Monday 14 November 2016

Beware! Lowballing is back. Did it ever leave?

I feel deflated.
Perhaps it never went away, but I am hearing more and more stories recently around the practice of 'lowballing'. Consumers and developers alike need to be aware that this will come back to bite them. I previously wrote about it in 2013 in response to the OFTs scoping document here: http://davidclarks.blogspot.co.uk/2013/12/response-to-ofts-residential-management.html

Lowballing is the practice of setting an artificially low service charge to either win a contract (agents) or to assist the sales process (developers). In some parts of the world it is illegal but in the UK not expicitly so. There is some legal sanction that service charges must be reasonable (works both ways, although I am not sure anyone has ever challenged a charge on the basis that it is too low...) and regulatory requirements set out in the ARMA Q Consumer code:

2.1 New Business & Tendering When seeking new business the Managing Agent: 

d) Must make it clear what services they are proposing to provide and at what cost, as well as the extent and limit of any additional services available; 
e) Must not purposely underestimate costs or provide misleading estimates of future Service Charge contributions required; 
f) Should quote their Management Fee as a fixed fee, unless the Lease specifies otherwise; 
g) Should pre-agree charges; 

Lowballing may take the form of artificially low prices for maintaining the development but often is more sophisticated and may involve ignoring areas of future costs and removing them as a line item. Health and Safety, mechanical and engineering costs as well as artificially low reserve/sinking fund allowances mean that charges are initially set to look very reasonable but quickly grow in the first few years to meet both large deficits and increased ongoing costs. Poor, or deliberately low, estimation of insurance costs often lead to significant hikes in later years. The use of phased and void costs to support an artificially low service charge. On estate schemes freehold house owners do not want to pay for managemenof the open spaces and charges sre often set innapropraitely low to offset this. Some stakeholders will want ot pay nothing, particularly housing associations buying under S.106. Anecdotally I am advised that we are increasingly asked to reduce overall costs despite the loss of quality.

Developers have a responsibility to check that each item of M&E in the specification is correctly priced and that there is a full health and safety regime. Is the manager likely to provide a worthwhile service for the fee proposed? 30 flats at £100 per year does not deliver many hours of service to leaseholders. Where there is an initial guarantee in place (for example lifts) then a note to the effect that there will be a significant future maintenance cost should be added to the estimate.

All agents have experienced a failure of the developer to provide all of the correct information upfront and the consequence of finding previously unmentioned plant at a scheme. Both parties must ensure real diligence in providing and obtaining all details that might lead to contractual, insurance or replacement costs.

We are in a competitive industry that is prepared to win work through artificial pricing and without more care on the part of developers then it is only consumers who will lose. Agents are still relying on the fact that initial management periods are often longer and more complex - allowing for a degree of stickiness and little consumer pressure for change.

I am pleased to be working with developers who recognise that their relationship with purchasers and the communities they create are not just transient. The best developers talk of whole life relationships from student accomodation to retirement villages and all homes in between. It pays them dividends to ensure that service charge budgets are set with honesty, that managing agents are rewarded appropriately as professionals and that cthe clear benefits of transparent management are set out clearly at the point of sale.

It pains me deply that I still lose work for being too 'expensive' by comparison to an agent who has not, for example,  had his engineer look at the M&E specification and whose insurance team haven't commented on the insurance reinstatement costs. Increasingly we pick up those schemes 3 or 4 years down the line when residents have tired of paying huge deficits every year whilst enduring massive hikes in costs. Personally I would like to see a requirement for managers to proveide three years of estimate for new devleopments with an element of  risk attaching to their fees. This would quickly ensure accuracy for consumers and fewer unpleasant surprises.

In summary:
  • Developers must provide all development details accurately up front
  • Agents must undertake to deliver accurate budgets and revise them when new information comes to light
  • Notes must be added to explain missing or future costs
  • Notes must explain how adequate reserves will be collected
  • Fees should reflect the cost of management
  • Other fees arising form the lease should be clarified
  • Consumers should look for comparables and be wary





One Month Without Property Managers

At this year's IRPM Fellows' meeting there was much debate about how we can ensure that the value of residential property managers is fully recognised. The increasing professionalism of the industry and the rising importance of sector specific qualifications have shifted us some way to achieving this. However, many feel that front line practioners still bear the brunt of consumer dissatisfaction and anger driven by misunderstandings, inequities and the a poor image fostered by those only interested in stories of overcharging and mismanagement. Regretable as these are, they are  the domain of a small minority of rogues who abuse the system and continue to taint the whole industry. Their days are numbered as regulation, consumer pressure, social media and competition makes it increasingly difficult to perpetuate substandard services.

My experience of property managers is that they are some of the nicest people to know and work with and I count many amongst my friends. They are skilled in many areas, work long hours and rarely have anything but the best interests of their buildings and communities at heart. There are many amazing success stories out there that we fail to promote and that has led me to thinking about what the world would be like without the essential service that we offer. To celebrate the value of what we do and try to imagine a world without the critical services we provide.

Would a month without property management lead to street riots and civil insurrection? Sounds like a silly proposition doesn't it? But let's have a think about it; we live in strange times after all.

In my imaginary world all property managers and supporting teams have been mysteriously relocated to a pleasant tropical island with no means of escape for a month. As recognition of their hard work, every luxury has been afforded them whilst they wait to see what happens back home.

A number of buildings quickly suffer from issues that we would normally consider critical. One or two have pump failures, other have lifts that break down. Many experience leaks. There is no one down at the managing agent - phones are not answered and emails sit unopened. Whilst the normal day tpo day services break down, the managers continue to top up their tans, drink virgin cocktails, play complex board games and read novels about dystopian futures. Life is, for them at least, briefly idyllic.

Residents become restless and agitated when they realise the common areas are not going to be cleaned, the grass is getting long, weeds are sprouting from the paths. Cigarette ends litter the paths under balconies.

There is a fire. It is put out but no one comes to look at the damage, the extinguishers aren't replenished. The insurance has not been renewed so residents have to live with the smoke damage.

Security systems start to fail and strangers are found in common areas. Crime starts to rise, more break-ins are reported. The CCTV is still working but no one is looking at the screens. Some residents can't even get into their block, eventually they smash the door down. It'll get fixed they hope.

Some residents take on the management themselves but find it difficult to raise the money for essential repairs and even more difficult to get a line of credit from the engineering company that oversees their plant. Where are the keys for the plant room? What are those flashing lights on the fire panel? Having chosen not to use the Mansafe system, a contractor on a roof falls and is critically injured.

There seems to be more noise, more parties, more anti social behaviour generally. This can't go on say concerned leaseholders. For sale boards start to appear in windows, next to drying washing. There are blocks in the neighbourhood that have had no hot water for a couple of weeks. One has no water at all.

People start to behave with less care. After all, if no one is cleaning up why should they be the ones to do it? Rubbish hasn't been collected this week because the bin doors weren't unlocked for the dustmen. Is that a cockroach over there?

Talking of pests, those Pharaoh ants are back. The regular pest control hasn't happened for a couple of weeks. The rats seem bigger, more confident.

Residents get together to discuss what can be done. They argue loudly at meetings but eventually letters are drafted and sent to politicians. Something falls off the side of a building, narrowly missing a family waiting while their dog excretes on the pathway. No point in picking it up, it's already a disgrace round here.

The emergency services are flat out rescuing people stuck in their apartments because the lifts are out of order and trying to get the water back on. Standpipes are put up in the street.

The very fabric of our communities is quickly tested. Buildings start to look untidy and tenants stop paying their rents in large numbers. What can be done? It is proposed that there will be demonstrations in the major cities. 'Bring back our managing agents' the crowd chants. Some cars are set alight. A politician is 'roughed up'. People are very clear that they do not like their homes being affected by this. I've already paid my service charges in advance shouts one irate pensioner on Question Time. Safety, security, warmth and running water are fundamental rights say campaign leaders.

After one month (or so) most PMs return to their grateful customers and put everything back in order. Some, however, never return, after all the island is a lovely place, immaculately managed, spotlessly tidy and environmentally perfect after a month in the hands of the experts.

Yes, this is a very silly article, but let's foster stories of all the good that property managers do because most of them are brilliant, commited and valuable. Anyone who thinks that we are less than the glue that binds residential communities together can take it up with me.