Replacing an Underperforming Property Manager: A Worked Cost

A worked example in SAR of what changing managing agents actually costs, against what the underperformance was costing, and the point at which the change pays for itself.

Owners tolerate a weak manager because changing feels expensive and disruptive. It is worth putting both sides on paper. This example takes an illustrative building where voids run long and arrears age, prices the change, prices the underperformance, and finds the month in which the decision becomes obviously correct.

The situation

An owner holds a building with six let units managed by the same agent for four years. Voids have averaged three months against a market norm the owner believes is closer to one. Arrears above ninety days sit at a level the owner considers high, reports arrive late, and the last two repairs were instructed without approval. A second agent has proposed terms. The owner wants to know whether changing is worth the disruption.

Assumptions (illustrative)

• Six units at an illustrative annual rent of SAR 50,000 each, giving SAR 300,000 in a fully let year.
• Current agent: management at 7% of rent collected, three month average void, arrears above ninety days of SAR 22,000.
• Proposed agent: management at 8% of rent collected, claimed average void of one month on comparable stock, letting fee of one month per new tenancy.
• Two tenancy changes expected in the coming year.
• Illustrative one-off cost of changing: new inventories and condition reports at SAR 9,000, legal review of the new mandate at SAR 6,000, and overlap of one month of fees at SAR 1,750.
• Illustrative recovery of SAR 8,000 from the aged arrears once a firmer collection process starts.

Step 1: Price the void gap

Monthly rent per unit is SAR 50,000 divided by 12, which equals SAR 4,167. Two tenancy changes at three months empty costs six months of rent, which is SAR 25,002. At one month empty it costs two months, which is SAR 8,334. The gap is SAR 16,668 a year.

The void difference alone is worth more than the entire fee increase. This is almost always where the money sits on a multi-unit asset.

Step 2: Price the fee increase

At the current agent with three month voids, rent collected is SAR 300,000 less SAR 25,002, which equals SAR 274,998, and 7% of that is SAR 19,250. At the new agent with one month voids, rent collected is SAR 300,000 less SAR 8,334, which equals SAR 291,666, and 8% of that is SAR 23,333. The fee rises by SAR 4,083.

A higher percentage on a higher collected rent costs SAR 4,083 more. Set against SAR 16,668 of recovered income, the increase is easily justified if the void claim is true.

Step 3: Add the letting fees

Two lettings at one month of rent each equals two multiplied by SAR 4,167, which is SAR 8,334. The current agent also charges letting fees, assumed at the same level, so this cost is common to both and does not affect the comparison.

Only costs that differ between the options belong in the decision. Carrying identical costs through both sides adds length without changing the answer.

Step 4: Price the one-off cost of changing

New inventories and condition reports SAR 9,000, plus legal review SAR 6,000, plus one month of overlapping fees SAR 1,750, which equals SAR 16,750 in the first year only.

The switching cost is roughly one year of the void gap. That is the real hurdle, and it is a single payment against a recurring benefit.

Step 5: Net the first year

Benefit: SAR 16,668 of recovered rent plus SAR 8,000 of arrears recovery equals SAR 24,668. Cost: SAR 4,083 of additional fees plus SAR 16,750 of one-off cost equals SAR 20,833. Net first year gain: SAR 3,835.

Even in the year you pay for the change, the owner is ahead. Most of the one-off cost is recovered by the arrears work alone.

Step 6: Net the second year and find the payback

In year two there is no switching cost and no further one-off arrears recovery. Benefit SAR 16,668 less additional fees SAR 4,083 equals SAR 12,585 a year. Cumulative position after two years: SAR 3,835 plus SAR 12,585 equals SAR 16,420. Dividing the SAR 16,750 switching cost by the SAR 12,585 annual benefit gives a payback of about sixteen months from a standing start.

The change pays back inside a year and a half even if the arrears recovery never happens. The arrears recovery simply makes the first year comfortable.

What changes the answer

• If the new agent does not achieve the shorter void, the benefit falls to the arrears recovery alone and the change is roughly cost neutral.
• If there are no tenancy changes in the coming year, the void benefit does not arise until one occurs, and the payback lengthens accordingly.
• If the outgoing agent withholds records, inventory and condition costs rise and the first year turns negative, which is why a record delivery obligation matters.
• If the aged arrears prove uncollectable, the first year gain disappears while the recurring benefit remains unchanged.
• If the asset has a single tenancy rather than six, the void gap shrinks dramatically and the case for changing has to rest on something other than letting speed.

What the numbers tell you

• Price underperformance before pricing the change, because voids and arrears usually dwarf the fee difference.
• Only costs that differ between keeping and changing belong in the comparison.
• Treat switching cost as a one-off investment against a recurring benefit and state the payback in months.
• Verify a claimed void performance against evidence from comparable assets, not from the proposal document.
• Negotiate record delivery before you serve notice, since the handover cost is the largest controllable item.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira builds the numbers on a Saudi property with you before you commit: rent and cost evidence, condition and capital expenditure, the appraisal and the sensitivities that decide whether the deal survives a bad year. The investment decision stays yours, and so does the advice of your licensed tax and legal advisers.