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Advice/Things to avoid in Property Management Contracts?

7 posts by 6 users

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Mehran Kamari Moderator

Real Estate Investor from Woodland Hills, California

Feb 21 '13, 12:05 PM


Hi everyone,

I am reviewing a property management contract for the PM company that works with a turnkey provider I'm thinking of doing business with for a property in Indianapolis.

1. First month's rent, not to exceed $1000 for tenant placement fee (Wouldn't this pretty much be an incentive for tenant turnover?) -Is this the industry standard? Or is this company just, for lack of a better word, "tripping"?

2. Tenant resign fee for resigning a new lease and the end of a good standing lease term = half of monthly rent. - Again, is this the industry standard?

3. Expenditures in excess of $400 require owner approval. - Should this amount be lower? I've read in other posts people mentioning $200.

4. Wording Regarding termination of contract.
"Either party may terminate this agreement at the end of the contract period by giving 30 day written notice. Failure to give written notice of cancellation shall renew this agreement for a like period under the same terms etc." -
I'm no lawyer but this seems like I cannot just give a 30 day notice whenever I feel unhappy, that I must wait til the end of a contract period and give 30 days notice before the contract is up, just to get out of the contract?

I'm not sure if it is within forum rules to link to the document, but I can email it to anyone if they want to take a look at the rest of it to help out.
The name of the PM company is PARC Property Management. If anyone has used, or is using this PM company and wants to chime in, I'd appreciate it big time also!

Anyone have a good PM company they can recommend in the area? Has anyone used reddoorrents.com? They seem awesome by the info on their web page

Thanks so much in advance


Edited Feb 21 2013, 12:16 by Mehran Kamari


Website: http://www.biggerpockets.com/show73
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Chris Clothier Donor

Real Estate Investor from memphis, Tennessee

Feb 21 '13, 12:30 PM


See my responses below, but I would definitely contact them about anything that makes you uncomfortable for either explanation or changing. The worst thing they can do is say no.

Originally posted by Mehran Kamari:
Hi everyone,

I am reviewing a property management contract for the PM company that works with a turnkey provider I'm thinking of doing business with for a property in Indianapolis.

1. First month's rent, not to exceed $1000 for tenant placement fee (Wouldn't this pretty much be an incentive for tenant turnover?) -Is this the industry standard? Or is this company just, for lack of a better word, "tripping"?

I don;t think there is any such thing as "industry standard" when it comes to property management as it is so loose and will vary from state to state and even within the city. However, if this is an incentive to provide bad service to you as an investor and just churn tenants for income, I would think they would have trouble staying in business. We too charge first months rent not to exceed $1000 in both the cities we operate, but our average length of stay per tenant is now approaching 31 months. If they are a quality management company, I would have no problem with that charge. Ask them what their average length of occupancy is.

2. Tenant resign fee for resigning a new lease and the end of a good standing lease term = half of monthly rent. - Again, is this the industry standard?

This one I'm not so sure of. I can understand a nominal charge of between $100 and $250, but a half month's rent - depending on how they are compensating the person who negotiates the rental contract extension and how successful they are, may be just right or it may be high. Ask for specifics as to how successful they are at resigns and ask what percentage move out and what percentage resign each month.

3. Expenditures in excess of $400 require owner approval. - Should this amount be lower? I've read in other posts people mentioning $200.

I have seen this number between $300 and $400. Usually is depends on how large the company is and what their typical clientele prefers. Often times, investors using turn-key operations do not want a lot of calls on smaller dollar items and many think less than $400 is smaller dollar. Of course, that is all relative. If you are purchasing a property with a rent of $600 and receive $550 after management, $400 is practically the entire rent an I would be fired up if I did not receive a call on anything up to that number. So consider the rent of the property and the reasoning behind the policy and I think this is a great thing to ask for a little negotiation on.

4. Wording Regarding termination of contract.
"Either party may terminate this agreement at the end of the contract period by giving 30 day written notice. Failure to give written notice of cancellation shall renew this agreement for a like period under the same terms etc." -
I'm no lawyer but this seems like I cannot just give a 30 day notice whenever I feel unhappy, that I must wait til the end of a contract period and give 30 days notice before the contract is up, just to get out of the contract?

I have never seen a contract that was not able to be terminated with a 30 day notice. I'm not sure of the legal language, but I am certain you can terminate with a 30 day notice at any time. If I am wrong on one or more of these points, then this may not be the right company. Often times, you just need to open the dialogue with them and get to the reasoning and the meaning behind each of the points.

I'm not sure if it is within forum rules to link to the document, but I can email it to anyone if they want to take a look at the rest of it to help out.
The name of the PM company is PARC Property Management. If anyone has used, or is using this PM company and wants to chime in, I'd appreciate it big time also!

Thanks so much in advance



Medium_new_mi_logoChris Clothier, Memphis Invest, GP
Telephone: 901-212-9647
Website: http://www.memphisinvest.com
www.MemphisInvest.com 1(877)-773-9998 Chris D Clothier


Lynn M.

SFR Investor from Chesapeake, Virginia

Feb 21 '13, 01:06 PM


Mehran, like Chris said, there is no industry standard. I have property managers in 2 states right now.
1 & 2. One charged me 1/2 months rent to place tenant, plus ad fees of about $100 or so, then $400 per year "inspection fee" if they renew, so like a re-signing fee (but 1/4 of month's rent, not 1/2), and 8% of rents collected. The other, which I prefer, charges $150 per year for 1-10 properties, whether tenants stay or not, no placement fee, no re-sign fee, and 8% of rents collected.
3. Both tried for $400 and dropped to $200 with negotiation.
4. All the management contracts I've seen had this in it instead of the 30-day notice that Chris mentions. I was able to get out of one without waiting for the end of term with no penalties when they were not doing their job, and if they are doing their job, I'm okay with keeping them around, anyway, so that clause didn't scare me so much. Might just be common practice for the areas I am in.



Marco Santarelli Verified Donor

Real Estate Broker from

Feb 21 '13, 01:13 PM


Hi Mehran,

I would be more than happy to share the property management company we use in Indianapolis offline with you if you like. We are not affiliated with them, nor do we receive any compensation from them. They do great work on our client's properties and I would be happy to connect you guys.

Continued success!



Medium_norada_real_estate_investmentsMarco Santarelli, Norada Real Estate Investments
Telephone: (800) 611-3060
Website: http://www.NoradaRealEstate.com
"Live where you want. Invest where it makes sense!" (tm)


Will B.

Feb 21 '13, 02:08 PM


Mehran,

Smart move reviewing the management agreement carefully. I encourage all owners to do the same but sadly, some do not.

Everything is negotiable but property managers enjoy uniformity in rules and regulations among their properties for the sake of ease and comfort. However, at the end of the day it is your investment and any good manager will respect that.

As for your list, I am not a fan of item #2. Where is the incentive for your property manager to try to retain a good paying tenant? We don't do this.



Mehran Kamari Moderator

Real Estate Investor from Woodland Hills, California

Feb 21 '13, 03:41 PM


Thanks everyone for the awesome responses!

@Chris Clothier Thanks for taking the time to respond so thoroughly. The Average length of occupancy is definitely on my list of questions. I'll also clear up the details of my ability to terminate our contract.

@Lynn M.It's nice to see what the numbers are for some of the contracts you have in place. Gives me more understanding to negotiate with.

@Marco Santarelli I'll PM you in a bit! Thanks

@Will B. I can't even imagine how someone can invest tens of thousands of dollars, and assume so much liability without reading the fine print! It's always good to be reminded that everything is negotiable. I tend to forget that when I'm venturing into something new and don't know the "rules" yet.

This thread has been great so far.



Website: http://www.biggerpockets.com/show73
Check out my BP Podcast Episode!


Kelly G.

Lancaster, California

Feb 21 '13, 04:16 PM


Hi Mehran;

I'm new to landlording and looking for a good PM in Milwaukee. I have stayed away from anyone who won't let me terminate when I want - but usually see a 60 day notice requirement. I'm ok w/ that.

I read one contract that actually allowed the PM to charge ME for 'lost income" if I cancelled the contract early (it was more technical than that - but the same idea). I thought: "Are You NUTS?! " and moved on.

I won't allow more than $200 work w/o prior approval- but am actually thinking of asking for notice for any-and-everything - except emergency services for tenant - at least till I get a better feel for this. Have heard too many stories of owners getting nickle-n-dimed to death!

Good Luck

Kelly



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