Business Management

5 Red Flags to Watch For When Hiring a Property Manager

Expertise: Real Estate Investing Basics, Landlording & Rental Properties, Real Estate News & Commentary, Mortgages & Creative Financing, Real Estate Wholesaling, Personal Development, Flipping Houses, Business Management
166 Articles Written
Property Management

Last week I wrote an article about the basics of property management. I thought it would be good to expound a little more this week and discuss some of the characteristics I would consider red flags when interviewing property managers. These characteristics in and of themselves do not necessarily indicate that a property manager should be avoided, but should at least cause an investor to take pause.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

1.) Bookkeeping and Statements

Most legitimate property managers have dedicated bookkeeping personnel. Property management may not seem very complicated, but I can assure you that many managers fall short in this area. I think that any property manager worth their weight will have a reputable software platform in place and dedicated bookkeeping staff. I’ve found that the property managers who try to “wing it” almost never have accurate accounting for their landlords and rarely provide monthly statements. As an investor, it’s critical that your books be in order …. choosing a property manager that sends timely statements and keeps accurate records is essential to this end.

2.) Unlicensed

Many states (including Georgia, where I live), require that a property management company have a licensed broker of record. It’s important to know the law in your state and make sure any property manager that you consider have the property licensing. Truthfully, regardless of what the law states, I would probably want any property manager I work with to have some sort of real estate licensing. Not only from a knowledge standpoint, but from an accountability standpoint. The licensing agency protects the consumer by providing a governing board that ensures licensees operate ethically and within the bounds of the law.

3.) Start-up/no References

I would be very cautious to work with a property manager that is just getting started out and/or has no references to provide. I’ve found that many individuals, especially real estate agents looking for additional sources of revenue, often jump into property management with no real business plan and little experience to help guide them in their endeavor. In the end, many start-up property managers find that the tedious nature of the business and the accounting demands do not provide the income originally projected (especially compared with the workload required). In the end, it’s the landlords that get stuck with sub par service and ultimately end up having to find a new property manager when the management company closes it’s doors.

4.) Super Low Fees

While many investors shop for property managers based solely on fee structure, I strongly advise against this. As an investor, property management is one of the most important components to the long term success of your rental property. Any property management company that is trying to undercut the average fee structure is in jeopardy of running an unprofitable business. While it may seem attractive to an investor at first, this scenario will almost always end up in one of two ways: 1) The quality of the record-keeping and overall management suffers 2) The business shuts down because it’s not profitable.

This actually happened in my market within the last year. One of the largest property management companies in Atlanta developed a model where they charged very low, flat-rate monthly management fees. For a while it appeared as though they were making up for this revenue by frequent and expensive maintenance and repair bills … but ultimately they ended up shutting their doors anyways. Hundreds of investors were told to go find another manager as they could no longer service their customers.

5.) Undefined Marketing Plan

Managing a property is really half of the equation. The other half is leasing. The last thing an investor wants is vacancy. If a property manager cannot rattle off at least three or more solid strategies for getting properties leased, I would be very skeptical of their ability to place tenants. A good property manager will know what it takes to put tenants in properties and will have multiple proven strategies for doing this (ie. MLS, signs, web advertising).

Property management is not rocket science, but there are good manager and there are bad ones. Any investor looking to hire a property manager should carefully consider if any of the aforementioned red flags exist and whether this may indicate potential problems.

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.

    Giovanni
    Replied almost 6 years ago
    Nice post Ken, great points on property managers. Agree with you 100% that shopping by price is bad strategy. We’re evaluating managers in a new market that we’re about to close an apartment deal in so this is very timely. A couple additional things that are part of our criteria: – They must be certified property managers from IREM, NARPM or similar. – Their software platform must have an ‘owner portal’ so real time performance data is available 24/7.
    Ken Corsini
    Replied almost 6 years ago
    Thanks for the post Giovanni. The certified property manager is a great addition to this list … and I absolutely agree about software with an “owner portal.” Reply Report comment
    Ken Corsini
    Replied almost 6 years ago
    Thanks for the post Giovanni. The certified property manager is a great addition to this list … and I absolutely agree about software with an “owner portal.”
    Seth Williams
    Replied almost 6 years ago
    Nice article Ken. These are good things to keep an eye out for (I hadn’t thought of these precise things before, but they’re all very true). Thanks for sharing!
    Ken Corsini
    Replied almost 6 years ago
    Thanks for the post Seth!
    Joel
    Replied almost 6 years ago
    Yeah Ken property management is a money loser and a massive headache and I do not go anywhere near it. Some of my friends are profitable with it but have hundreds and hundreds of units to manage. The funny thing among investors as property managers are seen as doing nothing but collecting a fat check YET the investors do not want to manage their own property! LOL So if there was nothing to it then the owner should do it themselves………. : ) The biggest mistake I see is other investors not building in a normal PM fee into their cash flow model when purchasing going in. Later on they do not want to manage themselves and are now trying to do a deal with a management company for low fees because they overpaid on the buy side going in.
    Ken Corsini
    Replied almost 6 years ago
    You are dead on. Too many investors think that they are getting taken advantage of by property manager … but at the same time, they don’t have the time or expertise to do it themselves. The bottom line is that property management is a very time intensive business with low margins. …and good point about investors leaving out property management fees from their pro-formas.
    Ken Corsini
    Replied almost 6 years ago
    You are dead on. Too many investors think that they are getting taken advantage of by property manager … but at the same time, they don’t have the time or expertise to do it themselves. The bottom line is that property management is a very time intensive business with low margins. …and good point about investors leaving out property management fees from their pro-formas.
    Jeff Brown
    Replied almost 6 years ago
    All 5 points are spot on. The ‘nebulous’ marketing plan is what sends me over the edge. “Yeah, well, we’re doin’ ‘this’, and we’re doin’ ‘that’, blah blah.” Most management firms view filling vacancies as a necessary evil.
    Jeff Wells
    Replied almost 6 years ago
    What is a good fee in your opinion(s)? We are long distance with our properties, and just getting started. We have 2. We were referred by a realtor/investor to a company that charges 150 set up and 10% of collected rents and pretty much handle everything and have repair contractors to handle minor things. They say most owners have a 200-300 dollar minor repair stash they hold on to for immediate issues. They have over 100 properties they manage. Any thoughts? Thanks guys!
    Helen
    Replied almost 6 years ago
    Hi, Thank you for the good article on property management. I had been burn by one PM company a few years ago. The PM had done what the article mentioned: no clear accounting, no regular monthly statement and no online portal for landlords. The PM didn’t deposit the collected rent to my bank account (she used my money for her medical bills), didn’t repair toilet and plumbing problem timely, which caused flooding from the second floor, damage the ceiling downstairs. It had cost me a lot of money. I had to filed a complaint to the real estate authority. She lost her broker license. I was told I was not the only victim. I am using a big property managment company that has online accounting system with landlord portal. I get monthly statement when the rent is collected. However the PM has another parttime job. She is not avalaible most of the time when I called. She sometimes doesn’t attend to problems in timely until I called her a few times or called her boss. She also calculated pro-rated rent wrong a few times. She took too long (8 days) to check credits and process one application, which cause me to lose one month rent because the applicant couldn’t move out in time to get his deposit back to fund the new deposit. He had to stay in his old place a month longer. The Pm was willing to hold my house for him for one month and 2 weeks. The biggest problem I have with this company is that their vendors always charge three times more for any repairs than it cost me to hire somebody myself to do the repairs. For example, I need to trim a tree because the leaves were touching the roof of my house (A). The estimate I got from the PM is $850 for which the PM’s landscaper said the tree would die if the leaves were cut back too much. So he had to replace this tree with a new one. I didn’t accept this, called around to get estimate myself. I got it trimmed for $75. It turned out that this landscaper who charged me $75 is also one of the vendors for this PM company. When I asked my PM to let him trim a tree for my other house (B), he charged me $350 including a few small trees that didn’t need trimming. I was veru upset, was willing to pay $75 only for one tree that actually needed trimming. The PM admitted that she didn’t communciate clearly with the landscaper when she put in the work order. She negotiated with me to pay $150. She said after all, your other trees got trimmed down. The fact is that she had her landscaper (the one who would charge me $850 for the tree at house A) to do landscaping maintenance for this house B just a month ago while the house was empty. He didn’t trim any trees big or small, not even throw away 2 tiny dead trees. He charged me $120 to only mowed a small lawn in the backyard. Another example, my PM gave me an estimate of $265 for the sprinkler repair at house B(adjusting the timer, replacing 2 valves). I called around to get a vendor to do it for me for $85. It seems to me that vendors tend to charge a lot more for work orders from PMs than from landlords directly. Anybody in this forum has similar experience? What strategies do you recommend to stop this? I also have problems with how the PM deals with HOA fines. They just send HOA violation notice to the tenant, but don’t verify if the violation has been corrected. I got into a lawsuit with the HOA for the house A at one point because the PM didn’t tell me the HOA fine and didn’t verify if the tenant had corrected the violation. What is your suggestion if the tenant doesn’t comply with the HOA rules and the PM doesn’t enforce that? I need help. Any suggestions would be appreciated. Thanks. Helen
    Shaun
    Replied almost 6 years ago
    Well first move is fire this firm. They have shown they don’t care for your best interest, can’t secure you any beneficial service and are incompetent. No much reason to not hit up a new one. One thing I’d recommend in the future is to make sure you are getting copies of anything coming from an HOA. If you are getting fined, sued or possibly liened for things that the tenants are doing I’d want to know. Even if only to follow up with the PM to make sure it was resolved.
    Helen
    Replied almost 6 years ago
    Thank you Shaun. I am looking for a better PM company in Phoenix. Any recommendations? Thanks. Helen
    Helen
    Replied almost 6 years ago
    Thank you Shaun. I am looking for a better PM company in Phoenix. Any recommendations? Thanks. Helen
    Shaun
    Replied almost 6 years ago
    Sorry I don’t work in that market so no recommendations. I’d suggest going onto the BiggerPockets Forum and asking. I think that there is actually a pretty disproportionate number of members from that area. If you aren’t familiar with the forum there is a tab that says it at the top of the page. If you post be descriptive and say Phoenix, Arizona, AZ, the neighborhood and/or Sub-division name to help setoff peoples Keyword Alerts. Good luck!
    Helen
    Replied almost 6 years ago
    Hi, Thank you for the good article on property management. I had been burn by one PM company a few years ago. The PM had done what the article mentioned: no clear accounting, no regular monthly statement and no online portal for landlords. The PM didn’t deposit the collected rent to my bank account (she used my money for her medical bills), didn’t repair toilet and plumbing problem timely, which caused flooding from the second floor, damage the ceiling downstairs. It had cost me a lot of money. I had to filed a complaint to the real estate authority. She lost her broker license. I was told I was not the only victim. I am using a big property managment company that has online accounting system with landlord portal. I get monthly statement when the rent is collected. However the PM has another parttime job. She is not avalaible most of the time when I called. She sometimes doesn’t attend to problems in timely until I called her a few times or called her boss. She also calculated pro-rated rent wrong a few times. She took too long (8 days) to check credits and process one application, which cause me to lose one month rent because the applicant couldn’t move out in time to get his deposit back to fund the new deposit. He had to stay in his old place a month longer. The Pm was willing to hold my house for him for one month and 2 weeks. The biggest problem I have with this company is that their vendors always charge three times more for any repairs than it cost me to hire somebody myself to do the repairs. For example, I need to trim a tree because the leaves were touching the roof of my house (A). The estimate I got from the PM is $850 for which the PM’s landscaper said the tree would die if the leaves were cut back too much. So he had to replace this tree with a new one. I didn’t accept this, called around to get estimate myself. I got it trimmed for $75. It turned out that this landscaper who charged me $75 is also one of the vendors for this PM company. When I asked my PM to let him trim a tree for my other house (B), he charged me $350 including a few small trees that didn’t need trimming. I was veru upset, was willing to pay $75 only for one tree that actually needed trimming. The PM admitted that she didn’t communciate clearly with the landscaper when she put in the work order. She negotiated with me to pay $150. She said after all, your other trees got trimmed down. The fact is that she had her landscaper (the one who would charge me $850 for the tree at house A) to do landscaping maintenance for this house B just a month ago while the house was empty. He didn’t trim any trees big or small, not even throw away 2 tiny dead trees. He charged me $120 to only mowed a small lawn in the backyard. Another example, my PM gave me an estimate of $265 for the sprinkler repair at house B(adjusting the timer, replacing 2 valves). I called around to get a vendor to do it for me for $85. It seems to me that vendors tend to charge a lot more for work orders from PMs than from landlords directly. Anybody in this forum has similar experience? What strategies do you recommend to stop this? I also have problems with how the PM deals with HOA fines. They just send HOA violation notice to the tenant, but don’t verify if the violation has been corrected. I got into a lawsuit with the HOA for the house A at one point because the PM didn’t tell me the HOA fine and didn’t verify if the tenant had corrected the violation. What is your suggestion if the tenant doesn’t comply with the HOA rules and the PM doesn’t enforce that? I need help. Any suggestions would be appreciated. Thanks. Helen
    Frank O
    Replied almost 6 years ago
    Thanks for the information. Well written article. These are good guidelines to be aware of.
    Shaun
    Replied almost 6 years ago
    Great follow up to previous article. Anyone looking into getting a PM for the first time should bookmark both and read each a few times!