By Coleman Cox

May 22, 2024

After accomplishing priority #1 of broker awareness and relationships*, and with deal flow starting to hit our inbox, the next steps were (i) ensuring we had reliable partners to execute alongside, and (ii) solidifying general underwriting assumptions. Acquiring a property without a reliable team of vetted partners to execute alongside is suicide. And identifying great investments without a large dataset of consistently underwritten comparable opportunities is impossible.

*Side note – to state the obvious, all strong relationships take work; a single conversation with a broker to get on their radar does not mean that box is checked and complete – regular communication, in-person meetings, quick and transparent deal feedback, etc. is required to stay top-of-mind and ensure you see all of the right opportunities.

Our next priority was identifying a third-party PM partner. From our broker conversations we had a list of ~12 potential partners, some more highly recommended than others. Our strategy was to have a ~30 minute introductory call with every group – building a relationship, asking a few key screening questions, and requesting a handful of anonymized P&L’s for stabilized sub-institutional product in their portfolio (this would be key for underwriting). While it is a large time investment (especially if you multiply this by the amount of markets you are covering), it was very valuable to us in narrowing our top 3-4 property manager options, and also collating a significant dataset of P&L data to analyze on a per-unit and percentage-of-revenue basis to convert into our base case OpEx assumptions. These 30-minute intro conversations, plus a data request to assess timeliness of response, control over data, and professionalism of the deliverable, was more than enough information for us to easily narrow down our partner options.

For our top 3-4 property manager options, we curated an interview question list covering a handful of items in each of the following key topics: (i) Overall / General Items, (ii) Staffing, (iii) Software and Systems, (iv) Operations / Leasing, (v) Maintenance, (vi) Reporting, and (vii) the Management agreement. The conversations took anywhere from 60-90 minutes and for an unprepared interviewee could be considered overwhelming. The information gathered during these calls was important in assessing our potential partners, but equally important was seeing the reaction and response to such a comprehensive question list and setting the tone for the level of detail and professionalism we expect out of a partner.

With our preferred partner emerging out of these conversations, we asked for references and to speak with additional team members we’d be working with in the company (operations / maintenance / accounting) and formalized the relationship. The systematic approach we took from a blank canvas, without the time pressure of a deal was refreshing, and quite frankly new to me. I had come from a world where property manager selection was very deal-driven and typically made in haste during a closing process when there are 100 other things going on. And made based primarily on the business development experience with the acquisition team, which is not always representative of the operations team responsible for executing. With our more focused approach and long-term mindset, we feel very comfortable and aligned with our property management partner when the time comes to execute on a business plan.

We started down a similar path for general contractors, having intro conversations with a handful of recommendations received from the brokers and property managers we interviewed. Frankly, we did not find the process to be as effective in gathering useful information about their operation. We pivoted a bit to focus more on relationship building and assessing their experience in working on the types of projects we were targeting. The reality was we needed to walk a property with them during due diligence, see the team they brought and how comprehensive their assessment was – are they order-takers only or do they have ideas of their own for efficient construction / design, how quickly can they provide an estimate for the requested renovation work during a quick due diligence period and what level of detail is included, etc.

While not as efficient as having this information beforehand, we found this really could not be replicated without the specifics and time pressure of an actual deal. To be candid, this led to some surprises on the cost and timeline front (some positive, most negative) of our first deal under contract. We ultimately canceled the contract on this first deal as a result of CapEx expansion – primarily attributable to relying on inaccurate information provided by the Seller, but also partially attributable to some naïve CapEx assumptions – mistakes that will not be made again, and led to a strong understanding of our base case CapEx assumptions going forward. Assumptions we were able to rely on to get our first deal under contract and executed shortly thereafter, and alongside a team that had separated themselves from the rest of the groups we had given a shot.

When you’re playing a long-term game with as many moving pieces as real estate, it is inevitable that mistakes will be made. The great operators have the acumen, structure, and processes in place to never make the same mistake twice.

Our hope is this walkthrough of how we ramped our real estate infrastructure (selfishly) adds credibility to the mindset and rigor we apply to every area of our business for future potential partners and (unselfishly) provides some education or semblance of a roadmap to those considering entering the space as peers.