Luke Eddinger on Maximizing Your Fees and Profit
Today, I’m talking with Luke Eddinger, the Director of Robert C. White & Company, a residential property management company in Connecticut, focused on SFH primarily. A little bit of a mix of other property types as well.
In today’s episode, we’re going to talk about what it looks like to make a dramatic shift in business and how to get intentional about driving profit. Luke shares lessons to help you understand what is possible with focus and intention around turning a business from low-profit into a cash machine.
Luke was one of the folks that we had participate in the financial benchmarking study that was facilitated by Profit Coach and there’s a great story here, so we’re going to dig right into it.
- (01:18) – Background Leading up to Today
- (01:23) – Luke shares how he got into the property management business.
- (02:57) – Transitioning from corporate finance to the small business world.
- (06:56) – What the Robert C. White looks like today.
- (04:05) – Co-founder Relationship
- (05:19) – How Luke approached the relationship from an operating agreement level.
- (07:30) – Discussing the buyout process.
- (11:35) – How to Execute a Turnaround
- (12:07) – Luke discusses the swing in numbers shown in the financial benchmarking study.
- (12:42) – Luke’s headspace during this upswing period.
- (13:37) – Changes to overhead, labor and property type.
- (15:49) – The intention behind the changes in the company.
- (15:49) – Growing with profitability.
- (16:52) – Breaking down the numbers and the reality of low-rent versus high-rent properties.
- (18:25) – Building an ELF business.
- (18:56) – Maintaining brand clarity.
- (20:14) – Different markets, different processes.
- (21:23) – Adjusting for lower income properties.
- (23:56) – Luke shares his thoughts on the idea of being, ‘staffed for growth’.
- (27:59) – The cold reality of customer acquisition costs.
- (12:07) – Luke discusses the swing in numbers shown in the financial benchmarking study.
- (30:18) – Fee Maxing
- (30:55) – Luke shares his thoughts and experiences on fee maxing.
- (31:21) – Experimentation and mystery shopping.
- (32:24) – Guarantees to back up increased fees.
- (34:32) – Raising fees for existing clients.
- (36:16) – The importance of an objective self-assessment.
- (37:16) – Luke’s advice for making a realistic self-assessment.
- (37:29) – Survey your clients.
- (37:48) – Mystery shop.
- (38:48) – Positioning.
- (37:16) – Luke’s advice for making a realistic self-assessment.
- (43:17) – The challenge of getting a strong yield on the management labor dollar.
- (30:55) – Luke shares his thoughts and experiences on fee maxing.
- (45:41) – Leveling Up
- (45:53) – The future of Robert C. White & Company.
- Profit Coach (01:04) – Business management coaching program that performed the benchmarking study that Luke partook in.
- Renters Warehouse (08:09) – Flat rate leasing and property management company.
- Net Promoter (38:25) – Resource recommended by Luke for gaining an objective self-assessment of your company.
Where to learn more:
To get in touch with Luke and find out more about Robert C. White & Company, head on over to their website, RobertCWhite.com.
Jordan: 0:00:00.3 Welcome closers. Today we have another episode of The Profitable Property Management Podcast coming at you. This is Season Three on profit.
I’m your host Jordan Muela, and every week I interview world-class property management entrepreneurs and industry experts who share actionable insights to help you grow your property management empire.
0:00:17.1 Whether you manage 100 units or 10,000, this broadcast is designed to help you see the big picture and to give you the tools and tactics that you need to get to the next level.
0:00:26.0 Today, I’m talking with Luke Eddinger, the Director of Robert C. White & Company, a residential property management company in Connecticut, focused on SFH primarily. A little bit of a mix of other property types as well.
In today’s episode, we’re going to talk about what it looks like to make a dramatic shift in business. What it looks like to get intentional about driving profit, and to understand what is possible with really just focus and intention around turning a business from low-profit into a cash machine and from beyond.
0:01:04.7 Luke was one of the folks that we had participate in the financial benchmarking study that was facilitated by Profit Coach. And there’s a great story here, so we’re going to dig right into it.
0:01:14.9 Welcome to the show Luke.
Luke: 0:01:16.4 Thanks Jordan. Happy to be here.
Jordan: 0:01:18.7 So, I’d love to start here: How did you get into the business?
Luke: 0:01:23.2 So, I actually have a big company background. I started out in financial services. Worked for Prudential. Was on the product side.
I left for awhile and helped one of my brothers start a greenhouse business. I went to business school for a couple years, ended up working for a management consulting company, McKinsey.
0:01:43.1 I did that for about five years. We were working for the biggest – you know, Fortune 100 not Fortune 500 – on their biggest problems, frankly.
0:01:51.8 And so, did that for about five years. Loved the company, but the travel with a new family was pretty rough.
0:01:58.8 So, decided to transition out of there. And had always talked to a different brother about starting a business with him.
0:02:05.2 We were starting to invest in real estate. Duplexes, triplexes in central Connecticut. And we decided to start a property management company. 0:02:14.4 And that’s kind of the foundation of it.
There wasn’t a lot of, “This is the perfect opportunity.”
It was, “We’re doing this, we like this, we want to work together.”
0:02:23.6 From being in financial services, I saw the recurring revenue side of property management. I thought that was very, very attractive. And we got going from there.
Jordan: 0:02:31.9 I love that. So, first off, I love the humility of going from big box enterprise to jumping down to SMB world.
Because there’s a certain level of humility that is required to even condescend down into SMB world when you’re at that level.
0:02:45.9 I’ve got enough of a taste to know what Valley folks or corporate folks tend to think about SMBs.
0:02:50.4 Was there any – did you have to swallow pride at any level to kind of come down to the lowly world of property management?
Luke: 0:02:57.6 No. But, I think in my heart of hearts, I knew that I was always going to start something.
0:03:04.7 I wouldn’t have said, “Hey, 0:03:05.3 <inaudible> in property management will be it. But, this is where I am and this is the business that I’m building right now.”
0:03:13.9 It’s interesting, because my background is with big businesses, the harder transition is applying all the big business to the stage I’m at at a small business.
0:03:23.5 So, the humility is in recognizing there is so much I don’t know on the small business side of what I need to do to get to a level. Where frankly, I’m more polished and know how to achieve results.
Jordan: 0:03:39.4 I love that. Yeah. That’s another way to look at the humility, for sure. There’s just a lot of rules – a lot of white paper, best in class advice that simply does not apply at this stage of the business.
Luke: 0:03:48.6 Yeah, yeah. We did a project for a company and we literally saved them a billion dollars. Right?
And, if I did the same project for my company, I’d save two thousand. Right? The scale of the things are so different. 0:04:02.2 And so, you just don’t attack the same problems. 0:04:04.7
Jordan: 0:04:05.0 Yeah, absolutely. So, let’s start off talking about the co-founder relationship. You A: had a co-founder. B: It was a brother. And C: if I’m not mistaken, this was your first rodeo in terms of your first small business that you’re running. Is that correct?
Luke: 0:04:18.6 More or less. We had a greenhouse business that I did work with a different brother for a period of time. About two years I was helping him build it out.
0:04:24.7 It was a family business that all of the – so I’m one of five boys and we’ve all been involved in that greenhouse business a little bit.
0:04:31.8 But this was the first thing I was doing with this brother and this is the first thing that was more intentional for me.
0:04:37.3 That, I viewed as a company that I was building with him and not just a company I was helping a brother out with for awhile.
Jordan: 0:04:43.9 Got it. So, let’s kind of dive into this relational aspect. Because there is so much kind of caught up in co-founder relationship.
0:04:53.5 And the easy, naive assumption is to always go in, 50/50 and just to say, “Hey, you know,” – 0:04:59.0 <Inaudible> I’m thinking metaphorically, but in your case literally, “Hey Brother, we’re going to go after it hard-charging. We’re just going to kill it.”
0:05:04.8 But when you wade into the opportunity in terms of contribution, skill sets, circumstances, there’s a lot of flux.
And most operating agreements do not create enough space to account for the potential change in circumstances as things happen.
0:05:19.7 How did you approach things from an operating agreement level at the outset and what would you do differently in retrospect?
Luke: 0:05:27.3 Yeah, so because it was a brother and there was a lot of trust and we knew each other quite well.
First off, we knew we had very complimentary skills. So that worked out really, really well. 0:05:36.7 You know, I’m more operational, I’m more systems and everything else. 0:05:41.0 And he’s just a natural, gifted sales person. 0:05:43.3 Very good relationally.
0:05:46.8 We didn’t do 50/50, but we were pretty close. I was 51/49. I wanted the veto. I wanted to make sure that if it was sticky that somebody was going to make the call, and we decided that it was going to be me that made the call.
0:05:59.5 Besides that, we try to divide up the labor, and just be real honest and fair about the fact that this was going to be a lot of legwork in the beginning. And not a lot of payoff.
0:06:09.4 And so, we frankly came to it with different backgrounds. 0:06:11.6 Because of the work that I was doing, I was able to take no pay for a longer period of time. He had to take pay earlier. And because of the trust between us, a lot of those things worked out pretty smoothly.
0:06:25.2 If this was a different situation that wasn’t a family member, I think I would have viewed it a little bit differently.
0:06:32.6 But luckily, we grew relatively quickly so then we were able to work all those things out. 0:06:38.2 And, we both respected each other’s strengths a lot. It wasn’t like I felt like I’m punching harder than he’s punching.
Jordan: 0:06:45.5 And how many years ago was that that you started the business?
Luke: 0:06:47.8 So we formed everything in 2012. We started everything in earnest in spring of 2013.
Jordan: 0:06:56.2 Got it. So, about five years and change into the business as of right now. What is the current state of the business in terms of just the rough parameters: doors, headcount, etc.
Luke: 0:07:08.7 Yeah so, Zack left the business the end of 2016. I bought him out. Yep, end of 2016 I bought him out.
And we’re at about 280 doors right now. We’ve got two property managers, an office manager, back office in India and three leasing agents.
Jordan: 0:07:30.9 Alright. Now, the buyout. Walk me through that situation. How did that come about? What did you learn through that process?
Luke: 0:07:35.2 So, in early ’16, we had a bit of a family tragedy. My mother got hit by a hit and run driver going to the mailbox.
So, that was a bit of a wakeup call for him and me. And at the end of the day, you know, I think soul searching through the year for both of us. 0:07:53.8 He realized that his true passion wasn’t this. He also has a premier soccer club that he runs.
0:08:01.2 And so, he wanted to go after that full-time. 0:08:02.7 And without saying it specifically, he started reaching out to people about buying our book. 0:08:09.2 And we got a couple offers, including from Renters Warehouse. And it was very fair offer for the way they run their business.
Jordan: For their playbook.
Luke: 0:08:17.1 Yeah. For their playbook. You know, I looked at it and I said, “I get it. I get why you’re giving me this number.”
0:08:21.2 But it wasn’t a number – I wasn’t ready to be done yet. And so, what I did, is I frankly – this is something that I wouldn’t do with a cofounder, this is because he’s my brother, but I in essence doubled what Renters Warehouse offered to pay.
0:08:36.8 I made him 0:08:36.0 <inaudible> us out. But I knew what the company was worth to the way that we were running it. And so, that was kind of a big hug and then we went on our way.
Jordan: 0:08:47.9 Wow, so you leaned in to make sure that – particularly because it’s family, there was no question about value and buyer’s remorse, etc.
Luke: 0:08:56.7 Yeah. And I knew – I knew what it could be worth. It wasn’t – what Renters Warehouse offered was a very, very fair price for where we were at and how they run their business.
0:09:08.6 But, we run our business different and so we already worth more than what they were offering. 0:09:14.3 And I knew that there was more there.
0:09:15.0 And so, there’s no way that I would even sell for the price that I sold it to Zack right now. Based on how we’re running our numbers and everything else.
Jordan: 0:09:22.6 So it’s great. Sounds like things are in a good trajectory. Now it is interesting when people say – make this commentary.
Because I’ve heard that both from Renters Warehouse as well as what people are saying about it, that the value is based on their playbook.
0:09:34.4 Which is interesting because ultimately, it’s your business and somebody else’s playbook is not particularly germane unless you’ve bought into that system.
0:09:42.9 If you sell in and you’re staying there and you operate in that playbook, that has significance. 0:09:48.4 But prior to closing any kind of a transaction, the way that another business runs or generates profit from the business – at the end of the day that’s their business, your business is to maximize the valuation. Right?
Luke: 0:10:04.5 Yeah no. Completely agree. But I think the reason that it works for them right now is because there’s not a lot of buyers our there.
Luke: 0:10:11.5 Right. Like, Home River’s doing it in a different way, but the only people Home River’s going to be interested in are bigger players. Right?
0:10:18.3 So, they’re going to give you a multiple on your IBDA, on the outside they’re going to give you a door price based on what you’re going to push through the system.
Jordan: 0:10:26.2 This is the progression of acquisitions in a market. The market gets frothy enough to attract outside capital.
The capital comes in and is spray and pray kind of manner and is leveraging asymmetry of knowledge in the marketplace. Right?
0:10:39.8 Where the buyer has significantly more context in terms of what their playbook is. As well as what the financial leverage, capital, etc.
0:10:48.8 The next step in this industry is going to be for there to be institutionalized seller-side knowledge, and a lot more formalized clarity around the basic valuation – apples to apples comparison. 0:11:02.5 That’s a different podcast.
Luke: 0:11:03.7 Yeah. Completely agree with you. And it’s going in that direction. I don’t know the timeline that it will, but you look over in Australia and they have established brokers that are helping set the value and helping matching buyers and sellers and that just helps when you’re selling to get a better price.
Jordan: 0:11:20.4 There is absolutely going to be a dedicated business brokerage within this vertical. I predict that’s going to happen sometime within the next 12 to 24 months.
0:11:28.7 And a shout out to Tom Sedlack for the talk that he did at Broker Owner 0:11:31.6 with the valuation model that he put forward.
0:11:35.7 So, moving on to where the business is at today. When we went through your number during the financial benchmarking study, this was a great story in my opinion.
Because we saw probably the most dramatic shift within a single timeframe. 0:11:50.5 We were looking at a 12 month period, and in that 12 month period, there was a really dramatic shift in profit.
0:11:59.5 Would you be willing to share in terms of bottom line numbers the swing that we saw during the 2016 timeframe that we looked at?
Luke: 0:12:07.5 Yeah. So we were running – on our side we were looking at – we were running probably, you know, 2% – 3% profit margins when you factor in that we took a little bit of a lower owner salary.
0:12:18.2 And so, making that adjustment that you guys make, we were running at a 2-3% profit margin. 0:12:22.6 By the end of the period we were running at about 25% profit margin.
Jordan: 0:12:26.5 Amazing. I mean, we saw that and it was just shocking to see that level of swing in such a short period of time.
0:12:33.5 And so, we wanted to really dive in and understand more about what drove that. How much of that was driven by an intentional plan to swing profit.
0:12:42.6 Where was your headspace at during that time window? Did you look at the beginning of that period and say, “This is unacceptable. We’re absolutely going to drive big change here”? Or was it a byproduct of a specific plan focus? Like, break down what happened.
Luke: 0:12:58.1 Yeah so, you know, it’s interesting. I was just talking to my wife the other day and if I was consulting to Robert C. White & Company, it would be very, very clear for me to tell Robert C. White what they should do.
0:13:12.7 But being Robert C. White & Company, being the guy in charge, there’s a disconnect there, right?
And so, very often I know what to do but don’t do it. 0:13:20.5 And the other side of it is, when Zack and I were partners, in some ways I was deferring to what he wanted Robert C. White & Company to be.
0:13:30.5 And so, when there was clarity that it was mine, then it was about what do I want Robert C. White & Company to be.
0:13:37.0 And I had to dig in on the property management side in a way that I hadn’t before. So, you know, just from – so from an intentionality perspective, I had decided that we are going to go upmarket. That we are not going to keep going with the lower end, lower rent stuff.
0:13:55.6 We still have a mix in our business, but we had more of that stuff beforehand so we’re transitioning a lot of those owners out.
0:14:02.4 I decided that, frankly, our overhead was too high, so we made some adjustments on overhead.
And our utilization – our property managers to doors utilization wasn’t right. 0:14:12.2 And so, we didn’t backfill some people until we got the doors right and then started scaling up new hires after that as well.
0:14:18.9 So, all of the ’17 change that you saw is attributable to cost changes on overhead, cost changes on direct labor and a mix 0:14:30.5 <Inaudible>. Right?
So, we were firing and transitioning out doors and replacing them with higher end doors. 0:14:38.0 We’ve continued to make changes in this new year and that’s more on our pricing side.
0:14:42.5 And so, with the introduction from Todd Breen and some direction from Todd Breen, we have worked with Darren Hunter and we’re continuing to make some moves now on the profitability of a door and how to squeeze that out.
0:14:55.5 But what you guys saw was more around the cost side and a mix side. Right? 0:15:01.0 Like, our multi-family doors, on average, were at like $900, $950.
Our single-family home doors, on average, in condos, were about $1600. You get a lot of the lower-end stuff and you shift up.
Well, just based on the fact that we don’t charge flat fees, you’d start changing your economics pretty dramatically.
Jordan: 0:15:19.9 So let’s go back to talking about the vision, the ‘why’, the intention that really drove the change.
0:15:25.3 When you saw that you wanted to make some changes, what’s the purpose of profit? I mean, why not keep growing as quickly as possible, keep profit down at 0%?
0:15:38.7 You made this big shift, you invested a lot of effort. Like, what’s the purpose of profit for you Luke, and your business? For the game play you’re running?
Luke: 0:15:49.6 At the end of the day, a company’s job is profit. Right? And so, if we don’t make profit, what are we doing?
That’s called a not-for-profit, and they make profit too by the way. They want to make profit on that side too.
0:16:01.0 So, what I realized about this business is you can grow and make profit. Right? 0:16:08.5 At least a little bit.
0:16:10.3 And so, what we are trying to do, is grow profitably. With intention. Right? And what does that mean?
0:16:16.9 At business school, I had a professor and he said, “Strategy is what you say no to.” 0:16:20.6 And so, if you are saying no to certain doors, you are driving your profitability.
I know that if I say yes to a door that will only bring in $850, $950, even $1100 dollars, that is order of magnitude, probably ten times less profitable than a door that I’ll bring in that’s $1900 dollars. Ten times.
Jordan: 0:16:45.1 Let’s dig in man. So somebody in their mind is doing that math and they’re like, “How can that be? How can that be ten times more profitable?” Break that down for me.
Luke: 0:16:52.7 Alright. So you have two factors going on. If I just – if a door is a door and they take the same amount of cost to manage, a door is a door, you have something that’s bringing in $90 to $100 dollars, right?
Let’s do flat fee. We’re Renters Warehouse. Right? 0:17:08.8 So, we bring in $100 dollars of monthly revenue on our property management fees.
Now take that scale and they are doing it in a way where they can push the cost down – they’re always going to beat you. If you’re a small shop, they are always going to beat you on cost.
0:17:21.5 But so, let’s just say you’re running at $80 bucks. Fully-loaded, $80 dollars. You’ve got $20 dollars of profit. Ok?
0:17:29.7 If I’m looking at something that’s $2000 dollars or $1900 dollars or something like that, I’m going to be making at least $200. Right?
0:17:37.5 And so, all that extra, that extra $100 dollars is all pure profit that falls to the bottom line. 0:17:42.2 Now that’s assuming – so that’s a 5x right there, right? A little bit more than a 5X. That’s assuming that a door is a door.
0:17:50.4 And the reality is it’s not. Right?
0:17:54.7 So, I have to work so much harder 0:17:56.2 <Inaudible> the door that’s the $800, $900 dollar door. Right?
The owner’s more demanding, I have more maintenance, there’s more deferred maintenance, it’s harder to rent, I have more collection problems so I’m getting paid for less total months of the year that I should.
0:18:11.8 Everything about that business is not as profitable as somebody that’s upmarket. It just is a fact.
0:18:18.6 I haven’t seen – in my market it’s a fact, I would assume it’s a fact everywhere. 0:18:22.8 Like, it makes sense that it’s a fact everywhere.
0:18:25.9 The other side is – so, we have a phrase in our company that the business we’re building is an ELF business. Easy, Lucrative and Fun.
0:18:35.2 Like that is what we are on target for. So, every decision we’re making, “Is this owner ELF? Is this property ELF? Is this process ELF? Is this vendor ELF? Is this property manager ELF?” Right? 0:18:47.7 And so, we are trying to shift the entire game to be profitable growth.
Jordan: 0:18:56.2 Ok, so. I love that. Let’s rewind and take it one more time from a different slice. So, you quoted your business teacher as saying strategy is what you say no to. Couldn’t agree more.
Let’s address the guy – the guy or gal that is just so tempted by the lower income units. They’re right there. Somebody’s knocking on your door. It’s the investor with the multi-family complex. It’s Section 8 or whatever it may be.
0:19:24.4 When that temptation occurs, what I hear you saying is, “Hey the higher end places are going to be more valuable.” And, of course, who wouldn’t want those.
0:19:33.8 But it doesn’t always feel like it’s an equivalent choice, right? Let’s talk about the dynamic of the constraint of simply capacity. Right?
0:19:41.8 Every time you say yes to one of those lower income units, you are really dramatically reducing your ability to say yes to one of these higher income units, because there’s only so much time in the day.
0:19:50.0 That marketing budget, that sales bandwidth, it’s a precious resource that really is at the mercy of your existing operating capacity. For most companies. Fair?
Luke: 0:20:01.2 Absolutely true. And the other side of that is there is brand confusion if you were doing both. Right?
0:20:06.5 And so, there’s confusion to the owners, there’s confusion with the tenants, there’s confusion…
Jordan: With the team.
Luke: 0:20:14.0 Yeah, with the team. And the processes are different. Like, what I have to do for a high-end home is different than what I have to do for a low end home.
0:20:19.3 And so, they’re not materially different, but they are different.
0:20:23.0 And so, if you are going to be excellent at one, you have to sacrifice on the other side. 0:20:27.3 And so, we’ve actually taken a different course.
We, for awhile, we found a strategic partner that wanted to go after some of the lower end stuff, so we were referring to him.
0:20:36.7 It wasn’t a formal joint-venture, but we set up a referral fee arrangement. More recently, we actually – a different brother, nuclear engineer, decided he was done with his job, wanted to get in property management. He’d always been an investor. He’s very focused on pursuing investors and everything else.
0:20:55.8 So now we have an arrangement where he, in essence, we’re incubating that side of the business underneath Robert C. White, and we’re going to spin it off in a couple years as an independent company.
0:21:06.1 But it’s branded differently, its processes are morphing to be more true to what those people that are doing – because my market, the lower end stuff is typically two, three, four family. Right? 0:21:17.7 And the nicer stuff is typically single families or nicer townhouses. 0:21:21.4 And so, that’s sort of the delineation that we’re going after right now.
Jordan: 0:21:23.8 So let’s call it – let’s talk about how you might be able to adjust for the lower income properties.
Is that a conversation where you’re adjusting your cost structure? Or do you think that’s a situation where the fees simply need to go up to account for the lower monthly rent as well as the work.
Luke: 0:21:41.1 Yeah, I think both. So, I think there are things that you can do to streamline your operations that you just – it’s more rules based. Right? It’s not as customized.
0:21:54.1 On the higher-end stuff you have to do more handle. Right? I’ve got a lot of accidental landlords.
0:21:57.1 You cannot, you know, you have more communication needs for them. You have everything else.
0:22:02.2 You can’t have that on the low end stuff. You’ll get killed. Right? 0:22:05.5 The lower end stuff, there’s definitely benefits. I’m seeing lower end right?
If you have investors that are investing in stuff that’s ranging in rents from $900 to $1200 dollars right? And that’s what they’re going after.
There’s definitely advantages to that as well. Like, negative churn. That’s really, really helpful. Referral opportunities. 0:22:24.1 A lot of those different things. There’s a way that you can make that business work.
So, it’s not like I don’t want to be a part of that business. It’s that Robert C. White is not that business. 0:22:33.2 We are rolling something out that is going to be part of that, that is going to be driving after that business and the economics of the business are different.
0:22:40.3 The referrals are way more important. Making sure that you have investors that are continuing to buy and that you’re influencing the properties that they’re buying.
0:22:48.1 And the reality is, the lowest income stuff on that side, we say no there too. Right? Like, if something is just a rough building in a rough neighborhood, you’re never going to be able to rent. Then you just don’t take it on. You have to say no.
Jordan: 0:23:00.3 Love that. So, the clarity and the intention about the playbook that you’re running is what you’re shooting for here.
0:23:06.1 You’re not saying that the lower income stuff is bad, you’re just saying there’s a lot of confusion trying to do that in tandem with the higher rent in terms of the processes, the culture, branding, positioning. Might as well split it up. Makes sense to me.
0:23:19.9 So, talking about the other aspects of this shift, the original ‘why’ was that you want this business to be profitable and you want it to be profitable today.
0:23:29.7 I want to talk about this phrase that comes up over and over and over again. And that is, “Hey, I get that profit’s good, but I’ve got this really compelling angle and it’s this: I am staffed for growth. That’s why I’m not profitable, because I’m staffed for growth.”
0:23:47.3 Luke, why didn’t you just stay staffed for growth and just grow into the labor that you already had?
Luke: 0:23:56.5 It’s just – we used to say it. We said the same thing. We said, “We’re staffed for growth, we’re staffed for growth.”
0:24:04.2 I just think it’s a miss. I think, in reality, if your numbers are there, if you actually have the leads coming in and in a predictable way that you’re closing at the level that you need that staff? Fine.
0:24:23.4 But besides that, it’s just an excuse. What you’re doing is, frankly, you’re just sacrificing profit that you should be putting into your pocket or being able to reinvest into your business. Right?
0:24:34.7 If you’re overstaffed on that side, you can’t spend as much to go after leads, you can’t spend as – you can’t do anything really on an optimal basis.
0:24:42.5 Like, ‘staffed for growth’ – if I knew that we closing 40 doors a month, like some of the people that have been on your podcast, well guess what? I know I need to bring on a new property manager every month, because I need three months to train them up properly, etc., etc. Fine. Staffed for growth. You need to be ahead of that curve.
0:25:00.3 But the reality is, for most businesses that are our size, right? 2-300, 1-300, however you want to say it, like, if you’re growing ten a month, you’re probably growing pretty solid. Right?
0:25:12.4 Like there’s a math here. If you tell me how many doors you’re growing a month and you tell me your retention rate, I’ll tell you how big you’re going to be. Right?
0:25:21.2 And so, what I love about this business is its got some 0:25:24.0 <Inaudible>, like recurring revenue, that are perfect and it’s simple, simple math. Right?
0:25:29.7 If you’re growing 100 doors a year, on a predictable basis and you’re – you have a five-year – you’re keeping doors for five years, then you know how big you’re going to be and you can figure out how long it’s going to take.
0:25:45.7 And so, fine, staff for where you are. And it’s predictable how you’re going to grow.
0:25:48.5 And so, you can actually budget out how you should be staffing over the course of the year unless something changes.
0:25:56.4 So, ‘staffed for growth’, if it’s not tied to actually planning and predictable numbers that you’re going to be bringing on and how many doors you’re losing, you’re not being as smart about your business as you should.
Jordan: 0:26:09.5 I love that answer. So, your answer – it’s not that staffed for growth is bad, it’s that it needs to be connected to the current rate of growth.
It’s when it turns into, “I’m staffed for a rate of growth that I have never experienced for the last five years that I’ve been in business.”
Luke: 0:26:24.4 “And I don’t have a plan for how to get it.”
Jordan: 0:26:27.1 Or the skill set or the abilities or the budget or all those.
Luke: 0:26:30.1 Yeah, yeah. So, right now, I”ll be completely transparent, right? So, we’re growing at about five doors a month and it’s seasonal. Right? We always have more this time of year.
0:26:39.5 We want to grow ten doors a month. We don’t really know how to do it yet. We’re making the moves to grow at ten doors a month.
I’d love to grow 15 doors a month at some point. 0:26:48.3 The reality is, I haven’t cracked that code yet. Right?
That’s what I’m working on now, is how do you figure out how to predictably bring in leads that we’re closing at a certain level that we can actually grow at that predictable level.
0:27:01.0 And once we crack that, well then guess what? I will be able to plan when we need to bring on people in a very predictable way.
0:27:07.4 I’ll be able to run the budgets and run everything else and make sure that we’re still making money as we grow.
Jordan: 0:27:12.1 I love that. So you’re focusing on the relevant, adjacencies for where you’re at right now.
What I mean by that, is given the fact that you run a property management business, you’re involved in operations, does it make more sense for you to focus on figuring out how to do that predictably, or does it make more sense for you to figure out how to master Facebook marketing so you can drive more lead gen?
0:27:37.8 The latter is sexier. Makes for a great podcast. A great talk from the stage, but at the end of the day, is it more of a jump for you to do that or for you to figure out how to get profitable with the business that you already run and that you need to scale?
0:27:50.7 I would argue that getting profitable is step one and that there was no point in scaling something that is not currently profitable.
Luke: 0:27:59.5 Here’s the reality, right? So, Dan Kennedy will say all the time, “The person that wins is the person that can pay the most to acquire a client.” Right?
0:28:05.8 And so, if my economic engine is better than somebody else’s economic engine, in the end I’m going to win. Right?
And so, if you don’t figure out your economic engine early, you’re in big trouble.
0:28:18.0 Because fine, you can get Facebook leads really cheap now, but what happens when they change it?
Or what happens when all of a sudden they change the algorithm and you can’t get the lead at all and you have to go to a different channel that’s way more expensive.
0:28:29.0 And right now, you asked the question all the time, and I don’t have a perfect answer, but I know that I would spend $1000 a door. And that’s not counting sales labor.
0:28:37.5 I just know I would based on how much I’m making per door. I’d probably go significantly higher than that. 0:28:43.5 I don’t want to, but I will. And I’ll work up the curve.
0:28:48.5 And frankly, if I can spend $2000 to take down a door and somebody else can only spend $500 dollars, I’m going to kill them. Right? In my market, I’m going to kill them.
0:28:59.3 Because I can be everywhere. And I can do things that they can’t do. 0:29:02.4 I can send them a welcome packet on a lead coming in with a book and a gift and a this and a that. 0:29:06.9 And I can pursue them in a way that another person can’t if they can only afford $500 dollars a lead.
Jordan: 0:29:13.4 And what you just talked about affects the entire lifecycle of the transaction. Not only does it allow you to close the business, it allows you to keep the business.
The high-touch practices that drive retention, reduce churn and ultimately drive up your customer lifetime value and your customer lifetime profit.
0:29:29.6 Very, very well said. The best marketer is going to win and the best marketer is empowered to have the budget. It is a byproduct of operational efficiency. 0:29:40.0 So, I’m digging where you’re at with this call and —
Luke: 0:29:42.4 Not just operational efficiency. Right? The other side of it is your pricing. Right?
People that are going discount pricing, people that are moving in that model and they’re winning based on discounting and everything else, they’re going to have a tough road against somebody that has a stronger profit motive. And the revenue side, the pricing side works better.
Jordan: 0:30:02.5 It increases the burden on your marketing function. If your CAC has to be low, it’s just a different form of a subsidy.
It means that you have to be even better at marketing in order to drive down your CAC. 0:30:14.7 And it means that your options for paid marketing are smaller.
0:30:18.8 Alright, so we just covered a lot of ground here on the labor side. On the revenue side, talking about pricing, talking about fee maxing.
Whenever this fee maxing conversation comes up, you’ve got a handful of people that are like, “Yeah, squeeze them! Charge more.”
You’ve got a handful of people that are like, “No! One for the customer!”
And then you’ve got some people in the middle ground that are like, “Hey. If I can add more services and if I can add more value, or if I can get paid for value that right now I’m not getting paid for in a way that is unfair to my business, I’m all for it.”
0:30:49.7 Where do you sit in that conversation? What have you done dabbling into fee maxing?
Luke: 0:30:55.0 Yeah so. I was looking back, I was talking to my business partner on pricing. And what we did in the first year. 0:31:05.3 Right? We had no background in this.
0:31:06.7 And we started flat fee and we pushed up our flat fee. Then we went percentage and we pushed up our percentage. 0:31:11.8 Then we pushed up our leasing fee.
We had no idea and we were sort of fishing. 0:31:15.9 And we landed on a middle ground that literally was – we weren’t the most expensive, we weren’t the least expensive.
0:31:21.1 The reality is, when we were doing a review, we actually mystery shopped, frankly, our whole market.
0:31:28.8 And we were in the middle. We had people that were cheaper than us and we had people that were more expensive than us.
But we were better. Right? 0:31:35.4 Objectively, we were better. We had lower eviction rates, we had lower vacancy rates.
0:31:39.8 We had things that matter to the market and to the financial performance of our owners that we delivered stronger than anybody else. Right?
0:31:46.5 And so, going through that process – and I had some of my key employees be the ones that were doing those mystery shopping calls.
0:31:54.8 It just became obvious that for the value that we were bringing to the client, we were undercharging.
And not just, “Oh because we give better service you should pay more.” But objectively, “I can rent your house 30 days faster than somebody else can.” Right? 0:32:10.7 And so, “I just drove revenue to you that is more than what the extra cost I have is.”
So in all of our sales process, even though we are the top of the market now, we pushed all of our fees up that we lead the market in all of our fees.
0:32:24.5 We are talking about performance. We are talking about customer satisfaction and performance. 0:32:31.1 And we have guarantees to back those thing up.
0:32:32.9 So we let them know right from the start right? I don’t have long-term contracts, I have a fast-friend guarantee. I have a quality tenant guarantee.
0:32:40.2 I have all these things, I explain them to them.
So, it’s not just me saying, “Hey I’m better,” I’m backing it up too. I have guarantees that make us accountable if we don’t drive these things.
0:32:51.6 But to your overall question, I am trying to make my company as profitable as possible. 0:32:57.9 And not sacrificing.
I don’t want to be a ten door company that charges 16%. But I want to be a growing company that is quite profitable. That has an economic engine that can win. 0:33:11.2 Right?
0:33:12.7 And so, we have additional services like eviction protection, rent loss protection, things like that that are quality services that help us push up our overall fees.
0:33:22.8 We have pushed up fees. We’ve introduced new fees. I don’t have any problem with it whatsoever.
0:33:29.2 If we don’t make strong enough profits, then why am I going to get – I won’t be able to have opportunities for my employees, I might not stay in this business. There are other things for us to do.
0:33:43.6 And then our clients are going to have to go, frankly, find someone else that isn’t as good as Robert C. White is.
Jordan: 0:33:49.6 I really think about it as just being a different problem or constraint to solve for. I think about the phrase, “Don’t wish it was easier, wish you were better.”
0:33:58.1 You can either solve for the constraint of marketing, growth, success by charging less, being really good at operational efficiency, ramping up that marketing machine in as lean a way as possible.
0:34:12.2 Or, you can solve for delivering service that is worthy of charging a much higher fee. It’s just a different set of problems.
0:34:20.5 Question is, both are hard, both have their own set of challenges. It’s going to be hard either way. Which of those two scenarios leads to a financial outcome that is more in alignment with your goals?
Luke: 0:34:32.5 So, for us, it’s the profit side first. Then optimize the marketing machine. Right? That was a conscious decision that we can impact – get enough doors that we can impact quickly the profitability of the book. Right?
0:34:48.6 Those numbers that I was telling you about before the 25%, that’s before we did any of our fee max program.
0:34:55.3 So, we have done the first phase of our fee max program and we’re probably running at about 28% now.
0:35:03.4 We took up our fees, in total, 25-30% across the board. Like adding new services, and by pushing up fees where we were under market.
Jordan: 0:35:13.1 Now are you talking about new customers or for existing?
Luke: 0:35:14.3 No, we went back to the existing customers and we fee maxed the existing customers.
Jordan: 0:35:18.9 I love it. I love it. Walk me through it. This is the section here where people are like, “Can’t do it. Won’t work. They’re all going to quit. They’re going to fire you.” So have you recently shut down your business? Did you recently lose all your customers as a result of doing this.
Luke: 0:35:35.2 No. So, we lost one three-family.
Luke: 0:35:39.3 One. And he was talking about selling next cycle anyway. And so, we actually – so we worked with Darren Hunter – Todd Breen introduced us.
We worked with Darren Hunter. He’s worked with a lot of NARPM folks across the board. It’s interesting right.
0:35:52.6 So, he says – that I truly believe from going through his program – that you will get the fee that you believe you’re worth. And that you can defend to a client.
0:36:05.0 And so, going through the process that we did, with – it helps that we are highly rated company in our market.
0:36:16.6 And, like I said, we did mystery shop, and we know that we are – we deliver a very, very good service. 0:36:22.1 And I argue probably the best in our market.
0:36:24.3 And so, it’s not like I was trying to sell a Hyundai at Audi prices. Right? The problem was we were an Audi and we were discounting and pricing it not like an Audi.
0:36:37.5 So we just had to reset what we believed about ourselves and what prices that we should go after, and then get us to where we were supposed to be.
Jordan: 0:36:47.0 Now that’s a really good conversation. The metaphor that you just brought up. The self-awareness to know are you an Audi selling at Ford prices? Or is it the other way around?
0:36:59.2 Because, the self assessment is what allows you to understand what kind of change and shift you need to make.
Because it’s simply viewing yourself as being worth what you are really worth, or is it growing into an aspirational level of value? There’s no right or wrong. People exist on both sides of that equation.
0:37:16.9 How would you encourage somebody to actually self – to realistically self-assess the level of quality of their existing services so as to know which of those two changes they need to make?
Luke: 0:37:29.6 Two things. I think survey your clients. Right? If they’re not happy with you, you’re doing something wrong.
0:37:35.3 But if people are happy with you, by and large, if you’re getting – if you’re doing net promoter score or depending on how you are surveying your clients, you’re going to have a good sense for how you are doing in their minds. Right?
0:37:48.6 And the other thing is, I would go out to the market, your local market and I would mystery shop. 0:37:51.9 You can get a good sense for how you are relative to other people.
0:37:55.3 So we don’t think we’re perfect, we’re good, we’re not great yet. We’re on a path to being great. 0:38:01.5 But we’re better than – I’d argue we’re better than everybody else in our market.
0:38:03.7 And so, there’s a relative – there’s an absolute question, and then there’s a relative question too. Because what else can they get in the market.
0:38:11.8 So, I would say, to your direct question, one: I’d be surveying and having conversations with our existing clients. “What do we do better than everybody else? How do you like us? Would you refer?” All those things.
Net promoter score’s a great one. 0:38:25.7 The other thing is to do some mystery shopping. Understand what else is in the market. What they’re doing. How you stand up against them and just be honest about it.
0:38:33.3 The reality is, what I realized is, the real problem – and you’ve talked about this, Jordan, with some of your guests – it’s really hard to tell the difference between A, B, and C property manager.
0:38:48.4 So, the thing to crack is, especially with new clients, at a higher price, needs to be showing how you are different.
Luke: 0:38:56.0 Exactly. Because, you know, when we were doing that mystery shopping, yeah it was obvious to people that were complete jokers, but besides that, there was a tier of people that all sounded ok and sounded like they would be fine, but they didn’t really sound that different.
0:39:09.4 And then you are going on something you can compare, is price.
0:39:13.4 And so, with our new clients and with our past clients, we’ve tried to change the conversation.
We’re talking more about performance. We’re not just talking about what we do. Actual results around performance.
0:39:26.1 We’re talking about our guarantees, we’re talking about, frankly, things that are more applicable to the actual person that you’re speaking to. Right?
0:39:34.8 So I’m not talking generically about my property management services. If they’re a person that is going overseas for an expat assignment for five years, we’re talking about what we do to help them over the course of five years and what’s unique to them.
0:39:45.4 So we speak as closely to them and what they care about as possible. 0:39:49.7 So that we sound different than any other property manager out there.
Jordan: 0:39:51.8 I love it. So, you’re focusing on the qualitative and the quantitative. And really, you’re bringing up the broader point that we as an industry have to get off of believing that if you build it they will come.
0:40:04.3 If you objectively deliver the value, that’s enough. As opposed to accepting that you have to prove and remind and demonstrate value at every stage of the transaction.
0:40:15.9 Pre-sale, post-sale. What happens right after that person signs the agreement? 0:40:18.9 It’s an opportunity for buyer’s remorse.
0:40:20.8 “I sign the agreement, I haven’t heard from this person, they drop the ball. I’m really wondering, are they going to deliver on the promise?”
That’s the opportunity to affirm and to keep proving your value. 0:40:32.8 So that one is great. Because you’re not even saying that your cost structure needs to change.
You’re just saying that your articulation of what you were already doing – whether or not you’re an A shop, a B shop or a C shop, the articulation, communication of value can maybe lift you up by a half point or a full point alone.
Luke: 0:40:51.2 Yeah, absolutely. And look, so again, we worked with Darren Hunter. It’s not something we invented.
And so, we had a framework to use. There was – he, like I said, is very focused on mindsets. 0:41:08.2 If you believe you are worth the fee, then you can sell it. You can.
I had – the hardest part we had was with the lease renewal fee. 0:41:16.8 We were charging a lease renewal fee of $99 bucks. And originally, it was nothing. We weren’t charging a lease renewal fee at all.
0:41:22.6 Then we went to $99 dollars before Darren Hunter ever came around. 0:41:25.8 And then, we were doing our own fee max before talking to Todd and getting introduced to Darren.
0:41:30.9 I think I’d gone to $199. He pushed us to go to a fee that I’m not even going to say on your podcast, but you can go find it, it’s on my website.
0:41:41.9 All of us have our problem with it. Right? Like, – and he was pushing us. Alright, “Well look, let me tell you why I think you’re worth this fee. See if you agree with it.” Right? 0:41:53.7 If you don’t believe it, then you’re not going to get it.
0:41:55.7 If you’ve been built on a flat fee or you’re built on a discount model, or you’re built on whatever else, well then, you’ve got to work on your head first. You won’t be able to push up your fees. You just won’t.
Jordan: 0:42:06.5 Absolutely. It’s just a different set of problems, right? I mean, what you just articulated is a problem, but you chose to solve it. And what was the fruit that was on the other side of that?
It could have been a different problem. It could have been, “I’m not going to change my viewpoint and we’re just going to adjust our cost structure.”
Luke: 0:42:19.9 Yep, absolutely. But the cost structure, you can only push so far.
Jordan: Absolutely. There’s a hard limit.
Luke: 0:42:23.6 And a company at scale, like Renters Warehouse, that has a model like they do to service the client? You’re not going to be able to touch them.
0:42:31.5 And so, if you are not going to try to scale to a significant level, or figure out really creatively how you make your cost variable, then my belief – the decision that we made is you go up market, you push up your fees and you make your company as profitable as possible.
0:42:48.2 And then, you have a lot of gasoline that you can throw on the fire when you’re trying – our next phase, which is, “Let’s figure out the marketing and sales side now.” Right?
0:43:00.4 So, we’ve been able to do it kind of without a really strong structure and everything else. And now we’re trying to organize, push up the tier, institutional that side of it. And we’ve got a really good economics behind it to make that side work now.
Jordan: 0:43:17.3 Let’s end with this. Let’s end talking about the challenge of getting a strong yield on the management labor dollar.
For everybody listening to this, the management labor dollar is what pays you. 0:43:30.6 Or, if you’re large enough, what pays your number one captain or lieutenant.
0:43:33.4 When we think about all the capital that gets deployed on labor in the business and that is by far the biggest expense, the direct labor of the people that are actually doing the work, the management labor, folks that are guiding the direct labor – so it’s kind of an engine and chassis metaphor, if you will.
0:43:50.0 The management labor is difficult because the management labor, oftentimes, is wanting to graduate to higher and higher tiers of theoretical value delivery.
0:44:00.0 The idea of working ‘in’ the business versus ‘on’ the business. 0:44:03.5 Well, first off, the business has to be big enough to have somebody working on top of it. Right?
Jordan: 0:44:08.6 Working ‘on’ the business at 100 doors just doesn’t really work. You can work ‘on’ the business for 5%, 10% of the time. Whatever it may be.
0:44:17.5 But after you get over that hump of 200 doors, 300 doors, whatever it may be, where you do have that bandwidth, you have to make a decision.
0:44:25.3 If you’re going to graduate to truly being functional management labor, you have to ask yourself, “Am I deriving this income as a result of the fact that I am the owner, or am I deriving it because of the fact that I’m actually creating money operationally. And if I’m doing that, how am I earning my keep?”
0:44:43.4 There are a very limited number of ways you can do that. You can do it with a killer sales and marketing program. You commit to the discipline of operationalizing sales and marketing in your business.
0:44:54.4 Or you can do it through increasing revenue on an incremental basis. Basically, increasing revenue per door or lowering your costs. But those are the rough parameters.
0:45:03.5 You could also impact client service which might lead to a reduction in churn. 0:45:07.7 Those are more or less the levers that you have to pull and most owners are simply not qualified – maybe not qualified, that isn’t the right way to approach it – most owners, when they jump into that capacity, don’t make enough of an impact in those areas.
0:45:24.8 You’re trying really hard to move those levers. And you’re just assuming that by acting as the management capacity – what you’re not doing is saying that you’re just watching the Indians work and assuming that everything is just – keeping tabs on things.
Jordan: 0:45:41.1 So, talk to me. With those specific levers in mind, where do you plan on taking the company going forward? Over the next 12 to 24 months, what is the future of Robert C. White look like?
Luke: 0:45:53.3 Yeah, so operationally – operationalizing the sales and the marketing is our next step.
We’re continuing to make that big switch, which is shifting out the multi-families in that separate company that I talked about.
0:46:10.5 And that’s going to happen over the course of the next 18 months. We’ve already made some big moves on that side. 0:46:14.3 But, the operationalization of the sales and marketing is the next focus.
0:46:21.2 We’ve got some things still in the works on fee maxing, frankly. We haven’t pushed on the tenants much. We haven’t pushed on – we have a preferred vendor program but we haven’t pushed on that as much.
0:46:36.2 But that is sort of the, behind the scenes – not behind the scenes, but that’s the 10% focus. Right? Just to keep that economic engine really, really strong.
0:46:43.7 The main focus is figuring out the marketing and the sales, operationalizing it in a way that we can attract those ELF doors that we want. Right?
0:46:53.3 We have made a commitment that we are upmarket. Right? So that – how am I going after those guys, positioning myself the right way and closing them at a level that makes the overall machine work.
0:47:05.3 And so, that’s the focus. And the honest truth is, when we crack that, then we’re opening more offices. And so, my strong desire is to have multiple offices throughout this region.
0:47:21.8 I don’t want to open up another office in Austin, Texas. 0:47:26.6 So you can’t hire me there Jordan. I don’t want to be far away and actually, I think that there is more juice in being close. Right?
0:47:36.3 If I could open another office in Fairfield County, I’m going to get a lot more juice even though I could stretch and be in Fairfield County in 45 minutes.
And so, once we can turn on the switch for the leads and marketing and closing at a predictable rate, then we’re going to start opening other offices nearby.
Jordan: 0:47:54.8 Awesome. Love it. Hey, this has been great. I deeply enjoyed our ability to kind of wade into the numbers. I really appreciate your willingness to open up the kimono and share.
Most people are willing to talk about doors but not talk about revenue. Certainly not talk about margin. You did. I’m grateful for that. I think this is a conversation that is so useful for the industry to have to really get clear and to get real on what’s really happening under the hood.
0:48:20.8 We’re going to be watching your success and growth and I know it’s going to happen. So, the next time you’re in Austin, let’s break bread.
Luke: Sounds good, Jordan. Thanks very much.
Jordan: Thanks for coming on the show.