Selecting a Property Manager This Is A Member-Only Page
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When selecting a property management company, you should be sure that they are seriously involved in management. Most real estate firms do property management to some degree. However, you want a firm that considers property management as its primary business or at least as equal to its sales business.
You also want to be sure that the firm has experience managing the type of property that you have. The fact that a company is managing single-family homes does not mean that they have the ability and experience to properly manage a 25,000 square foot retail center with a mix of 15 different tenants. In addition, you should be concerned with the following criteria:
Legal requirements: Most states regulate and require licensing of anyone engaged in rental property management for a number of reasons. Paramount among them is the large amount of other people's money a property manager handles and is responsible for. Licensed real estate brokers are generally permitted to act as property managers.
- Is the company properly licensed? Have any complaints been filed against it? Check them out via a phone call to the state's real estate license regulatory agency or on the agency's Web site. In particular, be sure that there have been no material trust account regulation violations.
Staff requirements: Think about and make a list of each kind of service you want a manager to perform for you. They may include: finding, screening and selecting tenants; executing leases; holding and accounting for deposits; collecting rents; handling tenant complaints; dealing with emergencies; maintenance and repair; financial accounting and reporting.
- Does the company have adequate staff to add your property to their current management load?
- Does the company have proper accounting procedures in place and do they provide financial statements adequate for your particular property on a monthly basis? Ask for samples of the statements that you can expect.
- Does the company use third party vendors or have their own in-house maintenance division?
- If using their own vendors, what assurances are there that use and pricing will be fair?
- Does the company protect owners against liens from vendors by obtaining lien releases on major work?
- Does the company insure that employees that work on your property, whether their own or other of other vendors, are covered by Worker Compensation Insurance? Potential liabilities for uninsured workers can be extremely high.
- Does the company have proper insurance to protect you against liability for property damage or injury to third parties?
- Does the company provide insurance or a bond to cover those who handle trust funds? Whether this is important depends upon collection and handling procedures and safeguards. For example, disallowing cash rent payments reduces the risk of lose.
Screening the manager: One of the most important functions a manager is likely to perform for their property owner is tenant screening. A bad tenant can cost an owner thousands of dollars and ruin your day. A bad manager could cost you everything you own and ruin your life.
- Use every screening device available to you, including: credit reports; financial statements and an extensive interview.
- Will the the company provide names and phone numbers for owners of similar types of properties that they manage? If so, check to see if current account owners are happy and drive by the properties to see how they are cared for. If possible, compare the vacancy rates with the general area.
- Request a copy of the management agreement that you will be asked to sign and read it carefully ahead of time so that you can ask questions and/or negotiate modifications. We provide a more detailed discussion of management agreements below.
- Request a copy of the lease agreement that will be used for your property. Again, read it carefully and discuss any matters covered or not covered by the lease. Examples of commercial lease agreements can be found in our members-only Forms Web.
Management Agreement Content
Be sure that you can unilaterally cancel management on relatively short notice (30 days). Some management agreements will contain an automatic listing agreement if you sell the property. If so, delete the clause or modify it to your satisfaction.
A good management agreement should, by necessity, be somewhat detailed. It should clearly define the duties and responsibilities of the manager and of the owner. It should define the manager's compensation for all services including account setup, routine management, leasing of vacancies and re-leasing of existing tenants, supervision of major construction or rehab, and various non-routine tasks (e.g., court appearances and other legal).
Few states, if any, limit management fees except that it is illegal in most states for management companies to agree among themselves regarding the setting of fees for management or sales commissions. The typical fee charged varies greatly, depending on size of property and competition in a particular market. As examples, full management services for a single-family home might range from 8 to 15 percent of collected rents, with all expenses, including maintenance and legal costs, an additional expense of the owner. Some managers may also charge an additional leasing fee for finding a new tenant or renewing an existing lease. In a particular market, a company that charges 10 percent for managing a SF house might charge 6 percent for a 12-unit apartment complex and 4 percent for a 70-unit project. An owner must be very careful when hiring a management company and the selection of one is another topic.
There should be enumeration of property-related expenses that will be paid for or reimbursed by the owner. This would include advertising, credit reports, and long-distance phone calls. There should be a list of what actions of manager might require prior owner approval, including the maximum non-emergency expenditure that can be made without owner approval.
It should be clear who gets late charges and other financial penalties assessed against tenants. It is not unusual that late charges will be split between manager and owner to provide incentive for the assessment of late charges in accordance with the leases. Certain other charges might go entirely to the manager because of the extra work performed that required the charges. Included in this category would be charges for NSF checks and lost keys.
Examples of commercial property and other management agreements can be found in our members-only Forms Web.
Bottom Line: ______________ What you see gives you some indication of what you are likely to get, but we have all learned that looks can be deceiving. If you had stopped at the top of the page and selected your property manager from their looks alone . . woe unto you. As you have just read:
- the manager will essentially control your investment
- a property manager represents you with your customers.
- the manager handles the tenant's money and yours.
Selecting a manager is more important that selecting a property or a tenant. It is likely the most important decision you will make relating to real estate investing. Look beyond looks and learn all you can before you make this important decision. Members' Homepage |