When Should You Turn to Third-Party Management?

September 16, 2013 3
When Should You Turn to Third-Party Management?

If you’re an independent self-storage operator struggling to compete against larger companies with deep pockets, you may want to consider hiring a third-party manager.

When you hire an experienced third-party management company, you’re tapping into the wealth of knowledge it has gained by running other facilities like yours. Typically paid between 4 percent and 6 percent of your gross revenue, third-party managers have a vested interest in maximizing your profit.

Bill Alter, an Arizona real estate broker who specializes in self-storage properties, said he’s a proponent of third-party managers. “They bring economies of scale to your operations that allow you to compete,” he said. “Operators who run their own properties can’t possibly afford the advertising and promotion that is required to compete against the big guys.”

However, some self-storage operators might balk at giving up control to a third-party manager.

Growing Your Business
By assuming management of small self-storage facilities, some large operators create another source of revenue for themselves. They also become familiar with businesses they might want to buy someday.

Meanwhile, third-party managers strive to help you get top dollar for your units, attract new business and retain existing customers. They’re experienced at optimizing online advertising so that potential customers can easily find your business on the Internet.

business growth

Also, they may be able to gain lower prices for supplies and services, as representing several facilities gives them more bargaining power. They typically take over the training of on-site management teams and oversee repairs and improvements.

“You step pretty much out of the picture,” Alter said.

Losing Control?
For some people, the down side of third-party management is the loss of control. Management agreements typically give these companies broad authority over how your business is run. “If you are micro-manager with a strong need to control and oversee your business, this would not work for you,” Alter said.

Sometimes, outsourcing your management can make your business more attractive to banks when you need to borrow money for improvements. If you are an inexperienced facility operator who operates independently, you could be viewed as a greater loan risk.

Before you decide to turn over management of your self-storage facility over to someone else, make sure you’ll be getting your money’s worth, said economist Eric Tyson, author of the “Small Business for Dummies.”

“The considerations would be what they are actually doing for that 6 percent (fee),” Tyson says. “Are the tasks they are undertaking things that you don’t enjoy or don’t have the expertise to do? It’s essential that you interview multiple companies that do this and have them describe to you how they can add value.”

Finding a Third-Party Manager
Not all management companies perform at the same level. If you turn over your property to an incompetent company, you’re likely to lose money in the long run. If a company is qualified, it should be able to tell you exactly what can be done to improve your profitability.

Tyson said your goal should be to avoid ending up with a company that collects fees without making a meaningful contribution. Be sure to ask for references and check them out.

Boosting profit isn’t the only reason to hire a third-party manager.

Some owners view their properties as an investment rather than a vocation. They simply don’t have an interest in spending their time overseeing day-to-day operations. The idea of letting someone else do the heavy lifting holds great appeal to some self-storage owners.

third party management

Sherman Smith, owner of K7 Self-Storage in suburban Kansas City, said third-party management companies work best for owners who lack the business experience to run facilities successfully.

Of the roughly 50,000 self-storage facilities in the U.S., fewer than 40 percent are operated by third parties, said Travis Morrow, vice president of the National Self Storage Alliance, which manages self-storage businesses throughout the Southwest. Small, independent operators still run most U.S. storage facilities.

Smith, who runs his own facility, said experience is important for all facility managers. Many people think self-storage outlets are simple to operate, but if you make a management mistake—such as overpricing your units—you’re bound to lose customers.

“There is no book out there that one can go buy that will explain how to run a self-storage facility,” Smith said.

Doing Your Homework
Before you hire a third-party manager, make sure you truly need one, Smith advised. 

“It would be unadvisable if an operator was at 95 percent occupancy and stabilized,” Smith said. “Why pay 6 percent of gross for a management fee when you are operating efficiently? That, to me, is a waste of money.”

When you interview prospective third-party managers, be clear about you expect from the business relationship. Find out whether the companies have instituted adequate auditing practices. Are there any fees you’ll be expected to pay other than a monthly percentage of your gross? Is the company licensed to do business in your state?

All states regulate third-party management companies. You can check out their credentials through the agency that regulates real estate in your state, Alter said. “If they are in the business,” he said, “they have to be licensed.”

personal mini storage

Pulling Their Weight
Alter acknowledged that third-party managers aren’t cheap, but he insisted that the best ones do more than pull their weight. Facility owners who are determined to run their own businesses often end up turning to third-party managers when they realize just how hard it is to compete and grow.

“As you become more aware of the competitive disadvantage you have with the bigger operations, you will gravitate toward management companies to fix those problems,” Alter said.

Marc Smith, president of Orlando, FL-based Personal Mini Storage, oversees management of 34 self-storage facilities in Florida. He said the independent operators he teams up with often need help bringing their financial records up to date. They don’t always understand that unit rental prices should be adjusted regularly. They sometimes fail to keep track of the tenants who’ve fallen behind in their rent.

By hiring a management firm like his, independent operators don’t have to worry about such details, Smith said.

“Many small operators don’t audit themselves,” he said. “I’ve taken over places where the owners don’t manage their delinquency lists. We have taken over places where people have stayed in their units for years and years and never had rate adjustments.”

He maintains that third-party managers bring “a level of sophistication” to the self-storage business.

Photos courtesy of sacramento.cbslocal.com

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