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The Rise and Fall of Castle Property Management with Max Nussenbaum

The Rise and Fall of Castle Property Management with Max Nussenbaum

Today, I’m talking with Max Nussenbaum, the former CEO of Castle, a property management startup in Detroit that was using technology to change the game.

At their peak, they had raised $4 million from investors and grew to be Michigan’s second-largest PM company, but in January of 2018 they winded down the business.

In this interview, Max shares the lessons he learned from his time at Castle, where things went wrong, how he would do things differently, and shares lessons that will help you avoid some of the same mistakes.

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Topics covered:

  • (01:10) – Background Leading up to Today
    • (01:16) – Max’s original vision for Castle.
    • (03:13) – Max shares his opinion on the reality versus the promise of technology in property management.
      • (03:54) – Tech for operational efficiency.
      • (04:25) – Enabling a better user experience.
  • (05:18) – Castle Post-Mortem
    • (09:50) – Specific challenges to Detroit.
    • (16:56) – Word of mouth.
    • (17:39) – Partnerships with realtors.
    • (18:18) – Networking.
    • (19:23) – Thoughts on growth through acquisition.
    • (19:55) – Max discusses the organic marketing efforts Castle made.
    • (05:29) – Managing investor expectations regarding growth.
      • (06:26) – Max shares Castle’s first big mistake.
        • (06:35) – Operational inefficiency for supporting growth.
        • (07:47) – What Max would do differently in retrospect.
        • (08:53) – Additional mistakes that affected Castle.
    • (09:17) – Speaking on the quality of Detroit as the market in which Castle operated in.
    • (12:02) – Efficiency and growth.
      • (13:24) – The significance of churn.
        • (15:19) – Max shares Castle’s numbers.
    • (16:17) – Discussing what did and didn’t work for Castle in terms of growth.
    • (22:22) – Some of Castle’s strategic wins that Max is most proud of.
      • (22:35) – Creating a pool of on-demand independent contractors.
      • (23:19) – Tenant replacement speed.
    • (24:14) – Discussing the challenges of maintenance.
      • (27:42) – How Castle handled communication around maintenance.
      • (30:09) – Max’s thoughts on labor coordination when it comes to maintenance.
      • (33:18) – Castle’s revenue contributions from maintenance.
        • (35:15) – The potential revenue opportunities Max sees with maintenance.
      • (36:19) – Discussing whether a maintenance markup is fair.
        • (37:33) – How Castle managed financial transparency.
          • (37:50) – Discussing software strategy.
            • (40:09) – The ‘build versus buy’ conversation.
  • (41:57) – Reflections
    • (42:25) – Max shares how he would approach technology and growth with a new property management company.
      • (43:48) – The basic elements of a well done owner portal.
    • (45:05) – The opportunity to act as a fiduciary and trusted advisor.
    • (47:08) – Advice for other property managers.
      • (47:28) – Giving attention to the proper management of the people within the business.

Resources mentioned:

  • PM Grow Summit (02:32) – Property management conference recommended by Max (and hosted by Jordan).

Where to learn more:

To find out what Max is up to next, follow him on Twitter, or find him on his personal website, MaxNuss.com.

Transcript:

Jordan: 0:00:00.4 Welcome closers, this is another episode of The Profitable Property Management Podcast. This is Season Three on profit.

I’m your host, Jordan Muela, and I’m excited to have you on. Whether or not you manage 100 or 10,000 units, this broadcast is designed to help you see the big picture and to take your business to the next level.

0:00:19.6 Today I’m talking with Max Nussenbaum, the former CEO of Castle. A property management startup based in Detroit, Michigan that was building a technology platform to change the game.

0:00:31.4 At their peak, they’d raised around close to four million dollars from investors and were going to be Michigan’s second largest property management company.

0:00:38.0 But, in January of 2018, they ended up winding down the business. Why? What can we learn? What’s it all about?

Today we’re going to talk to Max to do a post-mortem. My mind is blown that Max is actually willing to jump out in public and do a post-mortem on his baby this quickly.

0:00:56.8 So, Max, thanks in advance and thanks for coming on the show.

Max: 0:01:00.3 Yeah, my pleasure.

I’ll tell ya, I would not have been ready to do a post-mortem in February, but enough time has passed. I feel ready to hopefully, you know, share some of what we learned in a way that can help others.

Jordan: 0:01:10.6 Alright, well let’s start here. Let’s just kind of walk through what the original vision was. How would you describe it?

Max: 0:01:16.9 Yeah, so I mean, the idea for Castle came out of direct experience that me and my co-founders had buying a rental property, becoming property owners in Detroit. Getting really embedded in the community of other rehabers and investors.

0:01:29.3 And we basically noticed two things. One is that we saw pretty much everyone, owners and tenants alike, complain about the property management they were able to find. Especially in the single-family market, which was where we were focusing as investors.

0:01:42.9 And we also looked at a lot of management companies and noticed that a lot of them were kind of being run the same way they maybe had been 40 years ago.

There’d been a little bit of technology introduced, but we felt like there as an opportunity to use technology to both make things operationally more efficient, but also to just provide a way better user experience for property owners and tenants.

0:02:00.3 So that was kind of the germ of the idea, and that overall vision stayed really consistent throughout Castle’s lifetime, even as, you know, some of the details of the business grew and changed.

Jordan: 0:02:09.8 Got it. So, I feel like you guys were one of the earliest, if not the first of the, kind of tech hybrids that came into the market.

There’s been a wave of companies that have followed, ranging somewhere from being tech first, service second, to inverting that but having a pretty heavy tech focus.

0:02:27.7 When we initially met, was around the time of the inaugural PM Grow Summit. 0:02:32.9 We had you out, you gave the talk. Described the vision.

And a lot of these smaller mom and pop operators were pretty dismissive.

0:02:40.3 Kind of like, “Eh, what could these guys know? Young kids, bunch of technology.” Etc.

0:02:48.2 There was definitely some pushback on the level of wondering how big the opportunity actually was in the market to get some real leverage out of technology. Without building AppFolio. Effectively.

0:03:01.2 So, having been through this, what is your now kind of seasoned opinion on the actual leverage and opportunity that technology represents for a, let’s say, a mid-sized operator?

0:03:13.9 Somebody that’s managing 500 to 1000 doors – Isn’t going to go raise a million bucks. What’s the reality versus kind of the false promise of tech, in your opinion?

Max: 0:03:23.5 Yeah, so I think there’s two different ways to think about how – broadly speaking, I think there’s two different ways to think about how tech can help a services business.

0:03:33.7 And I think our initial thesis involved both ways. And I would say one proved out to be very right and one proved out to be less right than we thought.

0:03:42.3 And those two ways are: one: Tech as something that enables purely enhanced operational efficiency.

And secondly, tech is something that just enables a better experience for your customers, your users and everyone else you interact with.

0:03:54.7 And I would say, tech for operational efficiency in the property management world? There’s promise there, but frankly, I don’t think that is going to have the significant impact on anyone that hasn’t achieved really significant scale. 0:04:06.0 So, you know, 5000 units plus.

0:04:08.7 I think, certainly what we saw when we, you know, – that was a big part of our original thesis, we saw that – you know, definitely tech made us a little bit more operationally efficient for sure, but that a lot of the ways where that was promising, just frankly, weren’t really going to have much of an impact until we were at kind of the next order of magnitude of scale.

0:04:25.8 I think that tech, as a way to enable a better user experience is still really promising and is something that can help anyone.

0:04:35.1 But you just have to remember that, you know, that’s I think something that we definitely learned, especially in the property management world, is that the quality of the user experience, broadly speaking, is dependent on so many other factors that are not necessarily directly how your customer interacts with your product. Right?

So, for example, the quality of the third-party maintenance providers that you might be contracting out with, which is like extra hard to control.

0:05:08.4 And so, the – I think there’s still a lot of promise for tech to enable better experiences, but that certainly isn’t the only piece of the puzzle.

Jordan: 0:05:18.4 Alright. So, if we wind back to the story. Let’s say, kind of the zenith, at least in terms of funding, when you raised the larger round. I guess this would be like a Series A.

0:05:29.3 After that happened, presumably, there was a pro forma, their expectations around growth, etc. 0:05:38.7 What did you come to realize? Specifically as it relates to scale, and at what point did you realize that there was going to be a delta between your trajectory and the scale required?

Max: 0:05:49.5 Yeah. So that was our seed round in January of 2016, which was a little over two million dollars from Coastal Ventures and some smaller VCs.

And I think – basically the high level kind of story of Castle, is that we, you know, spent 2015 – launched in the beginning of 2015.

0:06:06.1 Grew at a moderate but steady clip where, kind of like, you know, still figuring out the business.

0:06:12.5 And then, starting that winter, we did the 0:06:14.2 [To confirm] Accelerator. Had really gotten a lot of the business nailed down. 0:06:18.5 Grew really fast. We doubled our units under management in about three months, from about 250 to 500.

0:06:23.6 And then, raised the money. Continued growing pretty decently.

0:06:26.4 And then, that summer, kind of hit this inflection point where – and this was kind of what I would say was the first, in retrospect, big mistake that we made.

0:06:35.7 Was that – our operations actually just weren’t prepared to support the level of growth that we had experienced. We’d kind of been a victim of our own success in some way. 0:06:43.5 And we failed to notice that up front.

0:06:45.4 I think one of the 0:06:45.5 [Inaudible] things with property management is that, because a lot of times – the true operational burden of managing a certain number of units I don’t think is going to be really felt until six months, eight months, a year into actually managing that portfolio.

0:07:01.7 Because, you know, first few months, you know, there’s probably going to be fewer maintenance issues because you did a walk through when you took on the property, took care of anything that was an issue.

0:07:10.9 And so, nothing else is going to break for another six months.

0:07:11.6 Or, there’s kind of a honeymoon period with the property owner where they’re excited about new management.

They’re just kind of letting things be, and then six months in they start getting on the phone more often.

0:07:21.3 And so, kind of all of these small things combine, where all of a sudden, around the summer of 2016, our operational workload really ramped up as a result of this growth we’d experienced, you know, three to five months ago.

0:07:35.2 And we just didn’t have the operational capacity to support it well.

0:07:38.1 And that was at a point where then a lot of our customers started experiencing longer wait times then we would want to return phone calls or emails. And it was kind of the first sign of trouble.

0:07:47.8 And I think, definitely, something I would do differently if I were starting a business again, is after that period of growth, I would have taken a step back, kind of intentionally not grown the business for a few months, and just really made sure that we were going to be well-equipped to handle that growth on an ongoing basis.

Jordan: 0:08:07.8 It’s a Catch 22, right? Because you have to grow. That’s the nature of taking on funding. Their expectations ramp, etc.

0:08:14.7 So, you were trying to do both in parallel, both growing …

Max: 0:08:18.0 Yeah. And I think in retrospect, you’re specifically speaking to the venture-backed kind of tech element of the business.

You know, actually, right after we raised the money would have been a period where it actually would have been fine to not grow for a bit if we had wanted to.

0:08:31.9 You know, if – thinking if you, kind of view your funding life-cycle as like, you’ve got – you know, you raised some money. 0:08:39.3 Then you kind of can have a quiet period. Then you need to show strong growth going into a next fund raise if that’s part of your plan.

0:08:45.7 And so, in retrospect, it actually would have been a really optimal time to do that.

0:08:49.5 But, quite frankly, this was our first startup. We didn’t – we weren’t really familiar enough.

0:08:53.5 I think we made two mistakes.

One is we weren’t familiar enough with the dynamics of venture capital funding to realize that that was really a very viable option from a fundraising standpoint at that time.

0:09:03.5 And the second was just not realizing that our seeming operational capacity was a bit of a mirage. Because the operational workload of managing this same number of units was going to ramp up over time.

Jordan: 0:09:14.3 The lag basically.

Max: Exactly.

Jordan: 0:09:17.5 Got it. So, what’s your commentary on the market that you picked? In retrospect, what’s unique about Detroit? Is that a meaningful factor in the story? Would you have picked a different market?

Max: 0:09:28.7 Yeah, so it’s interesting. I think that definitely, in retrospect, I would have gotten out of Detroit sooner. Or not gotten out, like expanded. Open a second market. We wouldn’t have shut down the Detroit business.

0:09:39.2 And it’s important to note that we were operating in all of southeastern Michigan. About a 45 mile radius.

0:09:43.5 So, it’s not like we were just in the actual city of Detroit. We were in a lot of the suburbs as well.

0:09:50.1 But I think that, definitely we experienced a, like 20-30% operations and satisfaction penalty from being in Detroit.

0:09:58.1 From everything from a more difficult tenant pool, properties that were very old and hadn’t been well maintained.

Difficulty dealing with city agencies.

0:10:08.5 Customers who had gotten really screwed by, you know, all the kind scammy stuff that was going on, I would say, between – well it hasn’t totally stopped.

0:10:16.9 But it was especially prominent between the crash and let’s say 2014.

0:10:20.1 And so, therefore, were predisposed to kind of distrust us and not – and I don’t blame them for that, but it made the burden of supporting those customers higher.

0:10:29.9 At the same time, it’s sort of a, I think – at the same time I think it’s sort of hard to answer that question because, you know, Castle was a very natural outgrowth of a problem we discovered in the course of this, sort of story of living our lives.

Where we moved to Detroit, we became real estate investors there.

0:10:49.2 It wasn’t like we were sitting in an office, analyzed a bunch of different markets, decided property management was the best one for our business and then analyzed it 0:10:56.7 [Inaudible] to figure out where to go.

0:10:57.9 And I think that’s often, kind of, the entrepreneur story.

0:11:03.5 And so, it’s not like we ever were in a situation where we were just, like, picking a market.

0:11:09.3 I think definitely I would have expanded beyond Detroit sooner if we could do it again in retrospect.

0:11:15.5 At the same time though, starting in Detroit, I think that the need there was so great that when we were kind of three nobodies with no other properties in our portfolio that that need was part of what enabled us to get our first, you know, 20, 30 customers.

0:11:29.9 Where in a more established market, maybe the barriers to entry for a new firm would have been higher.

Jordan: 0:11:34.5 Got it. Ok.

So it’s helpful to have you put some parameters on it. Maybe it’s a 25-30% penalty because of the market.

But you gave a caveat earlier that there’s really two primary drivers here. There’s the efficiency play, there’s customer experience play.

0:11:48.0 The efficiency play is going to be reflected – it’s a cost component. And in a financial model, it’s driving down cost.

The customer experience, the potential there is around growth, right? 0:11:59.1 Better product, network effects, etc. If you can get to scale.

0:12:02.7 When you look in retrospect, or maybe you knew at the time, how big was the gap in terms of the growth that would have been required?

0:12:14.2 And I guess it’s not even a fair question, right?

Because the answer to that is more – probably related to the next round of funding. Rather than actually – kind of the cash flow constraints that your average small business is subject to.

Max: 0:12:26.7 Yeah. I mean, I think it’s less about an absolute number than about – so I think there’s a couple of components to this.

So, one is definitely – I think early on we were too focused on the cost operational efficiency side. 0:12:46.3 Not as focused on the great customer experience side.

Like, our initial theory for Castle was that we were going to be able to be, sort of cheaper property management.

0:12:53.9 We sort of shifted that theory to just try to be better and not worry about being cheaper.

And I actually think – but – and I actually think if we had done that from the beginning, actually been a higher priced product, but then been able to offer correspondingly better service, that would have been more successful.

0:13:10.8 We did try to make that shift, but at that point it was too late to really have a major impact.

0:13:14.3 And so, that might have even resulted overall in having fewer doors but more revenue. More satisfied customers overall.

0:13:24.3 And then, the other big piece for us, again, was I think that was our biggest challenge – it was less about the absolute rate of growth and more about just our churn rate. 0:13:36.8 The number of customers who were leaving the platform.

0:13:42.7 And that was something that certainly – a lot of issues behind our churn rate were self inflicted. Operational issues for sure.

0:13:51.3 Like, caused customers to have bad experiences and leave. But also something that I’ve since seen, really talking to a ton of other people in the industry, is that property management just has a baked in higher churn rate than a lot of other types of businesses, because – and the way I think about this, is that I think it’s really hard to create an amazing property management experience because, like, when a customer’s having a great experience with you, they’re usually not interacting with you that much. 0:14:17.6 Like things are on autopilot.

And just by the nature of the business, the most touch points with customers are negative.

0:14:22.8 Because when things are going well, it’s like, “Great everything’s gone well.”

And every time you interact with someone, you know, it might be something negative that’s not your fault.

0:14:29.0 If a customer had a property that was just having a ton of maintenance issues, they might not have blamed Castle for that maintenance. 0:14:35.8 Maybe we were doing a good job fixing it.

We didn’t cause those problems, but that person is still not going to be having this amazing ten star experience where they’re going to tell all their friends how amazing Castle is, when they think Castle is pretty good, but they’re like losing their shirt on their portfolio.

0:14:48.6 And that’s a problem that – it was certainly compounded by operational issues that were just not an amazing experience for customers.

But now, you know, talking to a lot of other people in the industry, and maybe the listeners will empathize with this, I think, when your job is, sort of to be insurance and the bearer of bad news, it’s hard to always be this amazing service that your customers love.

Jordan: 0:15:12.0 Sure. And I think people can certainly relate to churn as related to sell off as well. Just market conditions.

Max: 0:15:17.0 Yep, yep. Absolutely. And that was a factor for us too.

Jordan: 0:15:19.4 Where was churn hovering? Either on a monthly or an annual basis there towards the end?

Max: 0:15:24.6 So towards the end it was around 3% monthly. And that was about 1% sale and 2% customers leaving.

And it had had spikes of being much higher about eight months to a year before. About it being double that every month.

0:15:43.5 And that just makes it – it just makes it really hard to grow and to tell – I mean we still were growing, but it makes it really hard to grow. It makes it really hard to tell a story of how you’re going to grow, you know, keep growing down the road.

Jordan: 0:15:55.9 Yeah. Absolutely. So churn is the silent killer. Right?

Churn dictates the ceiling and the wall that you will hit eventually.

Based on wherever you’re at in terms of your size and your current churn rate, there is a definitive cap on how big you can ever get.

0:16:10.9 Because at a certain point your growth will certainly replace your losses. 0:16:14.0 So it’s definitely worth paying attention to your churn rate.

0:16:17.2 I am curious, what did or didn’t work for you on the growth side? What did you learn there?

Max: 0:16:23.5 Yeah. Well – and the one other point I just want to make about churn too, that I think people might forget, is that it’s also just really demoralizing.

I think it’s easy to sort of do this post-mortem or analyze any business and talk mostly about sort of these practical concrete factors.

0:16:36.7 But for sure, I think the fact that it was demoralizing to the whole team definitely affected our ability to build the business as well as we wanted to.

In ways that I’m not sure I can completely tease out, but I’m very confident it had an impact.

0:16:48.5 I think momentum and good things happening kind of begets more momentum. And when you lose that momentum, I think it can be really hard to get it back.

Jordan: No doubt.

Max: 0:16:56.7 Yeah. So in terms of growth, the things for us – I mean, a ton – the business was always, from day one, built on a ton of word of mouth. 0:17:06.5 And that continued really up through the end.

I mean, one thing that – you know, even in periods where we had a relatively high churn rate, we found that it was really sort of unevenly distributed.

0:17:18.8 In other words, we would have a certain group of customers who maybe were really affected by some operational issues.

0:17:25.2 Because it only takes, you know, sort of one dropped ball for someone’s experience to turn really bad.

But we might have a whole other group of customers who just weren’t affected by it at all and still loved Castle.

0:17:33.2 And so, we were still getting a lot of word of mouth through and up to the very end.

0:17:39.2 We were doing a lot of partnerships with realtors and other like people that were selling homes.

And I definitely – any listeners who run management companies that do not also have an attached brokerage, definitely would encourage them to check this out.

0:17:52.0 What we found is that, you know, any realtor who’s selling homes to investors wants to be able to refer property management.

But, usually, one: They have trouble finding people they really can recommend, who they think are doing a good job.

0:18:03.7 And then, so many PMs have attached brokerages, that the realtor doesn’t want to recommend a PM with an attached brokerage, because they need to know that person’s going to come back to them as the realtor when they want to expand their portfolio.

0:18:15.1 And so, we were kind of able to play up that and getting a lot of referrals that way.

0:18:18.2 And then, the other piece for us was just, and I think that this is a – something that we got right that a lot of startups don’t, is just boots on the ground.

0:18:31.4 I mean, we went to different meetups. We were part of community events. We kind of really got out there and saw people.

0:18:35.7 And I think that some startups like, you know, think, “Oh we just got to be behind our computer, like doing 0:18:39.6 [Inaudible] and stuff.”

0:18:41.8 But, especially, you know, in the early days, like that can have a real impact, and you only – it sometimes had a – it’d be a really delayed reaction. Right?

0:18:50.2 In other words, like, it’s rare that you’re going to a meetup, meet an investor and immediately close them there.

0:18:55.5 But we’d go to meetups, we’d meet people and then five months later they’d call us to say, “Hey you know, I, you know, wasn’t ready then, but now I’m kind of thinking about switching management, and I remembered meeting you guys, you know, back then and we’re ready to talk.”

0:19:06.7 And so, that worked for us too.

I do think, though, having now kind of taken more of a step back and looked at the industry as a whole, you know, as you kind of mentioned earlier, there’s a couple other tech enabled or venture backed property management startups out there.

0:19:23.8 I think if anyone is going to make this business model work, it’s going to be through just a pure acquisitions model.

That was something we always thought about, but it’s just dependent on being able to raise a lot more capital than we were able to at the time.

0:19:36.6 I think that, ultimately, that’s going to be the only way to scale this business and make it – build a really, really large management company is just to be buying other small management companies.

Jordan: 0:19:46.4 Well, that’s interesting.

You say that, but you also didn’t talk much about traditional digital marketing, paid acquisition on the organic side. Is that something you guys dabbled with as well?

Max: 0:19:55.8 Yeah. And so, we did a lot of that too, and it worked really well for us.

0:19:59.2 But what we found there was that there was a real cap. Because, in – you know, for most of those digital marketing efforts, basically your cap is you can acquire some pretty high percentage of people who are actively looking for property management.

0:20:15.0 You know, we were the number one search result, number one or number two, moving back and forth – search result, for most of the common terms around property management in the Michigan area.

0:20:25.8 We had dedicated landing pages for every municipality in our service area that worked some of the top results for those.

0:20:30.2 We were the top buyer for Adwords. 0:20:33.2 I don’t know what percentage of those people we were getting, but I’m pretty confident it’s a pretty high amount.

0:20:38.3 But, ultimately, you’d look and see, ok – and this – I’m making this up, but this is maybe close to what the number was.

You know, there are – you know, a couple hundred searches for, you know, Detroit property management every, you know, week, let’s say.

0:20:53.7 And so, realistically, you know, how many of those people are actually ready to buy? You go down and down.

And even if you’re going to capture a lot of those people, there’s ultimately a cap there.

0:21:02.5 And to get – you’re never going to be able to grow faster than the rate of people actively looking for what you’re selling, through, at least, like the traditional digital marketing techniques.

0:21:11.0 And so, they worked well for us, but they – that resulted in a pretty steady amount of new growth that we felt like we weren’t going to be able to ramp up beyond that.

0:21:22.6 And definitely from talking to customers and other people in the industry, my – I mean, there’s no definitive research on this, but my intuitive sense is that above 50% of people who are in the market for property management are not just sitting down and like doing a search and then talking to some different companies.

0:21:38.4 A ton of it is happening through recommendations and word of mouth. Because it’s in some ways, a kind of commoditized industry and a lot of it is based on trust and reputation.

Jordan: 0:21:47.4 Yeah, key assets.

So what I hear you saying there, is that category expansion, broadening awareness is a big opportunity for growth beyond just targeting – fighting over the zero sum game 0:21:58.1 [Inaudible] online searches. 0:22:01.0 Totally makes sense. I hear that.

0:22:02.8 I think about companies like Renters Warehouse that have a huge – really pioneered the radio, kind of high dollar ad spending experience and created, like, a surround sound effect in terms of consumer impressions in their local market. That makes sense to me.

0:22:16.4 Talking about some of the operational points of differentiation that were tech enabled. 0:22:22.7 When you talked about better customer experience, creating delight, etc. 0:22:24.9 What were some of those strategic wins that you were really proud of for the consumer?

Max: 0:22:29.6 Yeah, yeah, so I’ll talk about kind of two. I’ll talk about one that worked really well, and then one that didn’t work as well.

22:35 So, one that worked well was we had this system of on demand independent contractors for unskilled labor who we called stewards.

0:22:45.6 And that was basically any onsite task at a property that didn’t require a very specialized skill.

0:22:49.7 So stewards would go conduct the group showings, replacing tenants, they’ve installed lock boxes, they pick up keys. 0:22:55.5 It was mostly when properties were vacant.

0:22:57.8 And that worked really well for us in a couple ways.

0:23:02.9 One was that that was an area where – and you know, the tech platform enabled us to easily have those people assigned to different tasks in our system based on their calendar availability, their geographic distance from the property, etc.

0:23:15.6 And so, that did result in huge efficiency savings.

23:19 And it also – we also found it – that combined with our broader tenant placement system enabled us to have a really quick moving tenant placement machine.

0:23:29.3 We were replacing tenants in an average of three weeks by the time the business wound down.

0:23:32.6 Which was about two weeks faster than the average for the metro Detroit region. 0:23:36.3 Obviously, it is very different in different municipalities.

0:23:39.6 And I think that was a combination of our listings tools for applicants being really excellent.

0:23:50.3 So, you could save your information and apply to multiple properties at once.

We were very aggressively re-marketing new properties to existing applicants who had passed the screening and we knew about their preferences, but maybe they hadn’t gotten a previous property.

0:24:04.7 We built a really good tenant facing brand and we – and then this steward program made our showings be really efficient.

0:24:12.9 And so, that was something that worked really well for us.

0:24:14.9 I think on the – one that didn’t work as well was for maintenance.

0:24:20.7 So, we had, you know, a large group of contractors who were on the platform. We built what I think still is a really cool tech platform for communicating, posting and getting transparency around maintenance.

0:24:33.6 And what we found was that property owners, by and large, really liked the tech platform. 0:24:37.6 It gave them a lot more transparency into what was going on with maintenance.

But maintaining the quality of our contractor network was just an ongoing challenge that we were never able to get quite right.

0:24:48.2 Even when, I mean, we think we got it right and we had this group of really great contractors, and then over time, they just wouldn’t – they would stop being as good. It was just an ongoing battle.

0:25:00.4 And, I think, also on top of that, one of the big lessons we learned there was that – I think early on we were focused too much on the objective metrics of our contractors’ performance.

0:25:15.6 And that’s going to sound weird, but I guess what I mean by that is, like, we would get customer complaints that were, you know, “This maintenance was too expensive. It didn’t happen fast enough.”

0:25:25.5 And then, we would really work hard on that and we would drive down our prices and drive down the time maintenance took. 0:25:30.2 But the complaints wouldn’t change.

0:25:31.8 And I kind of realized – and I, in no way – look, if any Castle customers are listening to this, there certainly were, up until the very end, many times when maintenance was too expensive, or actually took too long. So I’m in no way minimizing those very real complaints.

0:25:47.6 But what we also discovered was that, you know, if you’re a property investor in California, you haven’t seen this property in a year, you don’t really know what’s going on with the maintenance.

Having maintenance on your house sucks. There’s really no – unless we fixed it in half an hour for $5 dollars, it’s never going to be so quick and so cheap that you’re like, “Wow, what an amazing deal!”

0:26:08.9 Maybe it might be like that for some very standard issues like replacing a door, where you can have a good sense of what it should cost, but if it’s some weird plumbing issue, you don’t know how much that is supposed to cost. 0:26:17.9 You don’t know how long it should take.

0:26:20.1 And what we learned was that a lot of what I think we had to do there was around communication.

0:26:27.0 It was about giving our customers a lot more information and communicating around what was going on better, such that we were clearly communicating the value that we were providing.

0:26:37.2 Because, I think often, when someone says, “This is too expensive,” that can often be a proxy for trust.

0:26:41.6 And what they really mean is, “I don’t have the information I need to trust that I’m getting a fair price.”

0:26:47.6 And just making it cheaper without addressing that trust component doesn’t really solve the problem.

Jordan: 0:26:53.5 Ooh, I like that. Ok.

So I’m thinking about positions versus interest. My interest is, “I want the job done well.”

My position is, “You’re doing a bad job. I don’t know that’s the case but I’m just – I’m not getting enough proactive communication to make me feel like my interest is being taken care of. So I may even take an irrational position relative to may actual interest.”

0:27:21.0 How did you handle communication around maintenance?

That seems like a great example of where tech would be a solution that could actually enable a higher cadence of communications.

0:27:31.8 Think about what Property Meld is doing in the market and kind of enabling getting bottlenecks out of the way to increase the flow of communication. What are your thoughts there?

Max: 0:27:42.4 Yeah so, I think that definitely is an opportunity for tech, and it’s something that we certainly did.

You know, we had basically this real time platform for issue management that was pretty effective.

0:27:52.2 But I think, ultimately, another lesson we learned was that sometimes – property owners all say they want transparency, but too much transparency can actually backfire.

0:28:03.6 I think a great example is: One thing we always heard from customers when we were first starting out was, “I want to know more about what’s going on in my property in real time. I don’t want to wait until the end of the month to have to find out.”

0:28:14.5 And so, initially, property owners would get a real time notification, if they wanted, every time a new maintenance issue was created at their property.

0:28:21.9 What we found was – started happening was, that we would, you know, these customers would get these notifications and then we would get all these emails or calls that are like, “Hey just calling to make sure you’re going to deal with this maintenance issue.”

And we’d just be like, “Yes, like that’s our job. Like, we fix things in your property. We’re doing it, you don’t have to call in.”

0:28:41.0 But what we discovered was that those notifications were actually creating anxiety or causing people to want to call or email to make sure we were on the job.

Which actually decreased our ability to be on the job because we were suddenly spending 20% of our time answering these calls and emails.

0:28:56.3 And so, we later adjusted the system so that owners didn’t get a notification until we had already assigned a contractor to the job.

0:29:03.4 So by the time they learned about the issue, there was already clear evidence that we were actually doing something about it.

0:29:08.4 And that really helped. But it’s always harder to take real time transparency away than it is to add more.

0:29:14.9 And I think that’s a good lesson in – to run a successful business, you have to give your customers what they want, but that doesn’t always mean just implementing exactly the thing they say they want.

Kind of going back to what you were talking about before between position and desire and intention. 0:29:32.3 Like, you kind of have to figure out what’s that second order.

0:29:35.9 For example, a customer might say, “I want real time notifications about all maintenance.” Usually that comes from a place of, “Well my previous property manager was very untrustworthy. Didn’t do a good job, so I feel like I need to be always monitoring things. But maybe in an ideal world, what I really want is to never have to look at maintenance but be 100% confident that they will always be taken care of quickly, promptly and affordably.”

Jordan: 0:29:59.1 Sure, fair enough. So to the degree that I do become aware of it, I want to know that it’s being handled well. But there may be a subset of issues that I’d rather not be bothered with in the first place. I get that.

0:30:09.1 I do want to get your feedback on kind of the underlying elements involved with successful labor coordination around maintenance.

I think about the parallels with Uber, for example, where you’re coordinating these strangers.

There’s a lot of VC money that’s coming in that’s kind of inflating the prices and bringing people – bringing drivers en masse.

0:30:32.3 Over time, the subsidy has been eroded, the profile of the social strata of the people that are coming in to be drivers has changed over time.

0:30:43.5 Some maintenance contractors, GCs, you know, particularly the smaller guys swinging the hammer, he may charge rates that he can barely survive on. Right?

0:30:54.0 He may have a business model that is fundamentally broken and, therefore, there was nothing you could do because he set himself up for failure. 0:31:00.0 He was always going to churn out in six months.

What do you think philosophically is the opportunity for any of the larger players that are trying to have a scaled approach to labor coordination?

Max: 0:31:10.7 Yeah. So, it’s interesting.

So first off, I think one lesson we learned pretty early on, which is an example of how that labor pool for us was very different from Uber, is that when we started, we really thought, “Ok follow the Uber model. Get as many contractors on the platform as possible. More competition, drive down cost.”

0:31:30.2 But what we ultimately realized was that, you know, a skilled contractors is very different from someone who’s driving a car. 0:31:35.6 Ensuring quality is a way trickier problem.

0:31:39.4 And so, we actually ended up scaling the network back so that for any given, you know, trade, we would have two to five people who were good at that trade in the network.

And that meant that for any one of those people, we were usually going to be 20-60% of their workload.

0:31:54.7 And that enabled us to have at least have some leverage over them, where the threat of losing Castle jobs actually meant something.

0:32:00.2 When we were just giving someone one or two jobs a week, we basically had no leverage to make sure that they were actually doing high quality work.

0:32:07.3 Which is a challenge we never fully solved, but it got a lot better once we actually scaled down the network.

0:32:11.8 So, that was – that’s, I think, an important way these networks are different from sort of like classic like Uber style marketplaces.

0:32:18.8 But ultimately, I think anyone who’s trying to really do this at scale, I think I definitely – I am not as big a believer in the on-demand labor model for maintenance in property management as I was before.

0:32:32.1 We brought – once we reached the scale where we could keep a handyman busy full time, we brought on a full time handyman.

0:32:39.7 And the plan was actually to just continue bringing on as full time employees as long as we had enough work to keep them busy a full 40 hours a week.

0:32:46.6 I think, obviously, the independent contractor model makes sense. Like for something like a roofer, I mean, you’re probably never going to have enough roofing work that you can keep one roofer in a location busy 40 hours a week.

0:32:55.4 But as soon as you have enough work that you can fill someone as a full time employee, I think at this point it does usually make sense to bring them on.

0:33:02.9 Yes, your costs go up, there’s some coordination effort involved, but maintaining quality in maintenance is so hard that I – I’ve now become sort of a more of a convert to just be able to exert as much employer control over those workers as possible.

Jordan: 0:33:18.2 So that’s the cost for you. What about the revenue piece? Did you guys do maintenance mark up?

Max: 0:33:23.1 So we didn’t. I mean, one of the big – one of our big beliefs was that most maintenance markups are just fundamentally unfair.

They, you know, you have management companies that charge a percentage markup on maintenance and they’re incentivized to get better – to, you know, not get lower costs.

0:33:41.6 We had a – we did have one source of revenue for maintenance, which was that if a customer wanted to do a really large, like rehab project that was outside the scope of what we would do, we would refer them to a trusted rehaber or contractor partner, and we would get a referral bonus for doing that.

0:33:58.0 But, ultimately, I think the opportunities for making money on maintenance at scale, which were things that we had just sort of started to look into when we wound the company down. 0:34:05.7 Sort of around 800 doors we were kind of at that point.

Are things like, you know, buy a bunch of doors in bulk, and then when your customers need a door, offer them a price that’s lower than what they would get at Home Depot, but still higher than what you got when you bought 100 at once. 0:34:21.2 And, you know, kind of keep the spread there.

Jordan: 0:34:23.5 Got it. So maintenance markup is a non-significant contributor to the overall business model.

The average property management company is operating at an operating profit of about 6%. 0:34:36.4 And maintenance markup revenue can definitely make a significant impact.

0:34:40.2 Do you think that, in retrospect, if you were – had been able to make up the delta, to bridge the gap and get to the next funding round, do you think it’s more likely and viable that that would have had to take place purely in terms of absolute unit growth?

Or could you see that revenue-wise, also having been bridged through a greater contribution of ancillary fees?

0:35:05.1 Whether it be maintenance markup, etc.? 0:35:08.8 I mean, do you think that was a mistake, kind of taking that – drawing that line in the sand there?

Max: 0:35:15.3 I don’t, as it regards to maintenance specifically. I think that was just sort of, for us, most of the classic maintenance fees just were incompatible with building an experience that’s really fair to customers.

0:35:26.4 But on the broader point, I totally agree that ancillary services are going to be an important piece of the revenue stack for any management company.

0:35:33.0 I mean, our vision at scale was to be, you know about 50/50 ancillary fees and regular management fee revenue.

0:35:40.0 And we had already started implementing some of that stuff, you know, referral fees from realtors when customers bought new properties was a big one.

0:35:47.8 But, ultimately, at scale, I think there were opportunities for all kinds of things. Insurance for both property owners and tenants.

There’s – I mean, if you 0:35:53.4 [Inaudible] when a tenant is moving, there is an opportunity for cable, storage, mattresses, I mean all the things that someone needs when they move.

0:36:02.4 Definitely one of the things – one of the big pieces that we thought of the long-term value that we were creating, and I think any property manager’s creating, is that you sit at the – you are the main touchpoint for property owners and for tenants.

0:36:14.2 Both of whom need, like a wide variety of services that all cost money and that all have referral fee opportunities there.

Jordan: 0:36:19.9 So I’ve got to push back on your feedback about maintenance and the implications.

Max: Yeah, I’m curious to hear your take.

Jordan: 0:36:24.0 That the maintenance markup fee is fundamentally unfair.

I get the notion of the percentage being a lever that could potentially incentivize inflating the overall fee. 0:36:36.2 And, from my experience, those aren’t one to one.

It creates the possibility for perverse incentive, but incentives don’t – financial incentives don’t always work perfectly as intended.

0:36:45.8 Let’s look at the traditional real estate agent, the brokerage fee, right? That’s going to be a percentage. 3%, 4%, 5% of the transaction fee.

Is the real estate agent really and genuinely primarily motivated to max the sale price in terms of facilitating revenue to them? Probably not.

In reality: velocity. Velocity is a way bigger factor.

0:37:09.7 The number of deals that they can get done is going to be a more motivating factor than thinking that because it’s a percentage lever they’re necessarily going to be motivated to sell for as much as possible.

0:37:21.9 So, I definitely see an opportunity with maintenance markup, and as long as people go in eyes wide open.

0:37:27.3 It’s the non-disclosures is where I think this industry gets a bad reputation.

0:37:33.3 As it relates to the trust accounting piece, the finance, the money piece, did you guys own and fully build out, like an owner portal, financial reporting? Did you guys use any off the shelf software? How did you manage the financial transparency piece?

Max: 0:37:50.5 Yeah, so that was something that, for the most part, we completely built off the shelf.

I mean, we were using – underneath, we were using a lot of, you know, developer services that make this stuff easier. Like Stripe for payments, etc.

0:38:02.6 I think that’s one of the big advantages of starting a tech company now, is you have all these other building blocks.

0:38:06.5 But for the most part, those really weren’t user facing. They were just kind of – they were more kind of infrastructure.

0:38:12.5 And that was something that – frankly, our financial tools were fine. They weren’t bad, but they also weren’t a selling point. I think they were pretty average.

0:38:25.0 It was something that we wanted to really expand down the road.

I think a big – I think a big opportunity in property management tech, is that most property management tech is still fundamentally organized around different services that you do. 0:38:38.4 Versus being more of like an asset management platform.

0:38:42.0 But, for a property owner, like, you know, a bunch of properties, like that’s an important financial asset.

0:38:44.4 And I think that property management software should be taking more cues from, you know, 0:38:48.9 [Inaudible] basically.

Jordan: 0:38:50.6 So in retrospect, was it a mistake to not use more off-the-shelf software? I think about, not being technical myself. Being in the tech business, but I am not technical. I am never tempted to open up the command line and start coding. Right?

0:39:05.3 What I am tempted to do is to think about how we can use technology to augment the traditional service-based business to get more leverage.

0:39:12.2 What do you think the opportunity may have looked like for somebody that takes more the flavor, the tone, of taking a traditional crusty service business model and trying to make it incrementally better through technology, rather than rebuilding it from the ground up?

0:39:27.8 So that may look like saying, “Hey you know what? I’m going to bite the bullet. I’m going to use, let’s say Propertyware.”

Not AppFolio, because the situation is so dire in terms of getting your data out. Middle of the road. Let’s say Rent Manager. Rent Manager is probably an even better example.

0:39:43.3 They have a legitimate API, pull your data in, out. Strip the system bare. Have your own data repost somewhere else. Have a combination of services. 0:39:51.9 Kind of like a retail micro-services architecture, if you will.

0:39:56.4 Do you think that there’s a legitimate opportunity there?

Or do you take more of a purist approach and think that even if it didn’t work for you, the true scaling play does require you to build things from the ground up.

Max: 0:40:09.3 Yeah, so it’s interesting. I think at a high – I’m going to have kind of a different spin on your question, which is I think at a high level, you’re basically asking about when does it make sense to use what’s out there following existing best practices versus when it makes sense to blaze your own path and reinvent the wheel, so to speak?

Jordan: 0:40:23.9 Build vs. Buy. Classic question.

Max: 0:40:25.8 And I think our lesson there was actually – I would kind of flip that on its head. So I think – what I think the big mistake we made was, I think the software technology was the area – one of the areas that we were the best at.

It was the areas that the customers always loved, even up to the end.

0:40:39.5 But what I think our mistake was that there were too many areas where we tried to innovate or reinvent the wheel just in terms of pure operations.

0:40:47.5 And I think we would have been more successful if we had basically found a really well run property management company, which is, admittedly, not easy to do. But there are plenty of them out there.

0:40:56.1 I mean, like, I’ve met a ton of them at PM Grow Summit and was very impressed.

0:41:03.6 And found a really well run property management company and just basically, like, clone the sort of traditional way of how they were running their operations.

Then layered our own technology and user experience on top.

0:41:16.3 And then, much more slowly innovated on the operational side, kind of a little bit of a piece at a time. In the way that we could handle it.

0:41:22.9 And that’s how I would do things for us differently.

0:41:26.0 That’s 0:41:25.8 [Inaudible] for other people, the opportunity that you’re talking about definitely could exist.

0:41:29.3 Like, if your strength is really operations, use off-the-shelf management companies 0:41:33.4 [Inaudible] software writer and really innovate on the operations side. I think both models can work.

0:41:39.9 And there’s probably other – I mean, I think there’s people who run a really – a business that’s traditional in every way, but they really innovate on the sales and marketing side, right?

0:41:48.1 I mean, there’s all kinds of different ways. 0:41:50.1 I think it’s just about what are your team’s main strengths and weaknesses.

Jordan: 0:41:54.2 Yeah. Ok, great. So now you’re speaking to me, man. I think that’s where the sweet spot is.

0:41:57.4 What would happen if a progressive, more traditional property management company snagged you as a consultant and were like, “Max. Hey. Help us rebuild this. Help us take this to the next level. We have budget, we’re willing to spend. We’re progressive.”

0:42:15.8 Where do you think you would be inclined to start with that more incremental approach?

0:42:19.9 It’s not trust accounting right? It’s not rewriting the trust accounting system. Where do you think you would start?

Max: 0:42:25.3 Yeah, I mean that’s – I would start – I think it’s – at a high level, it’s more about, like user experience than individual features.

I think when you look at a lot of property management software, one of the reasons it’s a bit clumsy, is that, you know, it’s being made for – you look at, like a Yardy or a Buildium, and they have to sell all these different kinds of property management companies who do all these things these different ways and they all might need different obscure features.

0:42:51.6 And so, you end up mostly competing on a long feature checklist versus what tool is really the most pleasant to use.

0:42:57.7 And the owner experience is a real afterthought, because if I’m Yardy, I’m trying to sell to a property manager.

0:43:07.1 That property manager is probably competing with a bunch of other property managers who all also use Yardy.

0:43:12.1 So if build a better experience for property owners, that doesn’t really help me sell to my customers the property manager’s better.

0:43:20.8 Because if I’m a property manager, and 30 other managers in my area are using the same software that I am, having a better owner experience in the software tool, it doesn’t differentiate me. Because everyone else is going to get that same experience too.

0:43:30.9 And so, I think a focus on the owner experience, basically, at a high level is the way to go. 0:43:39.8 And I think that’s something that we did really right from a tech perspective, but just weren’t able to back it up with the operational productivity necessary to make the complete package work well.

Jordan: 0:43:48.0 Got it. So what might that look like? I mean, what do you think a well done – what are the basic elements of a well done owner portal, in your mind?

Max: 0:43:56.4 Yeah, so I mean, at a very high level, I think the way I think about it is trying to convey information in a way that lines up with how people actually think versus how a tool is designed.

0:44:07.7 And so, the great example I give of that is, like, you know, going back to this idea that most management tools are segmented by service.

So, if you’re an owner, maybe you can go look at payments. You can go look at maintenance, whatever.

0:44:21.5 But if you think about, you know, my classic example is, you get a new tenant. Right? 0:44:26.8 So that means a tenant passes a screening, they sign a lease, they pay their rent, they pay their deposit, they move in.

0:44:33.3 As a property owner, for me, that’s like one story or one event.

But in typical management software, how would I see that that happened? 0:44:39.1 Well, probably someone – leasing agent calls me.

Other than that, it’s like, “Alright, I’ve got the lease and background check and documents.”

Maybe I go to my accounting and see the payment. It’s like broken up into all these discreet pieces that obviously need to remain accessible as well, but I think communicating, kind of – helping people understand the story of basically what is going on in their property is where there’s a lot of opportunity.

Jordan: 0:45:01.2 Story, man. I’m totally with you on that.

0:45:05.0 What do you think about the opportunity with, kind of positioning yourself more as a fiduciary rather than a glorified gopher?

I mean, obviously that’s a no-brainer. You want to be a high authority, you want to be a trusted advisor, etc.

0:45:17.1 But where did you find that the sweet spot was in terms of talking in more financial terms and engaging in that conversation.

0:45:25.0 Which can be an opportunity but it could also overwhelm people if you’re jumping right into cap rates, to ask them …

Max: 0:45:31.6 Yeah. Yeah definitely.

I mean, I think at a very high level, the opportunity there is that for most property owners, property management is just a cost center.

And if you can turn yourself into a profit center by not just cutting costs, but delivering added value, 0:45:46.5 like helping owners increase rents. I think that’s a real opportunity.

0:45:49.1 That was definitely another thing that I think was a real challenge of the Detroit market, is that in any kind of market where rents are lower, you know, for us, if we could help a property owner increase rents by, you know, let’s say 5%, which is, like, you know, that’s pretty good to get out of – and I mean, like, not by, you know, doing capital improvements or anything, but just through the quality of our management.

0:46:13.1 You know, if the rent was $850 bucks, that’s going to be, you know, $40 bucks of rent a month.

0:46:18.9 Which is – it’s not nothing, but it’s not as significant as if you’re able to generate those same percentage increases in more higher end markets.

0:46:26.0 I think – it made it, I think in lower end markets, there’s not a ton you can do to be a profit center as a property manager. 0:46:31.1 You mostly have to focus on being a cost center. And that’s a harder position to be in.

Jordan: 0:46:36.6 Right-o.

Alright, my man, well, I want to wrap up here by just kind of going over some summary views – some summary high level thoughts on the big takeaways from the opportunity.

From one entrepreneur to another, I got to say, you went down the path, man. 0:46:55.8 You went after a really, really hairy hard problem.

0:46:59.6 Property management is just – it’s sticky, and it’s hard. And particularly doing it at scale. 0:47:05.4 So, kudos for attempting to take it on. Kudos for being willing to talk about it publicly.

0:47:08.7 If you were going to kind of sum up what you learned, some high level lessons of what you think could be useful to the property management companies that listen to this podcast, what would it be?

Max: 0:47:20.6 Yeah. So there’s one piece I’d like to touch on that hasn’t come up so far, which I think is another big mistake we made that is a little bit more subtle.

0:47:28.7 Is that, one of the things I would have done earlier, in retrospect, is just higher some people who were a lot more experienced people managers.

0:47:37.3 I think we’ve talked a lot about the practical elements of like managing properties, but kind of as regarding your team, you know, we were 18 by the end. Which isn’t huge, but it’s enough that it’s not just a few buddies in a room.

0:47:47.3 I think the people management element is also really important and was an area where we – I don’t want to say we didn’t pay enough attention to it, because we knew it was very important early on, but I think we just ultimately didn’t make – I think having one person who had run a, you know, customer success department at, even a non-real estate company for, you know, 15 years.

0:48:06.8 Like, early on would have been really helpful and is something I would definitely do differently.

0:48:10.8 So that’s one of the big lessons, I would say. Like, don’t focus so much on the specifics of your business that you, you know, accidentally neglect, kind of best practices for both and business in general.

Jordan: 0:48:22.0 That’s good. Yeah. It’s always a ‘who’ question. The ‘who’ question is always hire order than the ‘how’ and the ‘what’ question. I appreciate that, man.

0:48:28.9 Hey, if folks want to find out more about what you’re doing next, where’s the best place for them to go?

Max: 0:48:34.9 Probably follow me on Twitter. That’s @MaxNuss, where I say what’s up in my life. And you can also check out my personal website. That’s MaxNuss.com.

0:48:47.3 Not a ton there right now since I’m mostly just taking it easy and doing a little bit of consulting these days. But that’s how you can stay up to date with what I’m up to.

Jordan: Alright. Love it, man. Good. Well, it’s some much deserved time to decompress. Look forward to see what you’re going to do next. Thanks for coming on, man.

Max: 0:49:01.5 You got it. Always a pleasure talking to you.