Do your property management fees impact your agency growth? A Growth Case Study

Growing a property management agency is a critical area for Principals to conquer. Whether it’s agency fees, revenue structure, team structure, or rent roll, there are many elements to consider and not just one cookie-cutter method for success.

This is the second post in our growth series (read the first post here) and we’ve created a small case study which explores two of the most significant growth questions: How much should an agency charge for management fees? And do you need to lower your fees to compete?

In this study, we will utilise a fresh analysis from the property management business data platform Ailo.

Percentage vs Fixed Dollar

We began our research by reviewing each state’s fees and seeing if there was any correlation around Australia as a whole. To do this we created a correlation chart which plotted average management fee against average weekly rent.

It’s worth noting that each state historically has had different fee cards. In WA and QLD the fees are generally higher, while VIC and NSW have rates that are typically lower. This is because each state has a different history of fee regulation and so on. Many have argued that the differences are just legacy issues from those times, but they are still prevalent today.

As per the above, it was no surprise that we found the clear delineation of data in the below table.

Next, we ranked all the postcodes from highest fees to lowest fees on a line graph.

 

You can see pretty clearly that there is a smooth spread of fees, starting from above 9% in some postcodes down to just over 4% in others.

We then added in two lines which show the upper and lower limits for the bulk of businesses. This spread shows that there is a wide range even within markets. Most markets have a range of around 1.5 percentage points.

 

On the surface, it appeared as if some markets are just better than others. Refuting this, we dug deeper for a different explanation.

We decided to bypass the discussion around fees as a percentage of rent and instead looked at fees as a dollar amount. What we calculated is the lower line in green.

 

 

The result stunned us. We found that when applying fees via dollar term, most geographic differences disappear. Most markets actually have an underlying fee of around $30 per week.

In the worst performing postcodes that fee declines to the low $20s, but it is a relatively small set of markets.

 

The vast majority of agencies fit within a much narrower range of fees, falling within $5 per week of the average.

It turns out that fees as a percent are higher in low rent areas, and fees as a percent are low in high rent areas, both combined cancel each other out.

Ultimately what this means is that the industry has already adopted a fixed dollar fee card, we just pretend that we haven’t.

The remarkable thing is that the underlying dollar fee is so consistent across areas, and how little variation there is in each market.

So, that is the macro picture on fees.

 

You’re probably wondering, how do these costs impact growth?

Looking at the numbers across the industry, an agency will add around 10 new managements each month.

That is pretty consistent across geographies. And like most averages, it isn’t that useful.

To get a better picture of growth, we wanted to segment agencies based on their growth profiles and answer two questions: What do high growth agencies do differently from low growth agencies? And, how do we even define high and low growth agencies?

To answer these questions, we compiled agency data and reviewed their growth rates over the course of two years.

 

We then segmented these agencies into four groups:

  • Stars – (Green) agencies that had a high growth rate in both years
  • Low Growth – (Red) agencies who had a low growth rate in both years
  • Fallers – (Orange) agencies that had high growth in the first year but low growth in the second
  • Risers – (Yellow) Low growth in the first year and high growth in the second

Following this, we looked at each of these four categories and tried to work out what makes them tick.

 

The first thing we evaluated was fees. How low do your fees have to be to be a star?

We crunched the data and found the below:

To our amazement, it turns out that there is absolutely no difference in the fee profile charged in each of the four categories.

The data proves that an agency’s fee card does not impact its growth rate, so long as it is within the window that the market will support. This means, lowering fees to match a low fee competitor will not impact your growth rate. Alternatively, Raising your fees, so long as you stay within the band, will also not affect your growth rate.

 

It may sound ridiculous, maybe even against what you believe you experience, but for every time that we calculated the data our results painted the same picture.

 

So, if it’s not low fees that makes a star, what does?

To actually understand what makes a star, we decided to take a closer look and evaluate single agencies against one another.

In this study, we placed two agencies under review let’s call them Agency 1 and 2. We’ve hidden their property count, but it’s important to note that both of their rent rolls are well over 1,000 properties.

Note: We currently work with both of these agencies and have a clear picture into their data and how they operate. If you are interested in a review of your agency, please reach out to us as we are happy to work with those who want to be the best they can be.

Over the past five years, both agencies have done a phenomenal job growing their properties under management.

But that number is a facade.

When we took a deeper look we found that Agency 1 has been growing with low fee properties, which is dragging down the average fees of the whole agency. Agency 2 is doing the opposite.

 

If you look at the raw dollar income of growth, the two agencies are roughly the same.

 

We then looked at percent revenue increase, the first agency doubled in size (which is impressive), while the second one almost quadrupled!

 

There is a lot more to growth than just the facade of properties under management. Growing revenue is a related by a different game with a lot more variables. We wish we could cover all of what we have learned, but that is saved for our LPMA members in the Foundry and future blogs.

There’s one thing we’d point out quickly. Agency 1 had a good growth run until the BDM left, around here. The impact was immediate. 

This just goes to show that raw numbers can sometimes be misleading.

 

To sum it all up, what have we seen in the data when it comes to fees and growth?

First, there is no real relationship between an agency’s growth rate and its fee card. Low fee agencies do not grow more than high fee agencies. If you choose to be a low fee office, that is your choice. But don’t blame your difficulties in growing your business on fees.

Second, the lack of clear pricing effects is proof that we are operating within a lemons market. The only effective way to grow in a lemons market is to break the underlying dynamics, and that involves building out credible trust mechanisms in your business. That will involve a strong growth team, better marketing and above all a better culture in your business.

Last, our perception of our fee cards is not connected to reality. Our industry has moved to a fixed dollar fee model by stealth, and we are the last ones to accept it.

 

If this study was helpful feel free to share with a friend or comment below and let us know your thoughts.

 

Interested in dispelling myths and discovering the best way to grow your business? Get access to the Foundry and LPMA’s one-on-one affiliates services today and make your business extraordinary.

 

 

 

 

 

 

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