Owner Occupied Episode 3

All right, Peter, welcome again to, to the show, and we're gonna have a—

great to see you again.

We're gonna have a good conversation today. We're gonna talk about competition. It's something every small business faces. But in the property management business, you're facing some pretty stiff competition from, from some major tech players and people that have been partners of yours in the past. So I think, I think all of us as small business people can, can learn from that. And maybe you'll have some insight into how property managers are going to be dealing and navigating this new environment. Look forward to the talk today.

Yeah, absolutely.

Peter, you had an interesting post about on Twitter that, that caught my attention. And apparently some other folks got some traction, but property managers are facing competition from Zillow, somebody that you spend money advertising with on a monthly basis. Why don't you explain what that challenge looks like and what offering they're what they're doing and we'll begin that to have that conversation about what that looks like.

Yeah. Yeah. I'd love to. So Zillow has really, just a little bit of background, they've snatched up a bunch of other rental listing websites. So Zillow, I think a lot of people know they bought Trulia and Trulia was used by homeowners looking for homes, but it was also used by landlords to advertise their rental homes and apartments. And Trulia bought up several other properties that also have rental listing websites as a part of their offering. And so they've become kind of a juggernaut in the industry. It's to the point now where over half of all of our traffic comes from Zillow or Zillow-affiliated websites that they own. And when I say traffic, I mean people looking for homes to rent. So if we place an apartment available for rent, We were going to get a bunch of leads from Zillow, Trulia, HotPads, and some of their other websites. And then we get a little bit of traffic from some of the other websites like Zumper and Facebook and our own website. So for the longest time, Zillow was making this available for free to landlords. So if you had a rental listing and you wanted to make it available, you could list it on Zillow for free. And that had been going on for the better part of a decade that it was free. And so you almost had a whole generation of people come up that that's how they advertise their listings. That's how we did. And we became really accustomed to the power of having a free place to do that. The generation prior to me, it was like you took an ad out in the newspaper and the Yellow Pages, it was paid. It was paid back then, but then you had this weird time when it was free. So what started to happen recently is that Zillow is charging again for rental listings. So now you mentioned that we're paying Zillow and we are, we pay Zillow about $450 a month now to have our rental listings published through their networks. And we generally have anywhere from about 10 to 25 homes and apartments available for rent listings at any given time. So, so that's kind of happening and that's been an ongoing story. There's been a lot of discussion and weeping and gnashing of teeth about how they're charging now and everything else. People were mad enough about that. So then what started to happen in the last year or so is Zillow has now come out with essentially a rental manager platform. So if you're a small landlord or a property owner, You can go right on Zillow and they're providing tenant screening, they're providing the ability to collect rent, they're providing a rental application, and they're trying to make it easier for property owners to manage property themselves, which is a great thing. I think it's nice that they're doing that. It's a free country. They can do what they want. The problem comes in that that's essentially competing with us who are their customers, right? Because a lot of those folks who are looking at Zillow and using their platform to advertise rentals directly and take rental applications and collect rent, those are people who in theory would be using a property manager instead of going to Zillow directly. So it's been interesting to watch that develop. And I noticed Apartments.com was doing something very similar. So I sort of took some screenshots of that and posted it and I was like, "Hey, are you guys aware this is going on?" So that got some traction on Twitter. Then I posted it in a Facebook group for property managers and it exploded. I mean, it had 95 comments in a matter of 24 hours. People were just, you know, you had some people were arguing, this is outrageous, this is ridiculous, I can't believe this. And to make matters worse, Zillow actually advertises in our trade organization magazines and such. So you're opening your own trade organization that you pay to be a member of and you're seeing a huge advertising for Zillow front cover. So that was kind of funny.

But I know they're a major sponsor for the National Apartment Association.

Yeah.

ZillowApartments.com. Yeah. It's one of the largest trade shows in the country for rental property owners and managers. And, and now your competitors are now your vendors are becoming your biggest competitors or could be.

Yeah.

You view that— is, is Zillow offering a service for somebody that would otherwise be self-managing and packaging up those products, or is what they're offering a competitor to somebody who's looking for a professional property manager?

How do you think it's a little bit of both? I mean, certainly someone who owns 50 properties or someone who owns a 200-unit apartment building, you know, they're not going to use Zillow's little built-in platform. It's nowhere near sophisticated enough for what they need. But for the little kind of mom-and-pop investor who's just bought their first rental property or owns maybe 5 or 10 of them, or even what we call the accidental landlords who for whatever reason they can't sell their home or they're moving away, they want to rent it out, those are people who would traditionally turn to property managers or self-manage. A lot of them are even kind of on the fence about it. And I do think a product like this might tip them over to the side of self-managing, which obviously I don't love that as the owner of a property management company, but again, it's a free country. They can do what they want. Zillow can do what they want. And I think vendors competing against their own clients is a tale as old as time. I don't know if there's a vendor anywhere who hasn't looked at their client and thought, "Hey, I could do that." So in some ways it's an age-old story, and in some ways it's playing out in a new way here. I really view Zillow and Airbnb as kind of the two-headed monster that is positioned perfectly, both of them, either of them, to really extract an enormous amount of value out of the property management ecosystem. If you look at how Airbnb has captured the mindshare of short-term rental customers, so just, I mean, I'm sure you travel a lot for work. When you're traveling around, if you were to stay not in a hotel, but if you were to stay in a home or a vacation home or something like that, of course you're going to go to Airbnb. You're going to go on Craigslist? No, you're not going to do that. You're going to go on Airbnb, maybe one of the other ones, vacation rental by owner. And so because of that power, because of that aggregation of demand, if you own a short-term rental property, you basically have to go through Airbnb if you want to get your property rented and if you want it to be filled by a qualified resident who's going to pay the rent and not tear up the place. In other words, the best customers are on Airbnb. And so there is absolutely no reason they couldn't do the same exact thing in the long-term rental market. It would be as easy as flipping a switch for Airbnb to say, "Hey, we're now offering long-term rentals and it's the same Airbnb you know and love. You already have a profile there. You already have a credit card there. You already have a rental history there." And they could roll it out with kind of a select group of landlords. And if you're a tenant and you see that you could rent your next apartment through Airbnb for the same long-term rental rates that you're used to seeing on Craigslist or Zillow, why wouldn't you, right? Especially if you have the ability to see the landlord has a history of verified reviews from other people who have stayed in that property, and you see that Airbnb is forcing the landlord to use a standard lease, a standard security deposit, you make payments through Airbnb, your security deposit is handled through Airbnb and returned through a standard procedure, I mean, the power of that, I can't overstate it if they were to enter that market. So I know I'm kind of going on here, but there's some really interesting opportunities and threats coming from big tech in property management. And as I mentioned on Twitter, my hedge against owning a property management business is I've bought pretty heavily in Zillow and Airbnb stock because I'm either going to catch one side or the other, and I want to make sure that if they really do make some big moves, at least I can maybe capture some upside there.

Well, as a, as a business owner, you're used to competitive pressures. You're in an environment, there's other property managers, there's other ways where people can get that need met. What's the, in your mind, what's the difference with this big tech threat? Or is there, is there a difference? Are you just, you gear up to think about how do I offer a competitive product or service? How do you approach this?

Well, property management's extremely competitive, like most small businesses. We're offering a sort of a, I don't want to say it's a commodity, but it's a well-understood commonplace product or service. It's not like we're offering something brand new, some brand new tech product that's going to get really hot. There's a dozen other property management companies, even just here in Columbus, Ohio, that do exactly what I do. Yeah, we're certainly used to competition. And if you look, actually, if you read into the backstory of the property management industry, the FTC had to come in and smack around some of the trade groups here because they were getting a little bit too friendly and sharing their fee structures and other things. So the FTC certainly has a vested interest in making sure that competition thrives because that's what's best for the consumer. And I agree with that. Zillow and Airbnb are operating on a whole nother level. I mean, even setting aside their financial resources and the fact that they're huge public companies, it's really what I referred to earlier. They've captured the mind of the consumer. If you're looking for homes that you can buy, you go on Zillow. You just do. And if you're looking for a home to rent, you also go on Zillow. Maybe you go to a couple other websites, but they're getting less and less traffic. And so because these folks have captured the demand, they've captured the mindshare, that's everything. That's the game. That's the beginning of the end. Because if you say you own a 100-unit apartment building and you want to rent it out, if all your best tenants are on Zillow, you have to be there. I mean, of course, there's going to be these little boutique one-offs that They maybe develop their own website and continue to stay competitive that way. But I mean, it'd be like when you travel for work, say you don't want to stay at Airbnb, say you're staying in a downtown area and you want to stay in a big hotel, you're going to stay in a Holiday Inn, a Marriott, one of these brand names that you recognize. You're not going to go with some off-name hotel that you've never heard of. And there's power there. There's pricing power. It's really the top of the value chain that they're going to capture. Now, of course, there's always going to be a need for property managers. Someone's going to need to cut keys. Someone's going to need to go out in the middle of the night and deal with maintenance. Someone's going to need to turn over the properties, but that's really kind of low-value commodity, highly competitive type work that the value in property management is really in the tenant relationship and collecting the rent and communicating with the property owner, and those things are at risk, in my opinion.

So you talk about, um, 3 different, uh, revenue streams for property management, uh, owners. Uh, yeah, what are those 3 streams, and why is tech such a threat to those 3 streams?

Oh, that's a great question. So yeah, so when you look at Revenue for a property management company, it comes from 3 primary areas. The first is what everyone thinks of, which is the property management fees. So we charge a fee to manage a property and that fee's paid by the property owner. The second is tenant fees. So tenants pay fees, they pay an application fee, they may pay late fees. There's probably a lease signing administrative fee, that's pretty common. And they pay other fees if they misbehave and they let their dog, they don't clean up after their dog or something. And there's some other tenant programs that you can offer where you provide a value to the resident, maybe a curbside trash pickup or something, and then you can charge a fee for that. So there's a fee stream there. And then the third component is maintenance. So many property management companies, including us, offer a maintenance, an in-house maintenance service where we have the ability to go out and do punch-out items, maintenance and repairs to occupied units, getting units ready to rent again. We have 6 in-house maintenance guys that work for us. And so we pay them some W-2 hourly rate and we bill them out to our clients to cover our overhead and their time and the insurance and the liability and management and everything else. And there's a small profit there. So those are the 3 streams of revenue for a property manager. If I think about where Zillow and Airbnb could, could bite into that, it's probably those first two. The maintenance is always going to be there. You're always going to need somebody to go out and shut off a water pipe that's leaking or something. But if they are, if they're sort of controlling the relationship with the resident, they can use that as a lever to control the relationship with the property owner. And they can do things like enforce the standard lease. They can enforce what you put in your rental listings. They can enforce standard security deposit handling and really sort of take away that relationship between the, the property manager and the resident and the property owner. They basically sort of insert themselves there and, and kind of do what they want because you don't have a choice if you, if you want to fill vacancies.

It's early in this, so I don't— I'm not sure you're going to have a fully thought out answer. But these are the competitive challenges that— that's your job.

That's right.

You're the, you're the RL Property Management, your name's right there in the title. Have you thought through how you're going to compete or what you're going to do about this? The question I think you asked on social media was, should we pay money to our competitors? Should, should we go to war with them now? Or How do— how are you thinking about that today?

So the pragmatist in me says it's too late. The war is over. And actually, there was an effort about 6 or 7 years ago in NARPM, which is the National Association of Residential Property Managers. It's kind of like the apartment association, but for, but for scattered site management, meaning mostly single-family homes and small apartment buildings. They actually created their own rental listing website. It was a big effort. They paid a lot of money for it and completely failed. It never got traction. It never got movement in the market. So I just don't think you're going to take back that rental listing mindshare from consumers. I mean, it's Zillow. It's kind of like Google. It's like where you go to search for stuff, you go to Google. I mean, if you're going to try and compete with Google and start a new search engine, I don't think so. And that's kind of how I view Zillow and Airbnb for real estate and short-term rentals respectively. As far as strategy for me, I haven't thought a whole lot about it because I still think it's a little ways off. I kind of mentioned my hedge there, but I honestly think This is going to be if you can't beat them, join them type of situation. And I think if you can get in early with Airbnb and Zillow and be like a preferred partner or a premier partner and sort of help them develop this, you know, it's— I don't know what the right— there's probably a French term for this where you're getting in with the enemy or something. But I think that's the play. I think that if you get in early and you're like a premier partner with Zillow and Airbnb, you're going to fill your vacancies faster and you're going to command higher rents, and that's going to position you above your peers. Because as I said, property management's not going to go away completely, it just may look different. And so if you can be on top, I still think there's a lot of value there because maintenance is nothing to scoff at. There's entire industries and micro private equity firms who do nothing but run around buying up plumbing companies and they make a fortune. So there's still, you know, there's plenty of money there. Um, it just may look a lot different than the fee makeup may look a lot different than it does right now. And I just want to be out in front of it, I guess.

I was thinking when I was preparing for our conversation today and thinking it through myself, uh, the competition element said if I have to compete against these guys, scale might help in that if I've got if I either own a significant percentage of my units and I'm managing my own units, I can have a durable business for a long time.

And that's right. And the owners are going to be fine. And I think owning as much real estate as you can, you know, high-quality real estate bought at the right price, you can't go wrong with that.

But I was— I was thinking approaching that from the same standpoint of if, if ultimately, if property management is squeezed into Zillow, ultimately, it's owners who are going to get squeezed. And so an owner of a bunch of units needs to think about, is there a way to structure my business where I'm not dependent on Zillow? Could you fill up with high-quality tenants advertising and other venues to where you might pay more than the sort of the developing your chops at filling up units without using Zillow so that you could deliver that for owner, that high-quality tenant for owners without using Zillow.

Yeah. And that being a differentiator, your defense as a property owner against Zillow is brand. If you have a strong brand in your local market, you're going to be fine. Because if the 18 to 35-year-olds in your city know XYZ Real Estate, "Oh yeah, those cool guys, they X, Y, and Z. All their properties are by the river and they have the doorman," whatever it is that your brand stands for, you're going to be fine because you're still going to be able to command a premium for that. If you can provide an experience, if you can stand for something as a property or as a collection of properties, I think that is pretty much your only defense. It's kind of like the defense that Coke has taken against just off-brand, store-brand cola. You have to have something that stands over and above just every other Coke, every other soda, or every other property in the consumer's mind. But honestly, I think property owners are going to be fine regardless because their pricing is still going to be governed by supply and demand. I mean, there's only so many rental units in the city, and if more and more people want to live there, prices are going to go up regardless of who's controlling the marketplace. Just like Airbnb, you know, the owners of the short-term rental properties, you know, I rent a unit out on Airbnb. I have for 4 or 5 years. You're still getting paid, right? You're still getting your money. They're taking a little cut, but so did the property manager. And the rate you can charge is still governed by supply and demand in your local city. So yeah, it's interesting.

What about setting rents? You, you know your market, you, you know the differentiators about a particular property. You're setting the rent in that way? If I'm an owner and I go to Zillow, and I, I remember selling a house once, I wish I hadn't, but I did. And I saw it sold for way more than I would have listed it for because the real estate agent had a better sense of what people would pay than I did. Does that happen in the rental market? Or, or how do you think Zillow addresses that challenge?

Well, you know, Zillow does have their, you know, their Zestimate, and they have a rent Zestimate as well. That's been around forever. You can go on there and see how much Zillow thinks your home will rent for or your apartment will rent for. So yeah, I'm sure they'll continue to expand that. I don't see Zillow trying to control pricing. I mean, that would probably raise all kinds of flags for various government three-letter agencies. But it's certainly possible that the dynamics of pricing could change once things like leases and security deposit terms are standardized. So right now, if you're a tenant and you're looking at a place to rent, you're almost doing calculus. I mean, you got to look at what's the length of the lease? When does the lease start? What's the late fee policy? What's the security deposit policy? How much is the application fee? How much is— how's the water bill structured? You know, there's, there's so many factors that go into— you're almost never comparing apples to apples unless it's two units within the same building. So Zillow could kind of level that. And then suddenly, if you're looking at two different properties on Zillow, now, you know, at the very least, okay, they both charge one month's rent for security deposit. They both have a $50 late fee. They both have a very normal lease structure that gives me 5 days grace period, they both have a flat rate water bill, you know, whatever it ends up being. So that could be interesting to watch.

All right, well, I think we have a lot to think about. I'm glad I'm not facing that directly. I've got some sharks in my industry, but they're, they're, uh, it's a little different in in yours. Big changes on the scene for property managers, and I have no doubt that everyone's going to be scrambling a bit with this new challenge. I look forward to seeing what the response to this conversation is out in the wild.

Yeah, me too. Yeah, I'd love to get some feedback from, you know, we've got, I'm sure, some listeners that know just as much or more about this than I do, and I'd love to engage with some folks.