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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  • Walter E.
    Professional · Salem , OR · Member since 2014 · 44 posts · 10 votes
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    @Chris Clothier 

     Let's say a PM collects $100,000 in gross rent from one property every month, they get to keep $10,000 if they charge a 10% mtg fee? and aside from collecting rent and screening new tenants, what other services is included in the PM mtg fee? 

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  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
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    I think that @J Scott is on to something with the minimum tenancy, but I also like @Sam McPeek  re-lease fee, which is more in line with the investor goal.  I agree with the sliding scale depending on the property type due to the difference in the turnover rate.  In some properties with long tenancies, the PM is making up for the times they do have to work on turn overs. 

    In our 62 unit apartment complex we have a bonus program based on the revenue brought in and 0 turnover for the month.

    2Reply
  • Fred Heller
    Real Estate Agent/Property Management · Houston, TX · Member since 2014 · 1k+ posts · 827 votes
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    I guess I'm a little old-fashioned and hung up on the "fiduciary responsibility" thing. But I'm astounded that this is even a question. The PM's goals are the same as the owner's goals, period. We must always put our client's interests above all others, including our own. To do otherwise would be a violation of a cardinal rule of real estate ethics, not to mention the law.

    Having said that, I get that the PM needs to make a profit. But having the interests of the owner align with the interests of the PM needs to be spelled out when negotiating the original property management contract.

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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 @Fred Heller:

    I guess I'm a little old-fashioned and hung up on the "fiduciary responsibility" thing. But I'm astounded that this is even a question. The PM's goals are the same as the owner's goals, period.

    We're not talking about goals, we're talking about financial incentives.  And regardless of fiduciary responsibility, regardless of ethics, regardless of the law -- BY DEFINITION, when a PM charges more to re-lease a unit than he charges to keep a unit occupied, financial incentives are NOT aligned.

    I'm not saying that a particular PM isn't completely ethical and doesn't take his agency responsibility seriously (hopefully most do).  And I'm not saying that a particular PM wouldn't make every effort to ensure that the owner maximizes his income.  But by doing so, that particular PM -- under the current standard arrangements -- will not maximize his own income.

    Financial incentives are typically not aligned between owners and PMs...even when a PM does everything he's supposed to do, ethically and legally.  And that's completely independent (or at least should be) from their goals being aligned.

    Btw, this is no different than financial incentives not being aligned between a buyer and a buyer's agent -- by definition, the more money the buyer saves, the less money the buyer's agent makes.  Not saying all buyer's agents are unethical...just that they don't have aligned financial incentives.

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  • Josh Dotzler
    OP
    Austin, TX · Member since 2013 · 67 posts · 29 votes
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    J Scott, thanks for clarifying the problem. It isn't that PMs are being dishonest or trying not to fulfill fiduciary duties. The problem is that compensation for most Property Managers is not in line with what is best for the Investor (just like J Scott's example with a buyers agent).

    I think a one year tenant guarantee is nice, but doesn't solve the problem by itself (regular turnover that benefits the PM while hurting the Investor).

    How about this structure: 

    Instead of 1 month placement fee: 50% placement fee

    Monthly Management Fee is on the high side: 8%-11%

    12 month Tenant Guarantee (no new placement fee if Tenant stays for less than 1 year). 

    To alleviate some loss of income from putting Rental in the MLS (typically agents like to see 50% of one month's rent), ask the Investor if they want the Property in the MLS and charge an additional fee to put in the MLS at their request. MLS is not totally necessary for rentals.

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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 @Walter E.:

    @Chris Clothier 

     Let's say a PM collects $100,000 in gross rent from one property every month, they get to keep $10,000 if they charge a 10% mtg fee? and aside from collecting rent and screening new tenants, what other services is included in the PM mtg fee? 

     Hey Walter,

    The fees a PM charges are going to be commiserate with the market, the type of property and the rental rate.  In your example, the sliding scale would move down and the charge would probably be 1-2% -not 10% or it would be a set amount.  However, that is only a guess since we do not manage properties with those types of rates.  

    I network with some investors and management companies on the West Coast and they have to set their rates between 4% and 6%, but their average rents for single family homes where they are is closer to $3,000, so...

    It will all depend on market, property type and rental rate.

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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 @Walter E.:

    @Chris Clothier 

     Let's say a PM collects $100,000 in gross rent from one property every month, they get to keep $10,000 if they charge a 10% mtg fee? and aside from collecting rent and screening new tenants, what other services is included in the PM mtg fee? 

     As Chris said, for larger buildings or commercial properties, the monthly fee will scale down.  But, regardless, think about what $100K in gross rent means -- it could be a 150 unit apartment building, a 100,000 square foot office complex, a 25,000 sf retail space, etc.  The management company is going to have some complex situations, constant leasing work, around-the-clock maintenance, etc.

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

      Pm fee's placement fee's etc are regionalized.. your correct on the West coast and in your market and my market of PDX were you have basically zero vacancy.. ONe of my clients I sold a few apartments to he pays 4%  to management plus the onsite manager gets paid by him as en employee to the property that way she can do tenant placement.

    In the mid west were most of the rentals of SFR's are located or at least talked about on BP here... you could not survive in the PM business without placement fee and 10%.

    People move pretty frequently in other parts of the country compared to here were we live.

    You can incentivize your PM all you want but when you tenants lease is up and they want to move you can't punish the PM for that..

    Also many PM operations in the mid west half to pay realtors or leasing agents ... Its competitive for tenants in a lot of these markets not the other way around.

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  • Dawn BrenengenBusiness Member
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    Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes
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    @J Scott I do property management, and I don't charge another lease up fee if the tenant moves before the term of his lease is fulfilled. I'm surprised your PMs do. I do have a sense of responsibility that I placed them, so it's not right to charge for the same service twice. 

    I also agree with @Jay Hinrichs   Tenants will move when they want to move. I don't think the PM has much control over this. Some locations and classes of rentals are going to experience higher turnover just because it's the nature of the product you are offering. I love it when a tenant stays. It's way less work for me, and I much prefer my time than half a months rent at this point in my life. 

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  • Nate Garrett
    Property Manager · Tulsa, OK · Member since 2008 · 186 posts · 208 votes
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    Are you saying that because of a local/state law that prohibits refusal of section 8? 

    There is no federal law that mandates landlord participation in Section 8. There are several states and localities that have added a "source of income" protected class to their fair housing laws/ordnances but this is an area of ongoing debate in the courts.

    See this report for more details.

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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 @Dawn Brenengen:

    @J Scott I do property management, and I don't charge another lease up fee if the tenant moves before the term of his lease is fulfilled. I'm surprised your PMs do.

     Like I mentioned above, this is my first time using a PM (always managed in-house with my own employees).  The company I found has the same policy as you -- no fee if the tenant stays less than one year (typical lease term).

    Sounds like this isn't an uncommon as I had previously expected...I just didn't realize it...

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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 @Nate Garrett:

    Are you saying that because of a local/state law that prohibits refusal of section 8? 

    There is no federal law that mandates landlord participation in Section 8. There are several states and localities that have added a "source of income" protected class to their fair housing laws/ordnances but this is an area of ongoing debate in the courts.

    See this report for more details.

     i'm saying that I don't want to be a test case listed in that report for challenging source of income laws in Memphis, Dallas or Houston.  I would much rather run an efficient company that doesn't need to buy in predominantly gov. subsidized housing areas or advertised for tenants with vouchers to keep our properties rented quickly and consistently.

    So you won't find us advertising that we do not accept section 8 nor giving advice to other landlords or  management companies to refuse those programs as policy.  Just don't have the time to spend in court fighting that battle.

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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 

      it is so regionalized as you mention.... on the West coast Sec 8 is a huge stigma.. But many TK companies base their whole marketing program on renting to Sec 8 as its ( as they market it) Guaranteed rent..

    And I know in my experience in the South many will put in their adds section 8 accepted.

    I glanced through the document that was hyperlinked and of course these test cases are in high rental demand areas were owners would not need section 8... Like CA..

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  • Nate Garrett
    Property Manager · Tulsa, OK · Member since 2008 · 186 posts · 208 votes
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     I understand and concur with your approach. However, a statement such as

    Originally posted by @Chris Clothier:

    Hey Jay -

    As you know, you cannot turn away Section 8 by law. That would be discrimination...

    may have the unintended consequence of encouraging landlords on this forum to believe that they must participate in the section 8 program, regardless of state or locality. 

    Here is another interesting article on the topic.

    Sorry for the thread hijack. Back to aligning owner and property manager goals. =)

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  • Randy Johnston
    Residential Real Estate Broker · Beaverton, OR · Member since 2014 · 335 posts · 149 votes
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    @Nate Garrett , in Oregon, a landlord may not refuse to rent to an applicant based on their source of income, such as Section 8, they can't even use the excuse that they don't want to complete the paperwork required by a landlord to participate in the program. So, a Section 8 applicant cannot be refused housing just because they are a Section 8 recipient. 

    A Section 8 applicant can be denied if they do not meet all the landlord's criteria for renting his or her unit/house/apartment, but that same criteria must be used for all applicants, they (Section 8) cannot be held to a separate set of standards from all other applicants.

    A landlord may deny a Section 8 applicant based on a multiplier criteria that requires any applicant's income be a multiple of the rent, such as, income should be 3 times the amount of rent. But for a Section 8 applicant, the landlord can only use the Section 8's portion of the rent and not the full rental amount.

    This means that if a landlord denies a Section 8 applicant housing and that person meets all the requirements set forth by the landlord, then that would be discrimination.

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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 @Randy Johnston:

    This means that if a landlord denies a Section 8 applicant housing and that person meets all the requirements set forth by the landlord, then that would be discrimination.

    Just curious -- what if Section 8 requires repairs and the landlord refuses to make those repairs.  What happens in that situation?

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  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
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    Section 8 will reissue the tenant a new voucher so they would have to go and find another property to rent. Landlords are not required to repair anything if they don't want to.

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
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    Interesting, could you state that this property does not meet section 8 requirements because xxx?

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