Determining a pricing structure for your community association management services
When you are trying to break into the community association management business, one of the things that can be a real roadblock to getting your new business off the ground is figuring out what to charge.
If you have not worked in that area of the country before, or haven't worked with the kinds of communities your new business is targeting, you may not even have a ballpark figure from which to start.
Let's talk about the different ways management companies set their prices and how you can determine how much you should charge.
Step One, Gather Intelligence
Selecting your fee is something that is very specialized to the services you provide, your location, and the amount you can carry (what the market will bear vs your competition vs your experience).
I know you're hoping that somewhere in this article I will give you an exact number and say "Start pricing here". But I'm not going to do that at all, because things may be vastly different where I am than from the standards in your neck of the woods. So you may lose accounts due to my price being too high and seen as unreasonable, or it may be too low and not be able to sustain you on anything but a Ramen noodle diet for the foreseeable future.
What I am going to do is talk about how you can determine for yourself what you should charge. First, you want to work out the answers to some important questions:
What will the Market Bear?
You need to learn what your target audience is currently paying in fees so you can measure your own fees against that. You don't want to price your services too high or you'll price yourself out of the running, but there is also a risk of pricing yourself so low that the board thinks, "There must be something wrong with this company if they are so cheap."
Short of direct industry knowledge, your best option is to ask the manager or board treasurer of your own HOA for a copy of the budget (and have friends and family do it in their associations). The community's budget is agreed upon by the general membership, so as a member of the community, you should be able to get a copy of that year's budget simply by asking.
You'll find the management fee line in the budget, but also look for reimbursement expenditure lines as well to get as accurate a picture of what the community is paying the management company as you can (more on that in a minute).
What will the Client Bear?
Regardless of the market, sometimes you have to cater to the specific client you are trying to woo. Consider the fee structure of the community.
A small 24 unit building, even with a pool may only be charging owners an annual amount, lets say it's $300 per year per owner. That means the total amount of money going into the community's coffers is $7200 annually, or $600/month. Out of that comes all of the budgeted expenses for the community, service provider fees (pool care, lawn care, garbage removal) as well as the big one, reserves. That doesn't leave a whole lot left over for your management fee.
Whenever you do a proposal for a community, make sure you have done your due diligence so you don't lose your seat at the negotiating table before you ever have a chance to sit down. You may find that tiny communities such as the one in the example simply are not worth your while to bid on. Better to learn that lesson now then when you are sitting accross the table from the board, or worse, a year down the road when you realize how much you are losing on this community.
What are my Expenses?
Your business has expenses you need to cover too - rent, electricity, salary (even if you are only paying yourself, you still need to make at least enough to cover those Ramen noodles). How much will you need to pay for gas and phones? How about capital expenditures like computers and software? Also don't forget about taxes (you have to pay employment tax on yourself too, you know!)
Take all of your expenses and figure out how much it will be per month and you have a minimum amount that you can accept just to survive.
How do I know what salary to pay myself?
I know I joked about Ramen noodles, but I want to say something specifically about salary. Entrepreneurs in particular are notorious for skimping on their own salary to get their business up and running, and that is perfectly acceptable, since the potential payoffs if you succeed can make near starvation seem well worth it. That said, when you are setting your fees, you should at the very least be aware of what kind of salaries are sustainable in your geographic area.
It's important to set a salary for yourself when determining your expenses, because even if you wind up reinvesting that money into the company instead of yourself, you are still giving yourself that cushion to fall back on should you need it.
You should be paying yourself a reasonable salary that you can include in the breakdown of your expenses if you should ever need to show that to a community association board. CAI does a salary review every 3 years that they publish (here is 2013) For a more recent (but more regional) salary study, you can check out the FLCAJ 2014-2015 Salary Information Survey. However, for just a quick regional check based on reports by actual community association managers in your area, you can use GlassDoor.
Step Two, Set a Rate
Once you know your expenses, it's time to calculate your rate. Standard business practice is to account for a 10-20% profit margin on top of expenses. Some startups go as much as 50%. I think it really depends on your experience in the industry and what kind of clients you will be targeting (gated, luxury communities can handle a larger fee, but they also need more of your time and attention, so you should definitely charge for it!)
The key is you need to have sustainable rates, that is rates that will enable your business to grow into the future. For example, if you charge only enough to cover your expenses, you will never have enough capital to hire on more employees, or you will wind up working yourself to the bone with more and more clients to try to make enough to accommodate the growth of your business.
So you can take your amount of monthly expenses and add a multiplier (for example, 1.2 for 20%) to set your monthly rate. Next, divide that number by 173.2 to get your hourly rate.
Step Three, Choose a Charge Method
There are 3 primary charge methods that management companies use: all-inclusive, variable plus ammended reimbursements, and the matrix model. Each of these has their pros and cons, and different parts of the country favor one or the other. I would encourage you to consider all of your options and choose the method that makes the most sense for your business. You may find that a modified version that combines elements of two or even all three of these is best for you.
With an all-inclusive fee (flat fee per door), the management company assumes that it takes a relatively equal amount of effort to manage a single home in any community. So the management fee simply varies based on the number of homes in the community, and does not account for additional work or process.
While all-inclusive charging sounds really easy, it can actually be the least accurate method of pricing your services. Unfortunately, all things are not created equal, and a community with 10 homes could take up far more of your time and energy than one with 1000 homes.
One major downside of all inclusive pricing is that there is little way to accurately predict how many copies, mailings, additional meetings, etc. you will need to do for this community. Management companies who use this method often wind up losing money on the contract and not getting paid for the volume of work they are doing. (There is also little room to grow or negotiate in this method. Because it is a flat fee, the value of the individual services being rendered are not represented in the fee structure.)
If you choose to go with an all-inclusive model, you should appropriately increase the base fee by a factor of 10-20% to accommodate for all of the 'extras' that may come up over the course of fulfilling your contract.
With a Variable Rate model, the management company sets a low cost "fixed" price for the management fee. This is often very competitive (read cheap) and barely covers the management company's expenses. (Sometimes, it is a loss leader and does not even cover expenses.)
This low fee is offset by Addendum Charges that cover every action not outlined in the actual management fee (copies, minutes, postage, attending meetings, gas, newsletter, inspections, collections, insurance claims, vendor management... pretty much everything except the bare bones basics that are included in the contract.)
Imagine going to a fast food restaurant and ordering fries from the dollar menu, only to get charged $7.50. When you exclaim 'How can it be so much?' the cashier explains the fries were one dollar but you were also charged for the container they were in, the salt on them, the napkin they gave you with it, the ketchup, and a portion to cover future repairs on the deep fryer. As you might imagine, this method of charging does not go over well with clients, who see these extra charges as "hidden fees".
If you choose to go with a variable rate in order to remain competitive with other management companies in your area, be certain that your schedule of reimbursable charges is very clear and that the board understands how your charges will be presented.
Matrix Model (Cafeteria Style Menu)
Think of the Matrix Model like a menu at a cafeteria, you can see every item clearly marked in price. If you want meatloaf and mashed potatoes, you see the price for each of those. You can choose if you want to include that delicious looking piece of strawberry pie. If you manage to resist picking up the pie, you do not have to pay for it, but you can always go back and get it later.
The matrix model outlines a matrix of each and every service you are able to provide, a number of hours per month you would need to spend on it and the number of times in a year the task would be performed, times an hourly rate, then adds up all of those values to get the management fee.
Sample Matrix Pricing Model
The value of the matrix model is that you can easily negotiate with Board Members to establish a customized set of services you will provide to them, as well as getting their buy-in on the costs of adding additional services.
For example, if the Board has a Secretary who is comfortable taking notes at the board meeting, they do not need you to handle the minutes. No problem, that's 1 hour a month at $25/hour that you can remove from the price. However, if a month down the road the Secretary decides he isn't comfortable taking minutes, the board knows that's going to add $25/month onto the fees, since they are adding on a new service. There is no need for negotiation or discussion, or asking you to do it for free as a favor to the board. They know how much it costs (it's on the menu) and they have already agreed to that pricing structure, so it's just a matter of course - if you want pie with that, you have to pay for it.
A great explanation of the cafeteria style menu was covered by James Bradley in his webinar on Behavioral Economics for community association management. If you have an hour, watch the whole thing. But if you only have a few minutes, the section on pricing starts at 23 minutes in, and the section on the cafeteria menu is at 30:35.
Step Four, Finishing Touches
Once you have selected which charge method you want to use, your next step is to start putting it all together. You'll need to develop your schedule of reimbursable charges, and break down your fee on a per door basis. Both of these things should be included in your management contract, so the there is no confusion or dickering over price once the contract has been approved and signed.
While writing this article, I consulted with PCAM Andrea Meyer Smith, and she had this advice to offer from her many years experience running a successful management company:
The main thing I learned over the years is to document everything that can occur outside of your routine services and document a charge for it or they will want you to do it without compensation.
Items such as website maintenance, insurance claims, project oversight, even banking. I had one HOA that had us open accounts at 7 different banks which took my CFO 2 full days to go to all of them and prepare all the necessary paperwork!
We even accounted for Board training when a new member wanted to come to our office and spend a half day questioning how we do everything because it would require one of us to go through every process and explain financial management to them.
The purpose of the reimbursable charges schedule is to get paid for your time for special projects and meetings that are not routine."
Schedule of Reimbursable Charges
A schedule of reimbursable charges (also called Addendum Charges) can (and should) be used in conjunction with any pricing model. This worksheet is usually included as part of the management contract, and details all of the costs that the management company will pass on to the community, and at what rate. We offer a sample schedule of reimbursable charges here.
While you SHOULD use a schedule of reimbursable charges, you need to be very careful about arbitrarily inflating rates. For example, $1.50 per mailed piece. This would cover a lot of things: the cost of printing the piece (wear and tear on equipment as well as the actual cost of ink and paper), the labor of physically folding the page and putting it in the envelope and sealing it, the postage for mailing it, and any handling that needs to be done, such as taking it to the post office, or filling out a return receipt form.
It seems reasonable when you spell it out until you think about the fact that for a 300 home community, if the management company is sending out on average 5 letters per homeowner per month, you are talking an extra $2250 per month that the community didn't budget for when they hired your company. Plus, between your discounted bulk postage rate and your specialized folding machine or online registered mail service, it really isn't costing you $1.50 for each piece of mail, is it?
While it is absolutely proper to charge for services rendered, you should be careful not to abuse it. Addendum charges can add up VERY fast, and can easily get out of hand. This should never be the primary source of income for your management company. Management companies that rely too heavily on 'reimbursements' for their profits often are accused of 'nickel and diming their clients to death'.
Breakdown Per Door
Regardless of which charge method you choose, your management fee is almost always communicated to the community's board of directors as a "Per Door" amount. This allows the community to break out the amount each owner's assessments would cover, allows for growing communities (for example, only phase one of the development has been built out, so the community only has 100 homes now, but within 3 years there will be 1200.) and also helps the board in the budgeting process.
To calculate the per door charge, take the monthly amount you have decided to charge that community and divide it by the number of units in the community. This will be the management fee amount that you quote to the board in your proposal.
It you've followed all of these steps, at this point, you should have come up with the perfect pricing scheme for your management company that fits your location, is appealing to your prospects, and most of all, puts better food on the table than Ramen noodles. Now go out there and win some contracts!