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.
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.
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.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.