Whether it be your first or 10th rental, an apartment house, or commercial property; at some point in time, as your business grows, you will want to hire the services of a professional property management company. When you do, you will be signing some sort of property management agreement with the management company outlining a number of duties and responsibilities on both your and the company’s parts. The scope can range from simple for a couple of rentals to much more complex such as large apartments and commercial properties.
Often, the property owner signs what is placed in front of them by the property management company, thinking that it is all “standardized jargon” and not knowing that much is open to negotiation.
Price, of course, is important, as is a list of what duties the management company will be responsible for and what the landlord is specifically liable for. Many landlords concentrate solely on the monthly percentage that the company charges without a thought as to what that fee actually includes! Having a professional that understands these types of contracts is important so we highly recommend you utilize the services and advice of a professional that is versed in this area.
There are literally dozens of phrases, items, etc that can go into these agreements. Today we will limit ourselves to 6 common items that tend to get overlooked by many investors:
1. Contract Duration & Termination. It is vitally important to have a contract that isn’t open-ended as far as time. Obviously, once you have retained the services of a property management company and have used them for a long time, then this might be a viable option. However in the “honeymoon” period of working with a new management company, we suggest limiting the time to a year or so and then revisiting whether you want to keep using them. It is also important to have a way out of the contract if the management company is not performing as agreed. Believe it when we tell you that in most of their contracts, there will likely be language in there that allows them to “fire” you, if you don’t uphold your end, so it should be the same with you.
2. Property Inspections. Many of us as landlords hire a property manager so that we don’t have to interact with tenants, inspect properties, collect rents and some of the more unsavory tasks that are included in that role. However, it is vitally important that you always have some sort of idea of the current condition of your rental and if there are any issues with it. Insisting in writing on regular inspections and updates on your properties is important! You also need to have clarified, in writing, of whether or not a regular inspection plan is included or not and how often it will occur, the scope of the inspection,and if not included, what the additional fee would be.
3. Tenant Acquisition. This varies greatly from company to company. Some companies don’t charge anything and some charge as much as half a month’s rent- and sometimes more. Once again, it’s important to see what the management company’s screening and showing process is. If they are very diligent in getting the right tenants, one might be more inclined to not worry too much about a reasonable fee. Whatever it is, know how much it is, and what it includes, so you don’t get a big surprise.
4. Maintenance and Repairs. Every property is going to need some repair and upkeep from time to time. That is just a cost of doing business. A management company can take care of this for you and can keep you from getting those dreaded ”midnight calls” from tenants. This is a nice perk, but can come at a stiff price if you aren’t in the know. Make sure you know what the management company charges for this and who they use. Some management companies will hire a subcontractor at a premium price and then not only get a “cut” from the sub, but also may actually charge you an additional 10-20% for their involvement. I don’t have a problem with a company providing a service at a reasonable fee but it can get out of hand. Setting limits as to how much you will allow keeps everyone honest. A clause that anything under $250-$300 the management company can go ahead and take care of (with notice to you) and anything over that they allow you to get your own bids is a good way of controlling this issue.
5. Selling the Property. In most states, some of the principals in the property management business, need to possess a valid real estate license (in addition, other licenses may be required in some locales). Some of the property management contracts can contractually oblige you to use their services if you decide to sell your property at some point. In addition, there can be additional fees, due to them, if you decide to use someone else. Some property management companies are also great realtors, but it’s nice to have a choice in the matter should you decide to sell.
6. Fees and Services. There are a plethora of services that a property manager can offer, some required and some optional. Landlords can pick and choose, in some cases, whether they want a premium, all-inclusive service package or something where you participate in the process. Personally, if you have the right company, they take care of many of the problems and issues that occur, so let them do it! That being said; have a thorough understanding of what is and what is not included and what additional service will cost you.
So there you have it. Taking a solid look at any contracts you may sign with a property management company is imperative. Even if you have a current management company, it might be worth taking a look, so you can be ready to change things a bit when you renew. Most property management companies are hard -working, honest folks that provide good services.
A last reminder: It is also important to consider (especially in the early stages) using the services of a professional, such as a real estate attorney to make sure that your contract works for you! Here’s to your success!
Attorney William ("Bill") Bronchick, host of Legalwiz.com, has authored six best-selling books and is sought nationwide for his 25+ years of real estate and legal knowledge. He has been interviewed by numerous media outlets, such as CNBC, TIME Magazine, USA Today, Investor Business Daily, Forbes, and the LA Times, to name a few. William Bronchick is the co-founder and past President of the Colorado Association of Real Estate Investors and the Executive Director and founder of the College of American Real Estate Investors. Click on the "About" link above for more information on William Bronchick.