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Management companies are compensated in a variety of ways, and the types of fees and typical compensation vary widely throughout the country. In addition to a percentage or flat monthly fee, a firm may charge leasing fees, as well as fees for copies, postage, reports, court appearances, coordinating maintenance, getting bids, supervising capital improvements, and so on. Ask about these extra fees, and make sure that you fully understand the compensation of your property manager. But never evaluate the management company based on the management fee alone as a management company that competes on the lowest fees while certainly take shortcuts or assign way too many properties to each property manager, as the costs and overhead of a top property management firm are high.
WATCH THOSE REPAIR BILLS!
Most management contracts contain clauses that allow property management companies to perform emergency repairs up to a specified dollar amount without advance approval from the owner. This clause allows the company to take care of problems that occur unexpectedly. When you’re in the early stages of working with a new management company, make sure that you monitor its expenses closely. Even though it may have the legal right to use funds up to a certain amount, the company should always keep you informed. “No surprises” is one of my favorite sayings!
Repairs serve as a profit center for many management companies. They may offer very low property management fees, knowing that they’ll make them up through markups on repairs, and often, the repairs aren’t necessary. Look for a property management firm that doesn’t mark up materials, supplies, or maintenance labor, or one whose fees for such work you consider to be fair and equitable.
Discovering how property management companies charge
The typical professional management fees for single-family homes and individual rental condominiums are 8 to 10 percent of the collected income, with an additional fee earned each time the unit is rented. The rental fee can be a flat fee that ranges from $250 to $500 or a percentage of the monthly rental rate, such as 50 to 100 percent. If the rental home or condo has a high rental value, the management fee is often lower, in the range of 6 to 8 percent.
The amount of time required to manage the property: An experienced property management company owner knows the average number of hours the property manager, accounting staff members, and other support personnel will spend each month on managing your property. Then the company calculates a management fee schedule that should generate the fees necessary to provide the resources to manage your rental units properly and effectively. If you have large rental properties, management fees typically don’t include the services of an on-site manager, superintendent/maintenance technician, or caretaker; these employees are paid separately and are always an owner expense.
The size, location, condition, and expected rental collections of the property: Generally, the larger the rental property, the lower the management fee as a percentage of collected income. Fees vary by geographic area and by the income potential of the rental unit, with a higher-end rental property commanding a lower-percentage management fee. For certain properties that may be difficult to manage, the company may have higher management fees or additional charges for certain types of services or for a certain period of time. Management companies may also propose charging a minimum monthly management fee or a percentage fee (opting for whichever of the two is greater). A property that’s in poor physical condition and needs extensive repairs and renovations, for example, requires the property manager to spend extra time supervising the improvements. This additional time requires additional compensation for the property manager.
Try to find a company with a management fee that’s a percentage of the collected income. This kind of fee strongly motivates the company to keep rents at market rate and collect them on time.
Structuring compensation
Your management company’s compensation can be affected by more than just the standard considerations mentioned in the preceding section. Knowing how to look beyond the basics can save you money in the long run and make your management company work for you and your investment.
Make sure that your property manager is compensated in a way that incentivizes or motivates them to keep your rental property occupied by a stable, long-term tenant who treats your rental property as their home, respects their neighbors, and pays a market rent in a timely manner. Structure the compensation so that the management company has an incentive to get the property leased up (all vacant units filled) as soon as possible. When you’re analyzing your property manager’s compensation fees, keep these tidbits in mind:
Watch out for management fees that seem to be too low. The adages “You get what you pay for” and “If it’s too good to be true, it probably is” come to mind. Management fees that seem to be too low are a good indication that the property managers are spread too thin and may not manage your property properly. Poor management can result in unhappy tenants, which leads to higher turnover and longer periods of vacancy without rental income.
Understand that leasing fees are often justified and usually not negotiated. The most time-intensive portion of property management is tenant turnover. When one tenant leaves, the property manager must make the unit rent-ready; then they must advertise, field multiple inquiries, show the property, and screen the prospective tenants. Leasing fees may vary, but you can usually expect either a flat fee of several hundred dollars or a percentage of the rent, such as half or all of the monthly rental amount.
Making sense of management agreements
The management agreement is a pivotal document that spells out the obligations of the property management company to you, the client. Be sure to study the fine print, which is tedious but necessary to avoid unpleasant surprises. Even the management agreements available through state and national real estate organizations can contain clauses that are clearly one-sided in favor of the management company.
Many management agreements, for example, call for the property manager to collect and keep all the income from applicant screening fees, late charges, or returned check charges. Some agreements provide that the management fee must be paid even on any payments received from insurance companies as settlement for claims for property damage. Property managers justify this policy on the basis that they incur additional time and costs in handling such situations. But these fees should belong to you because you want to give the property manager a financial incentive to fill your unit with a tenant who pays rent on time and cares for the property. A management fee based on actual rents collected is a better arrangement.
The following are some nuggets that may be hidden in the fine print of your management agreement and how to protect your investment:
The “no management fee charged when the unit is vacant between tenants” line: Although this arrangement seems to save you money, especially when rental revenue isn’t coming in, the property manager can rush to fill the vacancy without screening tenants properly — and a destructive tenant can be worse than no tenant in the long run. It’s better to have a minimum fee that covers ongoing costs for the property manager to offer services and make periodic inspections, because vacant rental units can be more susceptible to damage than occupied properties. Most insurance companies have the right to cancel policies if the rental unit remains vacant for an extended period, as