Aligning Investor's Goals with Property Manager's Goals

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Aligning Investor's Goals with Property Manager's Goals

Josh Dotzler
Austin, TX · Member since 2013 · 67 posts · 29 votes

Hello BP Investors,

I have been in debate with another property manager about the merits of an alternate pricing strategy. I would like to hear the opinions from investors and other PMs out there.

Typical PM Charges for the DFW area:

- 7%-10% of rent collected as monthly Mgt Fee

- 50%-100% of one Month's Rent as Placement Fee for new Tenant

How to align Property Manager's Goals with Investor's Goals

- No Placement Fee for finding new tenant

- In order to offset the loss in income from replacing tenants, charge a slightly higher monthly management fee (ie. 12% vs 10%)

The reasoning behind this change would be to better align the goals of the PM with the goals of the Investor. Investor's hate turnover, but PMs love it (they get paid a lump sum). PMs love to say that tenant placement is a lot of work and demands a high payment, but for anybody who has invested in great PM software (ie Appfolio) this process is really not as difficult as they would make it sound. I use Appfolio and they have made it incredibly easy to post a vacancy, syndicate to the major sites, have tenants fill out/pay applications online, and finally screen tenants (all within the system). So to say it takes too much work and demands a whole month's rent in the DFW area is outrageous (even if posted in the MLS).

So if Property Managers didn't actually get paid an extra amount for placing bad tenants (that regularly turnover) then they would have incentive to place great tenants that stay there for years.

Downside: Rental units that regularly turnover due to atmospherics of the neighborhood and conditions outside the control of the PM (ie college towns, war zones, etc). The PM would have to actually evaluate each property they took on to see if they needed to charge a placement fee or if an increased monthly management fee is all that would be needed.

Would investors pay a higher monthly management fee on rent collected in order to alleviate the placement fee? Or would you prefer to pay a lower management fee and roll the dice on the frequency and cost of placement?

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Kevin Page
Commercial Real Estate Broker · Cape Coral, FL · Member since 2014 · 86 posts · 46 votes
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@Josh Dotzler  Renting to tenants is a lot more than using Appfolio. Meeting prospects, calling past landlords, verifying rental history and income, meeting them for initial walk through, collecting deposit money, getting the leases signed on time and correctly..... Not to mention all the inquiries you have to qualify over the phone or by email. We get 3-10 calls a day on one rental, sometimes more. There is a lot of work involved. Most property management companies have leasing agents that only lease properties and don't do any property management work. The only way they get paid is a commission from the lease up fee.  We would be glad to work with investors on reduced or discounted fees with the understanding that we will be the listing agent when it comes time to sell.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Josh Dotzler 

      you may want to talk with some Aussies about this from what I understand their PM process is  a la cart  not sure if that works here in the US.. From my personal standpoint PM is a very very tough job.. and one that is under rewarded not over rewarded !!  And I don't own a PM company... just have owned 100's of rentals and I know whats involved.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Josh Dotzler 

      on further thought... I think you could also have a sliding scale as to asset class.

    A:  cheapest

    D:  most expensive

    any low end rentals I would charge a minimum fee whether leased or not. and probably would charge double the going rate.. but then try to really manage them like Asset managers not PM

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  • Josh Dotzler
    OP
    Austin, TX · Member since 2013 · 67 posts · 29 votes
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    @Jay Hinrichs  thanks for the feedback!

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  • Kevin Page
    Commercial Real Estate Broker · Cape Coral, FL · Member since 2014 · 86 posts · 46 votes
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    @Josh Dotzler  Renting to tenants is a lot more than using Appfolio. Meeting prospects, calling past landlords, verifying rental history and income, meeting them for initial walk through, collecting deposit money, getting the leases signed on time and correctly..... Not to mention all the inquiries you have to qualify over the phone or by email. We get 3-10 calls a day on one rental, sometimes more. There is a lot of work involved. Most property management companies have leasing agents that only lease properties and don't do any property management work. The only way they get paid is a commission from the lease up fee.  We would be glad to work with investors on reduced or discounted fees with the understanding that we will be the listing agent when it comes time to sell.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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    I don't think it's as simple as reducing/eliminating placement fees and increasing monthly fees (for reasons mentioned), but I very much agree that having placement fees in the first place does a poor job of aligning incentives (and I've written a lot over the years about the importance of aligning incentives with your team members).

    Personally, I'd love a PM to commit to a minimum time for which they will not charge a placement fee, after which a fee would be reasonable.  For example, set the time period as 18 months.  If a tenant leaves within 18 months of entering the initial lease, there is no placement fee for a new tenant.  If the tenant stays at least 18 months, there is a fee for the next placement.

    The time period can be adjusted based on average tenancy period for the area (or whatever the parties agree to), and that holds the PM responsible for achieving a minimum bar prior to earning additional fees.

    Obviously, this has potential issues as well -- if a tenant should be kicked out after a 12 month lease is up, a PM may paint a more rosy picture to keep him around another 6 months to hit his minimum target.  Etc. 

    But, still a better option than re-placement fees after any period of tenancy.

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  • Josh Dotzler
    OP
    Austin, TX · Member since 2013 · 67 posts · 29 votes
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    @Kevin Page, yes I did oversimplify the process. When our rentals go vacant we have those calls directed to our leasing agents (read- hungry real estate agents) for qualification and appointments. They capture the leads and place them in our rentals first, then other rentals on the MLS if they don't work for ours (for added income). Once tenants apply through our online application and pass initial screening (10 minutes) we verify income, call references, and move forward with the move-in process. Obviously there is work related to placing a tenant, but I'm primarily interested in seeing whether investors would rather have a high placement fee or a low/zero placement fee and a higher monthly management fee. Does that make sense?

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  • Kevin Page
    Commercial Real Estate Broker · Cape Coral, FL · Member since 2014 · 86 posts · 46 votes
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    @Josh Dotzler  As an investor I would have to do the math.

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  • Josh Dotzler
    OP
    Austin, TX · Member since 2013 · 67 posts · 29 votes
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    J Scott, that's smart. Thanks for the input.

    @Kevin Page, thanks for the input. It would be worth it for the investor until the same tenant was in place for 4 years (on a $1,000 per month unit, 2% increase in management fee in exchange for 1 month's rent as placement fee). I would think that no placement fee and placing a great tenant for 4 years would make up for the difference in cost after that point.

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  • Kevin Page
    Commercial Real Estate Broker · Cape Coral, FL · Member since 2014 · 86 posts · 46 votes
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    I am a broker and investor and property manager so I have all the tools in house and look at it differently than the investor alone. I do talk to a lot of investors and they all have different points. Some don't mind paying the lease fee and some want discounted monthly fee. I try to work with them so they are long term clients.

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  • Josh Dotzler
    OP
    Austin, TX · Member since 2013 · 67 posts · 29 votes
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    @Kevin Page thanks for the input, I appreciate it.

    0Reply
  • Brett McCurdy
    Real Estate Broker · Kensington, MD · Member since 2014 · 84 posts · 16 votes
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    @Josh Dotzler 

    Just came across your post and thought it was really interesting because it many investors don't realize the disconnect between the P.M's and the performance of their investment.  Turnover is a huge expense and when they have no incentive to #1 properly screen tenants and #2 KEEP the tenant there as long as possible then it would make sense to work up a new pricing structure. 

    12%...ouch

    I like J Scott's idea of a minimum time frame between charging a fee to place a new tenant.  That would be a good start.

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  • Josh Dotzler
    OP
    Austin, TX · Member since 2013 · 67 posts · 29 votes
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    @Brett McCurdy, that's exactly what I was thinking. Too many PMs make money when the investor loses money. Yea, 12% seems a little tough to stomach but 10% is pretty standard here in the DFW area. As I mentioned to Kevin, even with the 2% increase, the investor would make more money until the tenant was in place for 4 years (using rental rate of $1000/month). If the tenant was in place for less than 4 years, it would make more sense to have 12% and $0 placement fee than 10% and 1 month's rent as placement fee.

    1Reply
  • Nate Garrett
    Property Manager · Tulsa, OK · Member since 2008 · 186 posts · 208 votes
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    @Josh Dotzler 

    I think of leasing fees as a continuum. The lower the leasing fee, the less incentive to get the property leased and/or get rid of a bad tenant to replace with a good one. The higher the leasing fee, the more incentive to turn the property over, set the rent too high, and get rid of even good tenants.

    I like your idea. With the higher management fees, there would be some incentive to get the property leased quickly and replace bad tenants when necessary. However, I feel that 0 leasing commission is too far on the continuum.

    An optimal leasing commission structure will pay the expenses of marketing, travel, showings, screening, and lease preparation/signing with a normal profit margin for the property management company. No more, and no less. 

    That way the leasing commission is not an oversized profit center for the company, but it's also not seen as a money-losing activity either. 

    What's the right %? It depends.

    It should be a somewhat lower % in higher priced markets, and a higher % in low-rent markets, or especially with lower-end rentals.

    It also depends on how selective the company is with tenant screening. If an owner wants a PM company that is highly selective, the % will need to be higher to compensate the extra time and money required to find tenants.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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    Btw, I just met with a new property manager today.  They don't charge a new tenant placement fee if the previous tenant was there less than 12 months.  First time I've met a PM who's volunteered that...

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @J Scott 

    from what I have seen less than 12 months and replace for free Is pretty common.. I don't think it would be wise for PM to forgo fee after 12 months.. so many of the HUD tenants move every year. and with the leases being a year there is a lot of turn over in certain areas and tenant bases.. the PM would lose money on a 18 month replacement is my thought.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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    Originally posted by @Jay Hinrichs:

    @J Scott 

    from what I have seen less than 12 months and replace for free Is pretty common.. I don't think it would be wise for PM to forgo fee after 12 months.. so many of the HUD tenants move every year. and with the leases being a year there is a lot of turn over in certain areas and tenant bases.. the PM would lose money on a 18 month replacement is my thought.

     I've never had property management before, so this is new to me.  The few PMs I've spoken with in the past never had this policy, but certainly seems reasonable...

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @J Scott 

    I suppose some wont tell if you don't ask... but when you have a rental portfolio or are managing a rental portfolio heavy to HUD you get all sorts of things happening.

    You can have a 1 year lease with your tenant but then the tenant gets caught cheating on their income and is kicked off the program or their voucher gets cut back drastically and they don't have the cash to make up the difference.. So its no totally uncommon to have a unit go vacant far before the 12 months just because of that issue.

    In my mind PM is a go large or go home type of thing... If you can get up past that 500 to 700 doors you can create a very nice business.. 200 or so and your working your butt off for a salary.. and PM in my mind needs to be more than a salary given the amount of time effort and drama you have with people and their live's...

    when I went through my dark days in 09 ... Living in Jackson MS taking back all those mid west rentals I loaned on... I officed at the PM who was helping with me as I acquired a home he took It over.  So I was their daily watching the interaction with the tenant base the handy man all of that stuff it was an eye opener I was there almost 9 months so pretty much saw it all first hand  !!

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  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
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    Originally posted by @J Scott:

    Personally, I'd love a PM to commit to a minimum time for which they will not charge a placement fee, after which a fee would be reasonable.  For example, set the time period as 18 months.  If a tenant leaves within 18 months of entering the initial lease, there is no placement fee for a new tenant.  If the tenant stays at least 18 months, there is a fee for the next placement.

    The time period can be adjusted based on average tenancy period for the area (or whatever the parties agree to), and that holds the PM responsible for achieving a minimum bar prior to earning additional fees.


    This is an excellent idea.  I would like to add though, that if a PM inherits a tenant that they did not place, and that tenant has to get evicted, they should still be able to charge a placement fee because they are doing the work and cleaning up after someone else, even if the landlord paid a placement fee 3 months ago to another PM.

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  • Sam McPeek
    Investor · Richland, WA · Member since 2014 · 71 posts · 29 votes
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    I have a hard time with placement fees. It seems that this is a part of the business and something that the 8-12% monthly fee should cover. One of the PM's should school me on why tenant placement isn't built into the recurring managment payment.

    I think @J Scott had an interesting idea. What about a bonus payment paid if/when the tenant renues the lease or stays longer than 12 months. That would be more palatable to me and rewards the PM for good management/screening vs. rewarding for turnover.

    I also think that any placement type fees should also follow some kind of sliding scale depending on the vacancy of the area. The city I live in currently is sitting at a 2% vacancy, with the neighboring cities at 5%, and 6%. Seems that in this environment, it would not be as difficult/time intensive to find a tenant even if you are picky.

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
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    Originally posted by @Josh Dotzler:

    Hello BP Investors,

    I have been in debate with another property manager about the merits of an alternate pricing strategy. I would like to hear the opinions from investors and other PMs out there.

    Typical PM Charges for the DFW area:

    - 7%-10% of rent collected as monthly Mgt Fee

    - 50%-100% of one Month's Rent as Placement Fee for new Tenant

    How to align Property Manager's Goals with Investor's Goals

    - No Placement Fee for finding new tenant

    - In order to offset the loss in income from replacing tenants, charge a slightly higher monthly management fee (ie. 12% vs 10%)

    The reasoning behind this change would be to better align the goals of the PM with the goals of the Investor. Investor's hate turnover, but PMs love it (they get paid a lump sum). PMs love to say that tenant placement is a lot of work and demands a high payment, but for anybody who has invested in great PM software (ie Appfolio) this process is really not as difficult as they would make it sound. I use Appfolio and they have made it incredibly easy to post a vacancy, syndicate to the major sites, have tenants fill out/pay applications online, and finally screen tenants (all within the system). So to say it takes too much work and demands a whole month's rent in the DFW area is outrageous (even if posted in the MLS).

    So if Property Managers didn't actually get paid an extra amount for placing bad tenants (that regularly turnover) then they would have incentive to place great tenants that stay there for years.

    Downside: Rental units that regularly turnover due to atmospherics of the neighborhood and conditions outside the control of the PM (ie college towns, war zones, etc). The PM would have to actually evaluate each property they took on to see if they needed to charge a placement fee or if an increased monthly management fee is all that would be needed.

    Would investors pay a higher monthly management fee on rent collected in order to alleviate the placement fee? Or would you prefer to pay a lower management fee and roll the dice on the frequency and cost of placement?

     Good property management companies already have their goals in alignment with those of their clients.  Now, granted, there may not be a lot of good management companies out there, but they do exist!

    As for your idea, I believe it would be a short-lived management company that would be out of business and here is why:

    1. revenue generation is key for a management company to operate. charging a lease-up fee to the owner is what allows a property management company to build a staff, advertise their properties for rent and list them on the MLS. In the DFW metro-plex, a property listed on the MLS and rented by a licensed agent typically commands half of the rental rate for that agent. Who is going to pay that? If the average rent is $1000 and a management company forgoes the first months rent and instead charges 12% instead of a low-end of 10%, that is a whopping $20 more in revenue for the company. It would take 25 months for the management company to generate enough revenue from management alone simply to pay for the rental fee off of MLS.

    2.  I'm not even sure if I need to list any more do I?  Revenue is the key for a management company to survive and grow.  The best of the best management companies are also the ones that cost a little more for the owner, but offer top of the line service.  It ends up being a small price to pay for stability and peace of mind.

    @J Scott - its your lucky day, I've mentioned you in two back to back postings!  It is becoming very common place for higher quality management companies (even though I know nothing about the  company you met with) to offer a form of performance guarantee.  Our company only offers 2-year leases to tenants and we have about a 40% success rate of getting tenants to not only fulfill, but also extend their leases by up to two additional years.  That is a way we absolutely align our performance with a clients goals.  Because of that, we tell clients that if we underperform and a property goes vacant in less than a year, we will not charge an additional lease-up fee.  We even offer that in Dallas and Houston where the tenants tend to be much more mobile and hesitant to sign 24 month leases, but it is working.  I think that is a great policy for a property management company to have.

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  • Josh Dotzler
    OP
    Austin, TX · Member since 2013 · 67 posts · 29 votes
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    @Chris Clothier thanks for the insight, I know you operate a very respected company.

    From what I am hearing from everybody, not many people would request a lower placement fee as long as the tenant stays put for at least one year (the usual lease length). Thanks!

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Chris Clothier 

      how do you handle Section 8 that will only allow a 1 year lease ?

    or do you have a work around or not bother with section 8 all together.. although I have to think in Memphis you would need section 8 to fully operate.

    You know my thoughts on this.. for as hard as PM is I would not do it for what the going rates are... I personally would only manage A type properties like my buddy here in Oregon that has 8 thousand doors all A and B  he charges 4% to manage the on site managers.

    And runs a very tight ship...But I bet he has less than 5% section 8 rest is market.

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  • Account Closed
    Property Manager · Baton Rouge, LA · Member since 2014 · 2k+ posts · 195 votes
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    I'm a Property Manager that echos Sam McPeek position 8-12% monthly should cover Placement, as it is the reason the PM was hired in the first place

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
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    Originally posted by @Jay Hinrichs:

    @Chris Clothier 

      how do you handle Section 8 that will only allow a 1 year lease ?

    or do you have a work around or not bother with section 8 all together.. although I have to think in Memphis you would need section 8 to fully operate.

    You know my thoughts on this.. for as hard as PM is I would not do it for what the going rates are... I personally would only manage A type properties like my buddy here in Oregon that has 8 thousand doors all A and B  he charges 4% to manage the on site managers.

    And runs a very tight ship...But I bet he has less than 5% section 8 rest is market.

     Hey Jay -

    As you know, you cannot turn away Section 8 by law. That would be discrimination, but we do not have any Section 8 properties out of the 2,700 properties we manage in Memphis Dallas and Houston. The main reason we do not have any is that we rent the properties so quickly. The properties look great and most will rent within days of being advertised. Those that don't still don't attract a lot of attention from Section 8 because we do not advertise in locations or within the HUD housing program so our houses are not exactly easily found by those only utilizing section 8 resources. We simply find we can get strong rents and have great tenants by having superior looking homes and high level of service when prospective tenants inquire.

    If you do that, you do not need Section 8 contracts and that keeps us from having to worry about the one-year lease.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Chris Clothier 

      Perfect  I was wondering.  as you know many rely solely on section 8 for consistent cash flow this now doubt speaks to the quality of the assets your managing and or selling.

    Very much like our market here on the west coast were section 8 is really almost un heard of.

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