Management Co Financial Drivers
HOA management companies thrive in all economic conditions. Even when homeowners are struggling to pay bills, these corporations are flourishing. While some companies are feeling the pinch of inflation and interest rates, the HOA management business doesn't feel the pain. How can this be? The biggest contributors to profit stability are rate increases pushed onto existing customers, transfer (resale) fees, and reserve fund investment services income.
- The single largest contributor to long-term financial stability for HOA managers is pricing increases. Management agreements by default come with terms that allow managers to increase prices without approval, buried at the bottom of a long annual disclosure letter. One letter in the mail, and BOOM! All of your costs have increased beyond the prices in your signed management agreement.
- The second biggest driver of the financial success of HOA property management firms is transfer fees. Commonly called resale fees, they are charged when a home within the community is sold. In exchange for the transfer fee, the new homeowner is provided governing documents (CC&Rs), HOA bylaws, meeting minutes, rules and regulations, financial statements, reserve studies, and more. Effectively, what they’re receiving is a stack of papers – papers that already exist, not uniquely generated documents. The fee is capped in certain states and remains a fair cost to the homeowners. However, in states where transfer fees are uncapped, management companies have aggressively raised pricing for years, driving millions in profits. The cost of providing these services, if one could amortize the upfront and ongoing costs, is next to nothing. Yet this gigantic stack of mostly boilerplate documents can cost over $1,000 all-in. No one questions this – I think because it gets lost in the much larger real estate transaction taking place – but this fee is egregiously overpriced.
- The largest service providers in the industry offer reserve fund management, an add-on service offering to generate safe returns on your HOA's excess cash in exchange for a share of the interest income generated. Corporate management companies leverage their size to establish banking relationships that will yield in excess of what the HOA can safely generate on its own. This service is a win-win for most HOAs and their management companies. Even though the two entities are splitting the interest earned, both are generating more than they would otherwise. In almost most cases, the management company is pocketing a multiple of what the HOA is taking home. The true mentality a board must take into negotiations is that, yes, both parties are winning, but without your HOA reserve funds, there would be no profits at all. The HOA deserves its fair cut.
- The largest service providers in the industry offer reserve fund management, an add-on service offering to generate safe returns on your HOA's excess cash in exchange for a share of the interest income generated. Corporate management companies leverage their size to establish banking relationships that will yield in excess of what the HOA can safely generate on its own. This service is a win-win for most HOAs and their management companies. Even though the two entities are splitting the interest earned, both are generating more than they would otherwise. In almost most cases, the management company is pocketing a multiple of what the HOA is taking home. The true mentality a board must take into negotiations is that, yes, both parties are winning, but without your HOA reserve funds, there would be no profits at all. The HOA deserves its fair cut.
Push back on these price increases, and you'll be met with a myriad of "explanations" for the rising costs: inflation, new administrative requirements, new compliance tasks, etc. The primary goal of the management company is to justify these costs by any means necessary. The most common approach is to overwhelm the board with a firehose of information, detailing every conceivable reason why costs would be rising. I have seen all these games and can expertly parse out price increases driven by real costs incurred by the management company and price increases aimed at padding the bottom line.
I don’t mean to imply that management companies are out to mislead boards about the true costs they’re being charged – all of this information is disclosed in a fair and legal manner. But what they won’t divulge is their bottom line on having your HOA as a client. On-site payroll costs, management fees, collection fees, etc., each drive a unique gross profit margin for their business, to the point where it’s often worth breaking even on some items to reap outsized benefits on others. My team gives you full transparency on how competitive your management costs are and what kind of profits you create for your management company. We are experts at knowing where to push and how hard. After all, get too aggressive negotiating low-cost services, and the management company won’t hesitate to terminate your HOA as a client.
Let Boardwise empower your HOA so you don’t end up being the management company’s profit margin.