"I'll pay you 65% of your fee for diagnosing and 35% for performing the operation and managing the recovery."
Most people would recognise the flaw immediately, yet we encountered a strikingly similar situation only last week.
This landlord has a setup whereby they instruct several agents to find a tenant for their properties (a small portfolio) whilst using another firm to manage the tenancy once agreed. We marketed the property, secured an excellent tenant, negotiated terms and guided the transaction through to completion. The references were strong, the tenants were delighted and the landlord was equally pleased.
At that point, however, responsibility passed to the managing agent...
Despite having weeks to prepare for the tenancy, the property was not ready for occupation. Contractors had not completed works, cleaning had not been properly arranged, decoration remained unfinished and a number of fairly fundamental details had simply not been addressed.
The result was entirely predictable. The tenants lost confidence, the relationship deteriorated before it had even begun and ultimately the tenancy collapsed, likely costing the landlord 10s of thousands in rental void.
What struck me most was not the failure itself; it was the economics.
The landlord had spent the majority of their fee budget on us - finding the tenant - and a far smaller proportion on the party responsible for preparing the property, managing the tenancy, protecting the asset and ultimately delivering the service that would determine whether the tenancy succeeded or failed.
The irony here is we find ourselves talking against our own financial interests.
Finding the tenant is important. If you are a landlord reading this post, ask yourself “would my agent have the tough conversation, would they tell me they no longer think the candidate they found me is suitable – before it’s too late?”. Notwithstanding, managing the next three years is at least as important, and aligning those interests so the agent who finds the tenant is accountable for managing the tenancy is most important. Most tenancies succeed or fail after the tenancy agreement is signed, that is when the real work begins.
The broader lesson extends beyond property - Businesses tend to get the outcomes their incentive structures encourage.
If you reward acquisition more heavily than delivery, acquisition will receive most of the attention. Equally, if you reward short term wins, you get short term thinking – and we’ve all seen how that turns out.
The quality of the outcome is a combination of the people involved and the incentives surrounding them.