In recent blogs, we have been talking about the costs of property management. Previously, we discussed the two primary costs: the ongoing management fee and the cost of one-time tenant placement. Some property management companies structure their services so the management fee and tenant placement fee cover all expenses incurred in the course of your relationship, but that’s not necessarily guaranteed. There are many companies that have different structures. So when you’re interviewing any property management company, make sure you understand the possible scenarios.
Maintenance and Repairs
Maintenance and repairs are always going to be a concern for property owners, so they are likewise a concern for management companies. They can also potentially be a source of revenue for the management company. There are companies that might charge an administrative fee on all maintenance and repairs performed at your property. For example, let’s presume that Company A assesses a 10 percent handling charge on top of the cost of any maintenance invoice generated. This means a $190 plumbing bill would conceivably be submitted to you for payment at $209, with $19 being retained by the agency. If your management contract states this is the company policy, you would have to anticipate that this would occur on every invoice. Be sure you understand what “maintenance administrative fees” means on a management contract.
There can also be extra charges any time there is an extraordinary project. If your property is flooded, has a fire or requires an insurance claim or other massive undertaking, your property manager might charge an administration fee in addition to the actual out-of-pocket expenses. It could be a percentage of the total cost or an hourly rate. Arguably, this is due to the additional administrative oversight and detail that would be required for a complicated, multi-disciplinary project.
Some management companies have “preferred vendors.” A management firm might give all or most of their projects to a short list of roofers, plumbers or electricians. The vendor, in recognition of that steady business stream, might give the management company a discount, credit or a rebate. This is not, on its face, an unethical or unscrupulous practice, but as the owner, you deserve to know could be a factor in the company’s business relationship with any vendor. Discounts and rebates could generate revenue for the management company, so should be clearly documented in your management contract.
You should also know if your property management company owns a maintenance company or holds a contractor’s license. If the property manager assigns work to their maintenance/contracting division, any work done at your property would ultimately be money paid to the management company. Again, it’s something that you should be aware of.
Specialized services might incur a premium as well. For example, we were contacted by a property owner – one of our clients – who was being audited by the IRS. He needed specific documentation from three years ago and we were the best people to provide it. This scope of work is not built into our standard management fee because it potentially results in a lot of research and document preparation. When you’re interviewing a company, ask if there are additional charges for special services. For example, If the property manager goes to court on your behalf or needs to initiate collections activities for a tenant who moves out without paying all of his obligations, you might likewise incur supervisory fees.
Your property is an asset, and at some point you may want to sell. When it comes to selling an investment property, it’s possible that the property management firm is the most capable and centrally situated to handle the relationship between you, the sales agent and the tenant. You may need your property manager to notify the tenant of the impending sale, schedule with buyers wanting to see the property and take care of inspections, estoppels and other details. If the administrative cost for those services are not covered by the standard management fee, you’ll want to know how it’s addressed.
What if your management company also has a sales division? Your contract may include a provision stating that the sales side of the business has the first right of refusal to list your property for sale. This could have long term implications if you don’t realize you’ve committed to a future sales relationship. Potentially, as another possibility, you might find yourself selling your property to your tenant. There might be a commission or a fee assessed to compensate the property management company for locating this tenant, who is now your buyer.
This is by no means a comprehensive list of the potential costs of property management in addition to the management fee and the placement fee. For example, this list doesn’t include financial issues that might be affiliated with tenants themselves. But if you’re interviewing DeDe’s Rentals or any other firm, be sure you’re an informed consumer so you can make smart decisions.
Property management can be a complicated business. We’re here to make it simple. Contact us if you have any questions!