Five Fees You Gotta Know Before Signing with A Property Manager

Reading the 6-8 page property management agreement can be an intimidating experience if you are a newbie landlord. Yet buried within that legalese mice size type are fees that can eat into your net profit. Failing to understand these fees can cause unnecessary stress and promote an environment of mistrust. Before you sign the dotted line ask the management company to explain the following fees in the owner's agreement. Doing so will make a less painful experience when you receive your first bill.

Lease up Fees

The lease up fee is either based on a percentage of the gross rent or a flat fee and should cover the following services: marketing, showings, tenant screenings and background checks and lease signings. The percentage can be as low as a third or as high as a full month's rent depending on the area. Some companies may even charge extra for advertising your property. What you're paying for is for someone to manually enter data into social media like Craigslist. However, if your property management company uses a  software system like Appfolio or Propertyware, it should automatically sync up to most free media outlets (Zillow, Trulia, Hotpads, etc.) once it is entered into the system and the download should be effortless.

Management Fees

Beware of management companies who charge extremely low flat fees, such as $25-$30 per month. A fee this low will likely only cover  rent collection and fielding calls from the tenant. If you read the fine print, there's additional charges for managing maintenance or repairs for the unit, paying utilities on the owner's behalf, issuing three day notices and performing inspections. Flat fees typically range between $45-$100 per month depending on the region and competition of the area and should include all the aforementioned tasks. Ask the manager to outline for you what their management fees will include. Management fees can also be charged based on the percentage of gross rent. This typically ranges between 8-12 percent,  and If there is little competition in the area, the percentage will be at the top end of the market. If you have 10-12 units to manage, or four or five houses, you are in a position to negotiate a lower flat fee or percentage fee of the gross rent. 

Cancellation Fees

Most management agreements are on a 12 month contract. If you have signed an agreement and choose to cancel because you're unhappy with the service, there's usually a cancellation fee. The fee can be a minimum charge or the company may require you to pay the management fee for the remainder of the contract. If you're lucky, they may waive the fee  to preserve good will. Cancellation fees often get buried in the contract so ask the manager to point it out in the agreement.

Maintenance Surcharge Fees

Maintenance fees are another moneymaker for these companies, particularly if they have their own in house staff to do maintenance and repairs. One way is to tack on a contractor's surcharge fee which is a fee the owner pays in addition to the amount billed to the owner by the service tech. The company may also charge owners a percentage amount for coordinating and overseeing major renovation projects such as a bath or kitchen remodel. 

Check to see if the contract requires you to hold a monthly reserve amount in your owner's account to fund repairs needed by the property. This fee is usually negotiable even though the contract may state a specific dollar amount. If you do not see this in the contract, have the manager point it out to you. 

Tack on Fees

Payment of utilities on the owner's behalf, shopping vendors for repair estimates, and performance of yearly inspections can sometimes be added to your bill if you have a bare bones policy that only covers rent collection. Even then, if the tenant pays late, the manager may charge you a fee to deliver the three day notice or appear on your behalf if you have to evict the tenant. If none of these tasks are listed as covered in the management fees, assume you will be charged an extra fee.

Property management is one of your biggest expenses when running a rental business.Taking the time to understand all the fees that go with hiring a service can help keep that business from running aground.