One of the most challenging responsibilities of a board of director of a condo association is hiring the right condo association management company. Ideally you are want to hire the best condo management company for your association at the lowest possible price. In this article, I will discuss the pros and cons of hiring a low cost condo management company.
If you live in a community association, the board meeting that tends to attract the greatest number of homeowners (second only to a board meeting to approve a special assessment) is the budget approval meeting. Why is that? It is because at these meetings, the board usually plans on approving a budget that includes higher assessments (again) and most homeowners don’t want to keep paying higher assessments with no end in sight.
As a result, board members are always looking for ways to keep costs the same or lower them. And the easiest way to keep costs the same or lower costs is to shop for a low(er)-cost community management company. One of the many reasons is that the cost of management services is typically one of the larger budgeted line items for associations that have professional management. And besides, everybody loves to save money especially volunteers that serve as board of directors for community associations such as a condo, townhome or HOA community.
The lure of hiring a low-cost (or lowest cost) management services company is so powerful that board members often lose sight of how to properly vet and hire a new management company by not determining the proper criteria for the new management company.
Although utilizing the criteria to selecting a new management company based on cost seems simple and is in some ways a traditional method in hiring vendors, it is a recipe for trouble. In fact, board members, in certain cases, simply discard bids that are higher in cost simply because they are a higher number and above the budgeted line item for management services rather than taking the time to understand the reason for the higher cost.
The biggest problem with this methodology is that there are side effects to hiring a low-cost management services company. Let’s look at some of the many risks involved in hiring a low-cost management company:
1. If it is too good to be true, it is too good to be true. The low-cost provider usually offers a monthly fee that is a nominal fee and is usually well under the true cost involved to properly provide adequate management services. Even for the smallest condo associations such as 10 units and under, there is a minimum time requirement. The items necessary to address include but are not limited to providing all the services for the association to comply with the governing documents, state laws, administrative requirements such as board meeting management as well as maintenance, repair resolution, project oversight and after hours emergencies.
Based on my time requirement calculations over the last 20 years, the minimum amount of time involved to PROFESSIONALLY manage a condo association of 10 units and under is at least 10 hours a month on average. For larger associations, the minimum amount of time required increases relative to the size of the association.
2. Secret source of additional income. There must be another source of income from the association for the low-cost provider of the provider is to provide the proper number of hours of support. Based on my statements in part #1, a low-cost provider cannot make a profit from the association without generating additional revenues. If the low-cost provider says that the low monthly fee is the only income from the association, then you should not believe it. There must be a catch. What are their hidden fees? How are they making additional income? Are they making money off the large-scale projects in an unscrupulous way?
3. Minimum hourly wages for the management company employees? What is the hourly billing rate for the low-cost provider? If you take the number of hours that the management company needs to spend to properly manage the association and you divide the monthly fee by the number of hours required a month, you get the hourly billing rate. Calculate the number and then ask yourself, does this hourly rate number make sense to you? How much do you think the company pays their employees per hour? Remember, this is a professional services company and not a fast food company.
4. You get what you pay for. The low-cost provider will provide exactly what you are paying for. And that is very little. When you hire a management company, you want the management company to respond appropriately and provide expert advice. If you are hiring a low-cost provider, do you tell yourself that you are paying little, so you expect to get a low amount of service?
You cannot expect to receive a high amount of service by paying a low cost. For example, you can’t expect a Nissan Sentra to perform like a Mercedes Benz. Just because you can’t see the management services product, doesn’t mean that there are not major differences in service levels between the various price points. Shopping for a management company is however like shopping for a car. There are many choices and the cost depends on your value and performance criteria.
5. Slow, poor or no response. The low-cost management company will respond slowly and/or will respond poorly or not respond at all to requests. The low-cost provider needs to keep costs LOW. So, they typically load up their property managers with unrealistic amounts of associations. This means that the property manager is going to pay very little attention to quality as the focus is speed. Just getting things done in the quickest way possible is the rule of law in the mind of the property manager. This translates to very little financial oversight for the association. Bills are paid without question; contracts are signed without oversight; projects are signed off without the creation or a resolution of a punch list.
6. Pay to play vendor management scheme. Is the provider charging fees to their vendors in order to get jobs? This might seem okay, but the problem is that the association is suffering by potentially not having access to the right vendors. For example, if the association needs a project completed that is a smaller tuckpointing job, the management company should utilize the best vendor for the job who will provide the best value. In the pay to play scenario, the management company is only going to work with vendors that have paid them money to get jobs. And what if their tuckpointing vendors on their list are only interested in large scale jobs? The association is going to get large scale bids for a small-scale job. This is great for the management company and vendors but very bad for the association.
7. High turnover of property managers. You can expect to work with a new property manager every 6 months when hiring a low-cost provider. This is because as I stated previously the manager will get a large amount of properties assigned to him/her since the company needs to keep costs low. This results in high frustration by the board members and homeowners since they will need to start all over again every six months with the new manager.
8. Large time requirements by board members. You can certainly expect to spend large amounts of time managing the management company when you hire a low-cost provider. That is because they are going to do what is easiest for them and not what is easiest for the board. This is the opposite of what should be the outcome of hiring a management company. Ideally when hiring the right company, the board members and homeowners should experience an improved community living experience.
Capital projects are handled in a professional and cost-effective manner, minor Issues are quickly resolved, administrative items are proactively addressed, board meetings are effective while relationships between board members, homeowners and management company are thriving. You should expect to spend at least 50% more time serving on the board with a low-cost management company versus a high-quality community association management firm.
9. Overpaying. One of the largest negative side effects of hiring a low-cost provider is not getting proper financial oversight. This means overpaying for contract services such as landscaping, snow removal and insurance. It also means for example paying for the plumber to come out and provide the same service over and over unnecessarily because there was no attention to detail by the property manager. This is because the property manager is too busy just trying to stay afloat and is not drown form the overwhelming number of tasks and issues that is confronting the manager. In each case, the root cause was never addressed but the symptom was addressed. These are expenses that would be avoided by a quality management company.
10. High management company turnover. In the end, the board will get fed up and switch management companies since they will become frustrated with the poor level of service. The problem is that they have a line item budget for management services from the last low-cost provider. This usually means that they are going to look for another management company that offers the same unrealistic low price. This is a vicious cycle that never ends in some cases.
The cycle goes something like this: board hires a low-cost company, management company switches property manager a few times, board gets fed up and, in the meantime, existing board members are tired of dealing with all the headaches of working with a low-cost provider and new board members are voted onto the board. New board fires old management company and hires another low-cost provider to keep the expense budget the same. Rinse and repeat.
Some age-old adages are timeless and are true today more than every before. I guess you get what you pay for even when it comes to community management services.