How community association management companies turn a profit

Posted by Andrea Drennen, CMCA on August 21, 2013

 

Image Credit: Absinthe, Caesar's Palace: https://commons.wikimedia.org/wiki/File:Balancing_act_(5892760393).jpg

How do I make my CAM Management Company More Profitable?

There are 3 sides to the industry we serve. You have the homeowners, who make up the board of directors for the associations, which hire the management companies. By nature of the fact that each one of these groups is reliant on the others to succeed, the three sides aren't always in perfect alignment. It's like a high wire circus act - one needs perfect balance to avoid falling down. Perhaps the most challenging aspect of the balancing act for the management company is finding a way to be profitable.

Let's talk about management fees.

Price is going to be a factor. Always. This causes most management companies to contract their services to a community for as low a price as they can possibly afford. Thus, profit margins in community association management are almost always razor thin.

Homeowners don't want to pay any more money than they absolutely have to in order to maintain the property and retain access to amenities. In fact, most homeowners probably already think they are paying too much in monthly dues, no matter how much (or how little) they are actually paying. The Association, as represented by the board of directors, is getting pulled on two sides. On the one hand, they have to answer to the homeowners who may be complaining about how much they are paying for the level of services they are receiving. On the other side, the board (which also happens to be made up of homeowners) is confronted with a seemingly endless supply of vendors with their hands out asking for more money to provide the level of service that the homeowners demand.

Enter the management company. Most boards of directors hire association management companies for the following reasons:

  1. To manage vendors and coordinate community maintenance
  2. To setup and provide accounting services for the community
  3. To maintain a consistent level of services and amenities within the community
  4. To maintain or improve property values (primarily by enforcing rules compliance)

Now that sounds like a tall order—and it is! But due to the fact that the boards are responsible to the homeowners, price is going to be a factor. Always. This causes most management companies to contract their services to a community for as low a price as they can possibly afford. Thus, profit margins in community association management are almost always razor thin.

There is no profit in management fees

Let me reiterate, because it is really important to understand this point—most management companies do not make a profit from their management fees. More often than not, management fees are barely enough to cover expenses, and sometimes they do not. To offset these thin profit margins, management companies employ a combination of techniques:

5 techniques management companies employ to make a profit

  • 1. Portfolio Management
    First, and probably the most common technique management companies employ to turn a profit is to take on extra clients without increasing staff. The fees they are charging one community may not cover the salary of the property manager, but if you assign that property manager to multiple communities, the management company can turn a profit from the monies paid by the additional communities. In moderation it works great, but on that tightrope, the more you burden your managers, the lower the quality of service they can maintain for each community they serve.

    This technique is referred to as portfolio management, and is employed across the board by profitable management companies, although, as a general rule, the fewer communities an individual manager is responsible for, the better service she or he is able to personally provide.
Management companies using a reimbursable expenses schedule should review these costs on a regular basis to stay current with changing prices in the economy.
  • 2. More Efficient Technology
    Secondly, management companies can leverage technology to lower their own costs. This can include reduction of mailing expenses by employing mass email, reduced inspection times by employing smartphones, and reduced processing time in accounting by employing features like ACH direct debit and Lockbox for dues payments.

    Of course, as with any technology implementation, the tightrope aspect here is balancing the initial expense of purchasing and implementing the various technologies against the long-term savings that such technologies allow. Check with your software provider to see if there is a way to offset these initial costs through monthly subscriptions or pay as you go plans.
     
  • 3. Reimbursable Expenses
    The third direction management companies can take is to bid low on the monthly contract, and charge à la carte for additional services rendered on an as-needed basis. This method of charging back the community makes sense because the community only has to pay for additional services if and when they use them. Once again though, the management company has to walk that tightrope, lest they be accused of 'nickel and diming' the association.

    One way to avoid that stigma with this method is to implement a schedule of reimbursable expenses as part of the standard management contract. This schedule should spell out all of the potential costs that will be passed on to the community by the management company, and the board should review and approve this schedule. Additionally, management companies employing this method should schedule a review of these costs on a regular basis to stay current with changing prices in the economy. Grab the free sample reimbursable expenses schedule for examples of how this would work:

    Schedule of Reimbursable Expenses
     
  • 4. Bulk Pricing
    Another method that management companies employ to make a profit is to take advantage of bulk pricing. If the management company's portfolio consists of thousands of homes, they have buying power to negotiate discounts with lawn care vendors, pool care vendors, garbage services, suppliers, contractors and more.

    This buying power can help them to achieve cheaper prices on services, which can then be passed on to their clients, helping to reduce the overall monies the community pays each period, even if the management fee is slightly higher than smaller firms. Once again though, that tightrope comes into play if the association feels that they are paying more (or getting less) for services from the management company's vendors than if they had bid out the job individually for just their community.
     
  • 5. Provide Additional Services
    One of the final tactics management companies employ to turn a profit is to provide services that would otherwise go to another vendor. For example, a lot of management companies choose to create a maintenance division, a pool care division, or a landscaping division of their company.

    By providing these services themselves, they are able to keep that money in-house, and services like these often have higher profit margins than community association management. However, just like the bulk method, if the management company doesn't walk that tightrope and keep it balanced and fair, this option can easily turn into dissatisfied clients who feel they are being locked into a service provider that may not have their best interests at heart.
Image Credit: Wikimedia Commons - http://bit.ly/1aoA9c9

Since many management companies wind up using one or all of these methods (and more I didn't mention, I am sure!) the balancing act between profitability and meeting the needs of client communities can be quite complex and challenging. It's easy to paint a picture in your imagination of the community management company as a circus juggler on the unicycle riding up and down the tight rope.

If you are with a management company (or you're thinking of starting one), hopefully you've learned some ideas of ways that you can help increase profit margins to create a stronger, healthier company, while maintaining a balance with your client communities' boards of directors and homeowners.

Even if you aren't with a management company, it is my hope that by providing a better understanding of how management companies make money, I have provided you, gentle reader, with a better understanding (and even perhaps appreciation) of the services management companies provide. 

If you have experience with additional methods that are being employed to by community management companies to gain profitability, please share them in the comments!

 

 *Image credit: Nikolay Frolochkin via Pixabay


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