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For a management firm , bulk purchasing takes time and requires additional staff. It means putting out multiple bids for jobs, negotiating deals with vendors, and knowing how to get the fairest price. Fairfield Properties has four full-time employees in its purchasing department. “Four full-time salaries is a major expense,” says Alvin Wasserman, director of Fairfield, which manages properties in Long Island and Queens. “Any company with a purchasing department would expect to recoup that cost through savings.”
But for managers and their clients, it can be worth it. Indeed, for many condos and co-ops, the savings can be stunning. Last January, Villas on the Bay, a 42-unit condo in East Moriches, Long Island, switched to Fairfield, a larger property manager than the one it formerly had. The 30-year-old community had capital improvements on the horizon and thought Fairfield could get them better prices.
Immediately, Fairfield signed the condo onto its master insurance policy for liability and property coverage. Many property managers offer master insurance plans to their clients. Because the plans pool risks for several buildings, premiums are lower. The new policy saved Villas $20,000 a year.
“Our insurance was our largest expense, but not anymore,” says Villas board treasurer Kim Blackmore. However, if Villas ever leaves Fairfield, it will no longer benefit from the company’s master policy.
It seems like a no-brainer. Property managers have found that by pooling their clients’ demand for goods and services, they can pass along savings. The managers rely on bulk purchasing for everything from buying calcium chloride for winter weather to hiring contractors for elevator inspections, for picking gardening services to ordering commodities like electricity and heating oil. “You think about what you buy for your own home – light bulbs, plumbing, roofs. Multiply that by 13,500 people, and I can’t think of something that I wouldn’t buy in bulk,” says Wasserman. “It works.”
But buying in bulk has its limits. Some managers find that the cheapest deal isn’t always the best one for an individual building. And some boards are skeptical of the savings, preferring to stick with vendors they already know. So what’s the story behind bulk purchasing? What do you need to know?
The Incredible Bulk
A bulk arrangement is a one-stop shop where a property manager knows what the price will be on a particular good or service and can keep track of a single vendor. If he needs to coordinate elevator inspection schedules or paperwork, he has to make only one phone call. A property manager can also expect better service from a vendor who is now getting substantial business from a single company.
“It’s buying me that person’s talent, that company’s undivided attention,” says Peter Lehr, director of property management for Kaled Management, which manages properties in the New York City area.
Lehr uses bulk purchasing for a variety of services, including elevator inspections. For the past four years, he has bundled all his buildings together when sending out bids. By offering a single inspector his entire portfolio of about 60 properties, he’s been able to reduce a building’s inspection bill by 50 percent in some cases.
The savings can be significant. Last fall, Cooper Square Realty, which manages 600 properties, pooled 250 of them to buy electricity from an electricity service company. So, instead of buying 500 kwh of electricity for a single building, the company shopped for 130 million kwh. Individual properties saved between 9 and 20 percent on electricity costs. “You get a better pricing structure because of the volume,” says Dan Wurtzel, president of Cooper Square Realty. Cooper Square hopes to eventually bring all its managed properties into the new plan.
Buying in bulk also works for capital improvements. Five years ago, Fairfield offered six of its properties the opportunity to convert to natural gas. By bundling the projects together, the company reduced the upgrade costs. The five properties that agreed to the offer are each saving about $100,000 a year on heating costs, says Wasserman.
Beware of Bulk?
For all that, convincing a board that the long-term savings is worth the capital investment is not always easy. Five years ago, Cherry Valley Apartments, a co-op in Garden City, L.I., needed to replace its boilers. But rather than heed Fairfield’s advice and convert to natural gas, the board spent nearly $100,000 on new boilers. Board members were concerned about possible gas leaks and since gas prices were comparable to oil at the time, the savings didn’t seem to be worth the effort.
Flash-forward half a decade and gas prices are substantially lower than oil, a trend that is likely to continue. So, when Fairfield sent the board members a letter last year suggesting they reconsider, they had a change of heart.
“We said, ‘If we made a stupid mistake five years ago, let’s not stick with a stupid mistake,’” says Joseph Evans, treasurer of the board. Cherry Valley accepted a $100,000 bid from the energy company Hess. The bid was 10 to 15 percent lower than all the other bids because Hess has a relationship with Fairfield. If Cherry Valley had been using natural gas last year, it would have saved $150,000, obliterating its upgrade costs in a single year.
There are ways to convince reluctant board members to consider changing course, say property managers. One option: show them the numbers. Cooper Square sends each of its buildings a detailed description of its energy usage, highlighting how much the property would save if it joined the electricity pool. If a building passes on an initial offer, follow up later, explaining how much comparable buildings have saved.
Bulk options don’t work in every situation, however. Although Villas could have joined Fairfield’s master flood insurance plan and saved substantially, the board decided against it. Because Villas is a seaside community, board members worried that there would not be enough coverage available to meet their needs if a major event affected other properties in the master policy. “We didn’t feel comfortable going all the way,” says Blackmore.
Critics of bulk arrangements argue that property managers can’t take a one-size-fits-all approach to buildings. If a property has a unique garden with exquisite landscaping, it may demand a particular gardener with a sophisticated artistry. The gardener that the property manager has a deal with may not be the right craftsman for the job. Or, if a luxury building wants a specific look for its doormen, the good deal on uniforms may not work.
“You don’t necessarily go with the cheapest contractor, especially when you’re designing hallways or lobbies,” says Steve Osman, president of Metropolitan Pacific Properties, which manages 38 buildings in New York City. “You may want someone where their work is just extraordinary. You’re buying for the quality.”
And there’s another risk to consider, says Osman. The lowest bid isn’t necessarily the best deal. A gardener may offer the lowest price and then bill à la carte for services that other gardeners included in their base price. A vendor may have a terrific price for calcium chloride, but if he can’t deliver it quickly after a snowstorm, the savings aren’t worth it.
Buying in bulk can also lock a property into an unfavorable deal. Building-wide cable television plans, for example, can save residents on their monthly bills, but they often require a minimum number of residents to participate. If the building doesn’t meet that threshold, residents get stuck with a larger bill than they were promised. And, with technology changing rapidly, locking a building into a three-year contract can trap a property in an obsolete service.
“What looks great today won’t be so great next year,” says Wurtzel.
Some critics have gone so far as to question the very idea that any property manager truly benefits from a so-called bulk rate. Rather, all managers cultivate relationships with vendors who in turn offer favorable pricing – a skill that goes along with being a property manager.
“I’m absolutely, totally skeptical of the characterization of it,” says Carl Borenstein, president of Veritas Property Management, which manages about 70 buildings mainly in the Bronx and Manhattan. “I think the vendors do it for everybody. They all want the business from the management companies.”
But even Borenstein finds that the practice works at times. Veritas buys calcium chloride in bulk, offers a master insurance plan, and bundles payroll services together. By consolidating his properties and hiring a single payroll service to handle them together, individual buildings save about $200 a month. Admits Borenstein: “It’s substantial when you think about it.”