By Linda Day Harrison, theBrokerList, Chicago, IL
You want to make a purchase, but what is driving that decision? Is it cost benefit analyses, the idea of getting more bang for the buck, impulse, or is it a high return on investment? And what does this all mean to us as property managers?
When you are a property manager, one of the biggest roles you play on behalf of your client or property is purchasing! You purchase utilities, light bulbs, labor, services, marketing media, copy paper (hopefully less each day!), equipment, tools, professional services, and capital improvements or repairs.
Each time a purchase is made it impacts your Net Operating Income (NOI). The NOI is the key ingredient to the value of the asset. Investors look to that number when valuing the asset, so it is very important to know that each purchase chips away at that number. But guess what? If the income goes up, the chip is worth it. So how do you measure each chip you make?
There are many ways to look at purchases. It shouldn’t be emotion, reaction, or impulse. It needs to be grounded with cold, hard, numerical fact. In other words, you need to know the bottom line of that purchase.
Some purchases are super simple to analyze, while others take a more complex analysis, and may even require experts to help you so you are measuring things properly. There are many ways to look at numbers and anybody can present those numbers to you in different ways. The most important thing to remember when performing the analysis is common sense and logic.
For instance, if you are purchasing marketing media, the #1 measurement is traffic! There is no other way to measure it except results. So if you place an ad or do a promotion, what is the result of that effort and expense? Notice I said effort. Effort = labor and labor = dollars. In other words, your time is money, and this is actually one of the largest and most critical pieces of the property expense pie.
If you are spending X number of hours doing a task and the result is a $0 return on the property, you must immediately stop doing that thing. It is that simple. If you ask your building engineers, administrators, or vendors to perform a task, ask yourself how that will bring a return to the property. Most things you do are valuable to the property, like preserving the structure or preventative maintenance. Those are no-brainers. However, there are things we do sometimes that we are not measuring accurately, like marketing efforts, or energy-efficient products and equipment. You might be surprised when you measure all of these components and determine how much money you may be able to put back into the income. I call that getting the “biggest bang for the buck”!
If the item saves labor or brings me tenants who lease at my property, that is quantifiable and clearly a bang! Just remember with each purchase to really think about your decision. Make sure there is value and evaluate the labor as well. Value is key because it is a test of quality and price, NOT just price. Do not fall into the rookie trap of just following low price. More property managers get in trouble buying for the lowest price than if they go with the middle price, for instance. Time and time again, they are not measuring. It just appears to be so low that they feel like heroes, when in fact they are being fooled. Now in some scenarios, this may not be the case, depending on the purchase. However, usually the low price is a low price for a reason. For instance, with a contractor it may mean they are not insured, they are non-union, or they do not provide all of the benefits and tools needed to perform the task properly. So now the hourly rate of $35 looks great compared to the guy charging $50, but it will take the $35 guy longer.
Always remember to ask for a budget or a not-to-exceed cap on purchases, if possible. The only time that a not-to-exceed cap is impossible to predict is if the scope of the project changes. In other words, if the scope is controlled by the service provider, they need to cap it. If the scope changes due to unforeseen circumstances, it is not always a fair compromise. Both parties need to face the risk. However, there are many service providers who have such a strong command of their business that they know alternatives that make them superior providers, and they can in fact give you a not-to-exceed. They also may be willing to do this to gain your loyalty for future purchase decisions.
Just remember to think things through. Do not buy in haste, as haste makes waste and every penny counts. Remember to always measure it! Even if it is not obvious, there is always a way to compare a purchasing decision.2 Comments