PA - Laws Surrounding Property Management
Investor · Easton, PA · Member since 2017 · 131 posts · 102 votes
Hi all,
I was approached by a family friend yesterday who wants a property manager for investment properties (50+ units).
I am a local investor in the same market, but I started thinking about property management for other local investors.
I understand for you to be an official property manager in Pennsylvania you would have to have your RE Broker's license.
However, Is it legal for me to take on his responsibilities as a private deal/transaction? Can I manage FOR him, not as a general property manager?
Any/all comments welcome and appreciated. Thank you.
So took a quick look at the statute and the regulations again. I posted a link below to the both the statute and the regulations if you are interested in taking a look. Just to give you an overview on how all this works, the main law on this issue is the "Real Estate Licensing and Registration Act." That Act creates the "State Real Estate Commission." The Commission has the power to publish regulations. I don't want to go into detail about the difference between a statute and a regulation --- for now, it's enough to think about regulations as a way for the Commission to supplement or clarify issues within the Act.
Long story short, here is a very short summary of the law on this issue:
1. Broker/Salesperson. The Act defines a broker is a person that provides certain services to another person for a fee, commission, or other consideration. One example of such services include management of "any real estate" and any promotion of "rental of real estate." The Act bans any other person from engaging in these activities unless they are "salesperson." The Act defines a salesperson as someone that a broker employs to conduct services that only a broker can do.
2. Owner Exceptions. There are few exceptions to the above rule. Both the Act and the Regulations have the following exceptions:
While the PA legislature enacted the above law before LLCs became a recognized entity, we can reasonably assume that the above law applies to LLCs as well. So let's say there is an LLC that owns real estate and has ten members. The above language suggests that five out of the ten members can do activities that only brokers can otherwise do.
3. Employee Exception. The other big exception in the Act reads:
The Regulations have a slightly modified version:
The above exceptions suggest that an owner can hire an unlicensed person to take certain actions. Express examples include: (1) showing apartments (2) provide information on the rental amounts to the public; (3) provide information on rules and regulations relating to the rental. The property manager, however, cannot enter into a lease on behalf of the owner, negotiate terms of the occupancy with current or prospective tenants, or hold money belonging to the tenants other than on the owner's behalf.
4. Links.
http://www.dos.pa.gov/ProfessionalLicensing/Boards...
http://www.pacode.com/secure/data/049/chapter35/ch...
5. Thoughts. Can't really give you guys any specific advice about the above without us having an attorney-client relationship and knowing more about both of you. But from a board perspective I see some obvious risk with both options.
Note that the Commission has the power to assess penalty for each violation. I can't recall what the max amount is right now. Last time I checked, I think it was around $10,000 per violation. So let's say you decide to help a "friend" manage 50 units. Everything goes okay for a year or two. One day, either the tenant or your "friend" --- who most likely won't get any holiday cards from you at this point --- gets pissed at you for something that goes wrong and files a complaint with the Commission. At that point, you face a potential fine of $500,000. Even if you can manage to avoid it, I assume you will incur decent amount of legal fees.
Now I do know many "real-estate firms" that offer property-management services where a non-broker/salesperson has an ownership interest. I can't comment on the legality of it without much research. But in those arrangements, most of the work gets done by salespersons and other employees. Even then, my guess is that it's safer to ensure that any employees that perform any kind of property-management activities have a salesperson license.
Long story short, such an arrangement would require you and the broker to have a decent number of properties under your belt to make it feasible (due to operating costs involved in running this kind of business). At that point, you are running a full-fledged business. While that's fine, historically property-management companies that serve smaller rentals eventually fail for one reason or another. Why that's the case is topic for another day.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.
Great question Samir! Others have asked me in the past if I would manage their properties. I have never seen the financial benefit in obtaining a brokers license to be a property manager. In my opinion, it is a lot of work to get the brokers license and then property management business model (as typically done) doesnt align the managers interest with the owners which tends to lead to management companies running on as small of a staff as possible to serve their owners somewhat marginally. Certainly not as good as I manage myself. In some instances, I would love to serve as property manager and help close friends and family achieve their financial freedom goals as I have been doing.
Chris, as the BP expert on PA law I would love to here more of your thoughts once you have a chance to read over the statute again. Your thoughts are always appreciated!
Based on my understanding, it isn't legal to operate as a property manager in PA without a broker representing you.
I understand that to be the law as well, which is what frustrates me about not being able to help friends and family that desire to invest in real estate but dont have the time or get any enjoyment out of managing the asset itself. Which is why I was curious about Chris' thoughts about managing with a partner broker and how that might work. Because again getting the brokers license to manage property doesnt really appeal to me personally.
So took a quick look at the statute and the regulations again. I posted a link below to the both the statute and the regulations if you are interested in taking a look. Just to give you an overview on how all this works, the main law on this issue is the "Real Estate Licensing and Registration Act." That Act creates the "State Real Estate Commission." The Commission has the power to publish regulations. I don't want to go into detail about the difference between a statute and a regulation --- for now, it's enough to think about regulations as a way for the Commission to supplement or clarify issues within the Act.
Long story short, here is a very short summary of the law on this issue:
1. Broker/Salesperson. The Act defines a broker is a person that provides certain services to another person for a fee, commission, or other consideration. One example of such services include management of "any real estate" and any promotion of "rental of real estate." The Act bans any other person from engaging in these activities unless they are "salesperson." The Act defines a salesperson as someone that a broker employs to conduct services that only a broker can do.
2. Owner Exceptions. There are few exceptions to the above rule. Both the Act and the Regulations have the following exceptions:
While the PA legislature enacted the above law before LLCs became a recognized entity, we can reasonably assume that the above law applies to LLCs as well. So let's say there is an LLC that owns real estate and has ten members. The above language suggests that five out of the ten members can do activities that only brokers can otherwise do.
3. Employee Exception. The other big exception in the Act reads:
The Regulations have a slightly modified version:
The above exceptions suggest that an owner can hire an unlicensed person to take certain actions. Express examples include: (1) showing apartments (2) provide information on the rental amounts to the public; (3) provide information on rules and regulations relating to the rental. The property manager, however, cannot enter into a lease on behalf of the owner, negotiate terms of the occupancy with current or prospective tenants, or hold money belonging to the tenants other than on the owner's behalf.
4. Links.
http://www.dos.pa.gov/ProfessionalLicensing/Boards...
http://www.pacode.com/secure/data/049/chapter35/ch...
5. Thoughts. Can't really give you guys any specific advice about the above without us having an attorney-client relationship and knowing more about both of you. But from a board perspective I see some obvious risk with both options.
Note that the Commission has the power to assess penalty for each violation. I can't recall what the max amount is right now. Last time I checked, I think it was around $10,000 per violation. So let's say you decide to help a "friend" manage 50 units. Everything goes okay for a year or two. One day, either the tenant or your "friend" --- who most likely won't get any holiday cards from you at this point --- gets pissed at you for something that goes wrong and files a complaint with the Commission. At that point, you face a potential fine of $500,000. Even if you can manage to avoid it, I assume you will incur decent amount of legal fees.
Now I do know many "real-estate firms" that offer property-management services where a non-broker/salesperson has an ownership interest. I can't comment on the legality of it without much research. But in those arrangements, most of the work gets done by salespersons and other employees. Even then, my guess is that it's safer to ensure that any employees that perform any kind of property-management activities have a salesperson license.
Long story short, such an arrangement would require you and the broker to have a decent number of properties under your belt to make it feasible (due to operating costs involved in running this kind of business). At that point, you are running a full-fledged business. While that's fine, historically property-management companies that serve smaller rentals eventually fail for one reason or another. Why that's the case is topic for another day.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.
^^ That is why I asked for Chris to provide us with some input ^^
I love it Chris! You a wealth of knowledge!
So from how I interpret the statutes that you provided I can basically advise the owner and as long as they enter into their own lease agreement then I am not crossing the line. I have done that with one of my friends, even helping them craft their own lease, but the lease was ultimately between them and the tenant.
Thanks again Chris! If you ever get to PGH let me know and I will have to take you out for lunch!
I think a salesman working under a broker can start own management company.
Key components of property management (leasing and renting) are considered real estate activities under existing Pennsylvania real estate licensing laws. If a property manager is going to lease, list or manage real estate, or promote the rental of real estate, he or she will need a broker's license. A salesperson working under a broker may engage in such activities.
Chris k
I know this is an older thread,but just read it today as it is a question that just came up for me at my stage of business. As someone newer, i cant thank you enough for your well written, informative reply that left me with no further questions. Thank you and bigger pockets members.