Hold a cash reserve account in property manager's escrow?

Question

Property Managers. In my area all of the larger PM's require the landlord to place a month's rent in a reserve account to cover repairs/etc. I'm the only one not doing it. However I'm thinking about starting such as we've been stuck with a couple of repair invoices of late. Not requiring this has been one of the benefits of hiring us, so I'm torn.

Do you hold such?

Thanks for sharing. Tiger M.

Do you hold such?

Thanks for sharing.  Tiger M.

Tiger M. · Answer

Bill Gulley The purpose of escrow/reserve(call it whatever you want) account is not so the broker can "stick it" to the owner and go on an unapproved maintenance binge. It is a held cash balance inside the owners operating account within a trust account for emergencies. Managers need to have funds on hand for emergency repairs. Unfortunately, some owners like to have work completed on their property and then seem to convieniently forget to send money for the repairs, especially when they are in the process of having a tenant vacate and/or canceling with their manager. Not all Investors are as stand up as I'm sure you are. At the end of the day, the vendor comes knocking on the managers door that ordered the repairs requiring payment. A good manager will pay their vendor and then write off the loss, unless they had a reserve and do not order work unless there is money held in the owners account.

Bill Gulley · Answer

Sandy Blanton, We keep switching from "escrow" and "reserve", do they  escrow funds or is someone calling funds a reserve?

I'm aware of what an escrow is, in fact, in many places banks don't pay interest on escrow accounts. Laws vary, but if interest is paid it is usually due the owner of the funds, if any agent or trustee is entitled to any interest it is usually for the maintenance of that account.

If however we agree to a reserve (not sure you could do that as a PM/Broker and not be required to escrow) a reserve might be devised as a joint account so that the PM could draft from that account and in such case interest might be paid and due as agreed.

Interest is not a real issue it looks like, point again was the broker scrapping and having money at hand to spend on maintenance and often they do so without informing an owner until after it has been accomplished.

Regardless of what brokers may be doing there, an owner has the option not to use them.

Tiger M. · Answer

I think al full month is too much. $250 has been enough for us. If we dont have funds, we simply do not allow services/ vendors to be sent to the property. Also I do not release security deposits on move outs until all bills are paid. My Vendors always know that we have the funds to effect the repairs, which makes them provide or clients a priority.

Bill Gulley · Answer

Hey Tiger, wasn't meaning to pull your tail and make you feel like some justification was in order, I'm well aware how PMs can get left holding the bag and why a reasonable slush fund, reserve, escrow or funds be set aside. I also understand the accounting behind accounts and the various ways disbursements may be made. The owner as well as the PM can certainly negotiate how these issues can be paid and either party can refuse to do business.

I don't blame you for covering your tail. PMs might take into consideration who these owners are, thier credit standing, thier financial state, thier experience as landlords and success besides just requiring X dollars being at thier disposal. Due diligence applies both ways, tenants as well as property owners and reduce risks accordingly.

Sandy Blanton · Answer

Bill Gulley  Brokers don't make interest on an escrow account.  In Florida if the escrows are interest bearing, the broker has to compute and pay 75% of the interest earned to the owner of the funds.  Paperwork nightmare, trust me no one is doing it unless they're holding million dollar deposits.

Dennis Tierney  Lender held escrows for reserves makes a lot of sense.  I'm sure it lessens the lender's exposure and helps keep apartment mortgages at lower rates.

Dennis Tierney · Answer

As a multifamily owner we have a reserve/replacement account for each apartment complex and the management co  Or the  lender, holds it in escrow.

Bill Gulley · Answer

I see now, sorry, PM's require it. Simple ploy for interest income? A means to spend you money before consent?

I have used PMs, they always wanted the ability to make repairs, they never got it. Depends on what you need as to a mgt. service you should be able to find an agent to do collections. A neighbor can be hired by an owner to manage in many states, as they are not offering rental services to the public, just through an employee relationship.

Seems the PM's are getting involved in some market control issues, depends on what they are doinf collectively.  :)

Xing Zhu · Answer

One place required I put $1000 initially in the reserve and then take  
a small amount everyday my unit is rented out.

Recently, I was told they need to spend money soon to replace all mattresses as they will be 5 years old.

Bill Gulley · Answer

I don't understand if this is mandated or by who if it is. What is "larger"?

If it is a general practice, I agree that one month for each unit could be excessive. 24 units or 2? For two units you should have a grand on hand anyway that you could tap into, that might include your credit card. It depends on the condition of the property, age, area and rates. 1 month rent might not cover a broken picture window.

Warranties and insurance play a part as well in making some repairs.

Your mention of "escrow" got my attention, never put your money in an escrow account with other peoples funds, not only improper but could be in violation of law in RE. If you meant a seperate escrow with just your funds, then that would be acceptable.

Unless there is some requirement to do so, I suggest you simply have reserves, not an escrow account.

Arthur Garcia · Answer

Both my management companies require a min reserve $250 for one and $300 for the other.  They also  invoice us if the repairs exceed our monthly rent check.  I'm also on a net 15 plan with most of my vendors, so that helps as well.

Hold a cash reserve account in property manager's escrow?

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