Practical Capitalism - Part 2 - The HOA and the Hi-Rise

Oct, 10 2017

Practical Capitalism - Part 2 - The HOA and the Hi-Rise

Within hours of learning the meaning of “dotard”, I was on the phone with a senior manager at one of Atlanta’s leading property management companies. And, no, he wasn’t one. But, it was impossible not to notice how the definition, and the man, seemed to meld when it comes to doing anything different from their standard routine.

The topic of conversation was the “possibility” of, at some point in the future, building management companies incorporating a real estate function as an add add-on service to their condominium communities. And yes, everyone knows Building Management can’t dictate homeowners use a specific real estate “style”. But, if Building Management were to eliminate the real estate profit margin, it would certainly have a significant advantage over any other sales methodology. And one would think, constructing a real estate sales model that actually helped the Building and its ownership would at least be viable enough to warrant discussion? Turns out, not really.

So we ask condominium communities, why isn’t there a real estate function provided by your Building Management? Isn’t real estate just another “service” management companies should offer? In order to have some insight into the situation, it may help to frame it against the backdrop of a typical Midtown hi-rise condominium. And, while no one knows what, “typical” actually means, it’s a better word to use than average.

One, typical, well-known, large, “named” community in town, has averaged 60 real estate transactions a year over the last 3 years with home sales exceeding $15M annually. That is a lot of money, a lot of transactions and a lot of on-boarding work for Building Management.

Real estate operates off a, dated, 6% commission split policy. Meaning a Listing for sale is “taken” at 6% of the sales price with each agent, buyer and seller, getting 3% each. In this particular building, with sales exceeding $15M annually, listing agents are realizing roughly $450K dollars every year in commissions by simply “farming” the building. Homeowners on the other hand are seeing their building Association Fees steadily rise. At some point, hi-rise homeowners will want an HOA-driven real estate solution that saves its sellers money, creates ongoing revenue for the Building and cuts down overall operating costs.

Just because a Building or HOA is non-profit, doesn’t mean it should stop acting like a normal American cut-throat business entity. Not to go all “Sopranos” here, but listing agents are taking nearly a half million dollars out of this Building every year without the Building even getting a taste? Un-American!

And, we aren’t joking. There is simply no other sector in American business where the owner of a “brand”, freely allows others to make vast sums off their brand only to receive nothing in return. Condominium communities are brands. People buy, sell and refer to their home, by the name it is commonly known or branded by; “I live in the XYZ” or, “wouldn’t you love to live at The Opus”. Make no mistake, a lot of work and investment goes into creating and maintaining successful brands. And, as every Brand Manager will tell you, if you aren’t actively building a brand, then you are open to having a brand being given to you. Rarely a good thing.

Building Management, particularly within hi-rise environments, must incorporate both Brand Management and Product Marketing as part of their ever-increasing role. Highly competitive markets, like Atlanta, will demand it.

In the future, HOAs, along with their Building Management, will re-configure the real estate process to make better use of the money their ex-neighbors spent on selling their units? Be aware the traditional franchise/suburban real estate sales model costs hi-rise homeowners millions of dollars every year. Why? Other than for historical preservation, there is no valid reason Building Management couldn’t take over the traditional listing and selling services of a real estate agent. After all, a real estate license has long been a valuable tool for many Building Managers.

As we move on to math, concede there is simply no way it should cost hi-rise homeowners as much money as it currently does to sell their units. Consider the Midtown and Downtown hi-rise markets; in broad terms, the pricing wheelhouse is approximately $250K for a one-bedroom and $400K for a two-bedroom apartment. Using traditional sales methods, the Listing fee for a two-bedroom apartment would be a whopping $12K dollars.

An HOA, in concert with Building Management, could cut that $12K listing commission in half! And in doing so, would still have enough money left over to contribute to the Building’s General Fund as well as pay the Building Manager a bonus for the sale. The construction of an HOA-focused real estate solution would create the ultimate in clichés: a triple win.

Sellers win because they save thousands. HOAs win because it creates a revenue stream for the Building’s General Fund. Building Managers win because it extends their compensation packages. The only people who LOSE in this futuristic scenario are those in the traditional real estate industry.

Unfortunately, it’s those in the traditional real estate industry who hold much of the control. When you ask Building Managers why they don’t offer real estate services, their most common rely is; “conflict of interest”. Not really an answer, but nonetheless, an indicator whose interest they are looking out for?

Rise up, HOAs of Atlanta. No business entity wants to, or is going to, upset the real estate industry on their own. It will be up to the HOAs to flex their muscle to force change. HOAs, perhaps the last bastions of true democracy, should be looking after their own interests and, unlike real government, not the interests of any trade organization.

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