Real Estate and Beyond Blog: TOP 7 MISTAKES WHEN HIRING A PROPERTY MANAGEMENT COMPANY INVESTOR BEWARE

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Good Afternoon, Harry.  This is surely an in-depth post, and it's great that folks even think to give advice and/or direction with regard to property management these days.  Personally, I'm licensed in 2 states and I've been the only strictly property management guy on our local home builders' association.  But property managers and the trade still seem to get a bit of a bum rap as "the property manager" visions bouncing through many folks' head is that of some on-site derelict that hates to interrupt a Farmville game to show an available unit.

With regard to the content of your message, though, we/you must be careful not to paint property managers and management companies with too broad of a brush.  Management companies are well within their rights to set policies as they see fit, and choosing one whose policy is different from another one down the street does not render the one not chosen any less professional or their policies any sort of dangerous.  I'll detail cases in point below, numbered to correspond with your numbers above.

1.  Absolutely agree that checking of references is a no-brainer.  It's good to get testimonials from a property manager, but one must remember that references the managers give themselves are rarely going to be critical- correct?  If one truly wishes to do their homework, they can search craigslist for ads the company placed and check with those owners to gauge their satisfaction (or lack thereof).

2.  Management agreement.  I strongly agree with the first part of this- and it's quite simple that an owner needs to ensure they take time to read what they sign.  I make it a point to never ask an owner to sign an agreement they've never seen at an initial meeting.  I know others have done it, but I feel owners need time to digest things.  I will email the client my agreement in advance of our meeting unless it's absolutely impossible- as I want to avoid any possibility that an owner has a "Gotcha!" feeling down the road.  On a side note, the growing Hispanic community here in Orlando has placed an even greater burden on folks in our business.  As I mentioned, I want all to understand what they're signing and at times it's required an interpreter and added delay in getting things done.

     You lose me past that, though.  I don't feel it's prudent for you to be so specific in your talk of what's "normal"- especially when I consider that I've worked for 3 brokers in 2 states and managed more than 700 properties.  Things are handled on a company by company basis in this business.  You'd never want to say that a 6% sales commission is "normal", and the slope when speaking of "normal" property management policies is no less slippery.

     I have never charged a "set-up fee"- never.  Some do, and that's their prerogative to choose to do that as a matter of business practice- but I've never charged one at any of the 3 brokerages where I've worked.

     Percentages of lease fees themselves vary.  I've seen folks charge as low as 5% and as high as 15%.  I also provide discounts for owners of multiple properties.

     Some companies split their advertising and leasing charges.  In what is perhaps the faultiest part of your post, to be kind, you advise folks to "be sure that you are not being charged for both".  I feel you're going a bit far with this one, and it's a bit of poor advice to speak in such generality about something most often handled on a case-by-case basis.  For example, my two previous brokers split these charges and owners paid these separately.  I'm not altogether familiar with the Arizona market, but I believe we share a big problem in existing inventory for both sales and rental properties.  That glut has been a tenant prospect's dream and afforded them an opportunity to view many properties prior to settling on one.  As a consequence, some companies look to recover costs for marketing, showing, etc. properties that ultimately don't lease.  Again, that's their choice.  My current broker provides marketing and coverage on par with anyone in the country, though- and our owners never pay a dime for it. 

     Most important to remember, though, is that a broker's choice as to whether to include advertising fees as part of their leasing fees or keep them separate is simply a matter of business practice and preference.  Owners/clients can choose to go with one company or another for one reason or another- but a company's choice to charge both fees and separate them doesn't in and of itself make them any less "normal" than one that bundles the fees together in some manner.

3.  Long term leases.  Advice here is a bit sketchy, and once again you're speaking of things that are handled on a case-by-case or company-by-company basis and proffering it as "settled law".  I prefer 1-year leases myself- as it allows me a good out if a tenant isn't the greatest.  I prefer a break at one year, but I've also handled leases of longer duration that benefitted both owner and tenant. 

     I've had specific 30-day "out clauses" for owners everywhere I've been and I've never charged one a dime to leave me.  Having an owner take their property back is surely never good- but managing a place for an owner who you know is unhappy with you doesn't do either side any justice.

     My owners that have entertained tenant prospects' requests for leases longer than one year have done so carefully- and I've advised them as to whether it was prudent, whether to insert an escalator clause, etc.  Longer-duration leases have also been a blessing for many of my owners.  It's good to have some peace of mind that an income stream's coming in for a longer time, and the value of not having a vacancy period is hard to measure.  They've also been great for my owners fee-wise, as my highest renewal fees have been 1/2 of what the owner would pay me to replace the existing tenant(s) with new ones.

4.  Manager's location.  Good points here.  This is especially critical for foreign investors that have never even visited their own properties.  Condo conversions are the way to go for many Canadians these days- and one needs to do a bit more than Google-mapping their property's location to their manager's location.  In the best scenario, a manager will go hyper-local and define a good manageable territory for themselves and not manage properties that they can't effectively manage.  Times are tough, though- so owners have to be on the lookout for the managers or companies that will take anything that comes their way.  My best advice there is that terms such as "We cover all of Central Florida" should be viewed as double-edged swords.

5.  Your property is your priority.  You're surely correct in that an investor needs to remember that his property is an investment.  Having owners place their own ads?  No, no and no.  A few pitfalls lie ahead should an investor do that- the two most glaring be with regard to states' advertising rules and with the potential for disagreements along the "procuring cause" lines.  Owners/investors could end up placing blind ads in violation of state's statutes, ones that violate federal Fair Housing laws, etc.  Dealing with my own ads is tough enough- I don't want to deal with owners' ads and anything they might suggest in them.  Yes, they'd be ultimately responsible for any ramifications, but it;s not worth the hassle.

     Disagreements would also arise when prospects look at ads, see both the manager's ads and the owner's ads- then call the manager to make the trip out to the property and show it to them.  Which ad did the prospect see first?  Does it matter?  Do you cut the owner a break on the leasing fee if the owner's ad was the procuring cause?

6.  Don't go with the cheapest.  Good point.  Age-old knowledge says that you get what you pay for, though- so one should also be cautioned against going with the most expensive.  Over the years, I've found that those charging the most for their services are often ones that manage very few properties have to charge increased fees to off-set their overhead.  The most basic ideas and common sense prevail here- and as in any other business, we can try as we might and still find that there's never going to be a direct correlation between cost and benefit.

7.  Contract pricing.  I mostly agree with you here.  I usually like to tie the scope of a repair with the number of estimates (if any) that I seek prior to completing it.  For example, I don't get estimates if I need to have a guy fix a busted-up mailbox or replace a broken window, but I'd like to have a couple of estimates for a painting job or tile job and I'd like to have three estimates for something like a roof replacement.

     Investors need to remember that their house is still their house at all times, but they must respect the tenants' leasehold rights and peaceful enjoyment of the premises.  If they've done their homework, investors usually find that hiring a professional property manager to handle their property is a true blessing and assure themselves that they've got a partner in their quest to reap benefits from their property- the American Dream.  If they don't do their homework, they'll have no one but themselves to blame when their investing and property owner/landlord experience becomes a nightmare.