior to entering into a management contract. How do I know if the property manager has any knowledge of common maintenance issues? How do I know if they have good relationships with tradesmen, and that repairs are undertaken promptly and at a reasonable price? How do I know how they treat tenant complaints and requests?

To summarise,

1. There is no accessible objective information about the quality of the service provided.

2. It is time consuming to change agents, and you risk getting one equally poor or perhaps even worse (as you don’t know whether they are good either).

3. Landlords generally get very little feedback from the tenants as to how the agent is performing from their perspective.

4. There are barriers to entry. To start an agency you need a rental role, to have something to offer to tenants. Starting from scratch and attracting landlords to shift to your agency may be quite risky.

Given I believe property management agents are not acting competitively, and therefore we are all losing out, I should really offer some suggestions to improve the situation.

My first and only suggestion is some kind of survey system administered by the State, local government or even the State industry association (such as the REIQ) that gets all landlords and tenants to rank the performance of the agent in a number of areas each year. It might consume about 1 minute of time for each landlord and each tenant annually and could be compulsory is agents want to be REIQ members.

The results of this survey can be published against the property manager’s schedule of fees on a simple website – the Real Estate Review. I would think this might spur one some better performance in this industry.

Any other ideas?

1 comment:

  1. The problem Cam, IMHO, is that rental returns only form a very small fraction of the income of real estate agents, as opposed to the comission they earn from sales.

    Hence there is minimumal incentive for them to improve their level of service.

    Add to this that real estate agents usually give their singularly most incompetent employees rental management duties and you have a perfect recipie for mediocrity...