Here’s a tricky situation…
You have invested in an apartment syndication that was supposed to make money hand over fist. The operators promised you an 8% preferred return quarterly on your $100,000 investment. Things were going well for the first few quarters, but then you noticed that your quarterly distribution became dismal… Nothing like what was “promised” to you in the shiny brochure.
You ask the operator why the returns are dropping off. The answer you are given? Higher vacancy.
As an equity investor, you want to know for yourself WHY the property keeps going with a high percentage of empty units especially when they are move-in ready.
There can be many, many variables, but this situation points to possibly poor property management, lack of a marketing plan, failure to conduct periodic market research, or even just outright neglect. Let’s focus on the property management angle in this article and what you can do about it… Secret Shopping.
Many times, this activity can help uncover some detrimental practices that need to be addressed. By arming yourself with some basic facts, you can confront the syndicator and ask him to correct the problems you see and learn about. This is sort of a first step that you can take before getting all the other investors involved. Secret shopping is all about being inconspicuous and acting the part of a potential resident or renter. You will be a secret agent of sorts. Your goal is to get in and get back out without calling attention to yourself.
Caution: This process can be adversarial, especially in the final confrontation step. After all, you are in effect back-seat driving. Best to use facts rather than emotion, as well as tact and good manners. So how do you get the facts? Read on.
If you are lucky enough to live fairly close to your investment, you should definitely go to the apartment complex yourself. Drive into the parking lot. Make a note if something looks out of place or uninviting. Ask questions like these:
- Does the state of the outside of the property look like the photos that the syndicator has shared with you and the other investors?
- Are there any potholes in the parking lot and driveways?
- How does the landscaping look? Is everything being watered properly?
- Are the exteriors of the buildings in good shape? Is there peeling paint, broken rain gutters, roof tiles missing (if you can see them), warping and loose siding?
- Are there any safety hazards and/or piles of trash?
There are many more items that could be amiss. Take photos of what you see. These will come in handy later in this process.
Websites and Marketing
What websites are being used to market the property? Some of the most prevalent websites used by property managers are Apartments.com, HotPads, Trulia, ApartmentFinder, and Zillow. It is likely (and hopeful) that the property syndication that you have invested with markets their vacancies with one of these heavy hitting listing services. But although these are some of the go-to websites, if your investment is not using these, it doesn’t mean that the property management company is neglectful.
Many apartment communities have websites that are truly magnetic in that they have a lot of web traffic and can afford to not have to pay for listings on the above websites. However, if you’re currently investigating high vacancies, this might not be the case.
Do the photos on the listing services look inviting? Sometimes, the photos of apartments can be very humdrum or even dreary. Apartment seekers want as much for their money as they can possibly get. They want to live somewhere where they feel special or pampered. Who wants to live in a hole in the wall… unless the price is unbelievable low?
Pictures are definitely worth a thousand words here, and if they are anything less than stellar (or even average), people are just not going to want to investigate further by viewing in person, especially when they can find a great looking home just around the corner for a good price.
As you meet or communicate with the leasing agents, there are several things that you should take notes on, so that if there is a problem, you can let the operator know if you actually do need to confront him.
Are the leasing agents prompt? Do they answer your emails or phone you back in a reasonable amount of time? I know of a syndicator who mandates that the property managers and leasing agents get back to potential renters within a few minutes no matter what time of day or night. We are in a fast-paced world, and potential residents are in a hurry to find a place to live, so a quick and nimble leasing agent is key to a property’s success.
Many times, a bad leasing agent could be the only problem you find throughout this whole process. This unfortunately has an outsized effect on how well a property can protect against vacancy.
Are the leasing agents nice? Every once in a while, companies hire people who are abrasive, lazy, rude, non-empathetic, and arrogant. Property management is no exception. Sometimes a person inhabits a job that they are not really suited for. While this is no excuse for the property management company, they do have the obligation to ferret out these types of problems.
A good leasing agent will be cordial as well as motivated to get apartments leased. They will try to establish a rapport with potential renters in order to make them feel welcomed.
Do the leasing agents follow through? An exemplary property management company will only hire conscientious individuals and those who follow industry best practices. Systems should be in place such that other members of the leasing team can pick up where the first leasing agent left off. If you sent a late-night email to the leasing team, and your question is answered immediately, does another person on the team follow up the next morning with a phone call or email asking to schedule a viewing?
Ideally, a certain number of viewings lead to a rental contract. A good property management company knows this and will do their best to follow up on every lead.
Voicing Your Concerns
This is your investment, and you have the right to voice your concerns.
If you’re lucky, the syndicator already knows of the problems you are about to list out to him. He might even be in the process of replacing the management company. Many syndicators and property managers conduct periodic secret shopping tasks as a matter of course and is part of their asset management processes. By doing this yourself, you are simply confirming some of a project’s challenges. But every once in a while, the syndicator is simply not aware of any problems or hasn’t done a secret shopping trip to their property recently. If this is the case, your phone call or email might be welcomed.
This is the step of the process where you need to have an honest dialog with the syndicator. Let him know that you had a concern about the high vacancies and did some research to find out why. Tell him your findings. Again, keep to the facts and do not be emotional. Although you might be hesitant about being confrontational, a frank discussion is in order. The success of your investment (and their operation) is at stake. In the long run, I’m sure the syndicator will thank you.