Peter Lohmann's Mailing List - Issue #38

Today’s newsletter is raw.

I’m sharing more operational and financial details about my business than ever before.

It’s really uncomfortable. Hopefully, my pain is your gain.

This will be a deep dive issue, without the usual news & updates from around the industry. We’ll be back to normal programming next week.

Four Large Clients Terminated Us

In the past 3 weeks, we received non-renewal or termination notices from four large clients. Their unit counts were 7, 22, 30, and 60 units. Together that’s about 17% of our total units gone. That’s on top of an absolutely brutal year for churn in 2022 - despite adding over 120 net units during the year, we churned out 25% of our clients.

As a business owner, it’s hard to describe the feeling that comes up when you receive news like this. Something along the lines of:

Why are they leaving?

Are they stupid?

What did we do wrong?

Am I stupid?

This sets us back a full year on growth.

 Will we have to lay anyone off?

What does this mean about my skills as a business owner?

I’m supposed to have this all figured out…

Why They Left

Some time has passed, and I’ve had a chance to research, reflect and think about what went wrong. I also spoke with several of the clients, and of course our team.

Here’s what I learned:

1. Some owners felt that our company did not have their best interests in mind, and was not looking out for them & their property (customer service)

2. Owners are not receiving timely updates on the status of their property turns (customer service)

3. Owners are being asked to fund additional work at the end of a turn, which should have been included in the original scope (errors)

4. Mistakes are being made in our property accounting / billing, and owners are finding them (errors)

5. Some owners found that our pricing structure didn’t work for them (sales process)

6. We’re not turning over vacant units fast enough (operations)

Why This Happened

Our company has grown quickly, adding over 100 units under management for the last 3 years in a row. We staffed up and had to make a lot of changes to support that growth. Our company has a departmental organization structure, which means each person at the firm has a specific function they perform for all units under management.

An advantage of this structure is that you can hire & easily train specialists, who become highly efficient at what they do.

Two disadvantages of this structure impacted our clients (specifically with regard to items 1, 2 and 6 above):

• No single person at the company has a complete picture of any individual property or portfolio (information is siloed within departments). From our client’s perspective, it feels like nobody knows or cares what’s going on with their properties.

• Without extremely careful attention being paid to process, an extraordinary amount of time can be wasted on interdepartmental handoffs and communication. This destroys throughput, and everything grinds to a halt… made worse by the above. Hiring more people just makes this worse!

I still believe departmental is the right organizational structure for us, but obviously changes are needed to make it work at scale. More on that later.

Why Else This Happened

A couple weeks ago I wrote a well-received article about the value of separating customer service from operations in property management.

No surprise, I think our failure to do this sooner was a contributing factor to our client losses (items 1 and 2 above). Our operations folks were busy executing, and their delayed and/or brusque responses left our property owners feeling like an afterthought.

I go into more detail about my vision for how to fix this in the article, so give that a read if you haven’t already.

Error Rates in Property Management Companies

Beyond that, I’ve come to understand that for every error a property owner finds (with a bill, statement, account, vendor work, etc), they assume you made ten others they didn’t find.

Tiny mistakes are trust destroyers in property management. We simply must find a way to eliminate nearly all errors at our company.

I’d heard it said that the average office worker error rate is around 3%. Let’s assume we’re completing 10 tasks per unit during a given month (everything from paying water bill to entering a work order to preparing a lease renewal to replying to a client question). If a property owner has 30 units with us, this implies we’ll be completing 10 × 30 × 12 = 3,600 tasks for them annually. At a 3% error rate, that’s 108 mistakes!

I have no idea if this is correct, but unless it’s off by two orders of magnitude, it’s likely that we’re going to continue to make mistakes and errors. The question is, how can we reduce the frequency and severity of those? I found an interesting article that has some suggestions:

Using data cited in the article, our challenge is to turn "Complicated non-routine tasks” (1 error in 10) into “Routine simple tasks” (1 error in 1000).

How exactly to do this is beyond the scope of today’s email, but perhaps I will talk more about it in a future issue. And no, it’s not just “automation”.

What We’re Doing Now

1. Making adjustments to our P&L to stay healthy while we rebuild. I won’t comment on staffing changes, but we had to say goodbye to couple valued vendor partners, and scale back our engagement with a few more.

2. We’re leaning heavily into technology partners that un-silo information and build resilient processes. That means going all-out with Property Meld, LeadSimple Process & Inbox, and Airtable. You can read more about how I think about process here.

3. Restructuring our “Property Management” department into 3 functional groups: Tenant Ops, Client Ops and Customers Service. See this article for more about why.

4. Documenting & chasing down the source of errors aggressively.

5. Getting extremely focused on metrics that have an outsized effect on our clients, such as “Time-to-Turn” and “Days-on-Market”.

6. Considering a free “Signature Program” for 10+ unit clients:

   • Dedicated account manager

   • Priority support

   • Monthly zoom calls with a portfolio advisor to discuss real estate investment goals

   • Other TBD

I’m hopeful that these changes will significantly drive down our churn rate for the remainder of 2023.

If you’re still reading, I appreciate you walking this path with me. It’s not easy to talk publicly about the major business blunders that we all make as entrepreneurs. If you ever need an ear, hit reply to any of these newsletters and I will see your message.

-Peter