Is this even legal? Ex PM takes entire portion of PM fees?

Question

I am very confused, I have been with a property manager for about 2 years. The property is in South Bend, Indiana. I am a very passive landlord, in fact too passive and trust me my lesson has been learned. I had a long time tenant there who decided not to renew their lease. My property manager then made all these "upgrades" to my property and sends me a statement for about $10k! I trusted her expertise and wired the money. I then looked at the listing she had and realized there were no appliances...who would want to move into a home without a fridge or stove? Anyway she finally gets those added in, and my property has been vacant for 4 or 5 months! Everytime I would ask for an update (and trust me not often) she'd beat around the bush. Eventually something felt off and I hired an inspector to go to my property so I could get a 2nd opinion on what they would think needed fixing since the property was vacant and obviously not renting. I let my PM know and gave the inspector their number so they could let them in the unit. Minutes later the inspector calls me to tell me that the PM said we've hired someone else, and that their services weren't needed, oh and that she hung up on them!

That was the last straw for me. I terminated my contract, and she then proceeds to text me (mind you I've been trying to call her, email etc. and no response until I sent an email terminating our contract). She then says "Should I cancel the lease signing" and before I could answer yes please cancel she said she is going to proceed with the lease signing and that she would be collecting from it the management fees for the entire term of the lease.....Is this even legal? I have so many instances where I've written off mistakes her company has made with collecting rent etc.

What would you do in this situation?

That was the last straw for me.  I terminated my contract, and she then proceeds to text me (mind you I've been trying to call her, email etc. and no response until I sent an email terminating our contract).  She then says "Should I cancel the lease signing" and before I could answer yes please cancel she said she is going to proceed with the lease signing and that she would be collecting from it the management fees for the entire term of the lease.....Is this even legal?  I have so many instances where I've written off mistakes her company has made with collecting rent etc.

What would you do in this situation?

Nathan Gesner · Answer

She didn't tell you there was a lease signing until after you sent the termination request. You should not let her sign a lease, you should not pay her a dime (regardless of what the contract says), you should demand everything be turned over to you immediately, and then you should get all your documentation together and file a complaint with the state regulatory board.

Have you read your agreement? I don't know of many Landlords that authorize a PM to spend $10,000 without written permission. Most PM Agreements have a spending limit of $200 - $500.

Your PM also has no authority to refuse you access to the property when it's vacant. Even when it's occupied, the PM has to allow access with reasonable notice or whatever your State requires.

I suspect you've had a renter the entire time. The PM was collecting the rent and keeping it, thinking you wouldn't notice or care. When she realized you were trying to send an inspector, she canceled them and tried to cover her tracks by creating a fake lease as if she had just found someone.

I would send your inspector to the house immediately to see if it has been occupied. If so, find out how long, how much they are paying for rent, if they have a written agreement, etc. If it's vacant, I would get a locksmith to change the locks immediatley and send notice to the PM that she is not to set foot on the property.

I recommend you assess your situation honestly. Real estate may not be right for you.

Taylor L. · Answer

What does your contract with her company state happens in the event of termination of the agreement? You may have already agreed to that. Review the legal docs you've already signed.

This type of thing happens to hands off out of town property owners all the time. Once you're clear of this situation you may want to rethink your investment strategy and choose another method to invest in real estate.

Nathan Gesner · Answer

My comment was based on your own admission. You've been too passive. Your PM made $10,000 in repairs/upgrades without even asking your permission in advance. explicit permission in advance, and you allowed it. The property is vacant for 4-5 months and your PM is avoiding you and not giving you any explanation. When you can't get answers and finally decide to take action, the PM shuts you down and then claims to magically have a new tenant ready to sign a lease.

In my experience, most Landlords are not particularly good at managing rentals. They stumble through a couple decades with significant losses along the way, eventually selling for a profit because real estate is a forgiving. But they could have made much more if done properly.

Just like renters, not all property managers are equal. If you just take the first one that returns your call or that offers the lowest fees, you'll probably regret it. You have to screen them just like you would a renter. If you don't put in the effort, it's a crap shoot and the odds definitely are not in your favor. If you intend to stick with real estate, I recommend using some of my suggestions below to help prevent another mistake:

Remember: cheaper doesn't mean you'll make more money.Start by going to www.narpm.org to search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start. You can also search Google and read reviews. Regardless of how you find them, try to interview at least three managers.1. Ask how many units they manage and how much experience they have. If it's a larger organization, feel free to inquire about their staff qualifications.2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, but especially if they violate the terms of your agreement.3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 6% management fee but the extra fees can add up to be more than the other company that charges 10% with no additional fees. Fees should be clearly stated in writing, easy to understand, and justifiable. Common fees will include a set-up fee, leasing fee for each turnover or a lease renewal fee, marking up maintenance, retaining late fees, and more. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate, particularly if you have a lot of rentals.4. Review their lease agreement and addenda. Think of all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance, late rent, evictions, turnover, etc. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that policies are enforced equally and fairly by their entire staff.6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. The fact that a tenant is complaining online might be an indication the property manager dealt with them properly so be sure to ask the manager for their side of the story.7. Look at their marketing strategy. Are they doing everything they can to expose properties to the widest possible market? Are their listings detailed with good quality photos? Can they prove how long it takes to rent a vacant property?This isn't inclusive but should give you a good start. If you have specific questions about property management, I'll be happy to help!

Bjorn Ahlblad · Answer

Unfortunately legal does not mean as much as it used to. Today it is hard to know what will be enforced and what won't. Judges and prosecutors have turned into unpredictable permissives or enforcers depending on wind direction.

Colleen F. · Answer

@Irene Navasca don't shut off the utilities in Indiana in winter unless you are winterizing. Frozen pipes aren't fun. That could be an expensive mistake!

Julie Gates · Answer

My advice is to go there and see the home yourself. If there is a tenant in the home, talk to them. They will tell you the truth. You need to review the contract you signed and proceed with a court case against the property manager. This will force them to provide records of what they have been doing. No matter what, cut ties with the property manager. Never deal with anyone that lies to you, even if it's small.

Irene Navasca · Answer

@Nathan G.

Thanks again for the advice, Nathan.  Yes, I am aware that this property so far has been a loser for me. I also do put money into ETFs as well (similar to mutual funds), but that’s besides the point.

Let’s say I never wired the money to my PM, and was able to hire a new manager who could have it occupied at current market rents in the area which is $200 more than the previous tenant. Would this then make the investment less of a loser?

If I were to sell it now comps are selling at about $30k more than I purchased it (similar condition to my property), with loan payoff, the 10k renovation and appliances, the recent vacancy, my down payment and closing cost I walk out of this with $7k, and maybe I’m missing something else. Which if you’d like, feel free to add.

But no matter which scenario, whatever loss, potential gain and all the relatively stupid mistakes that I made with this one deal, do you honestly feel that I am just not meant for real estate?  I get it, you’re looking at numbers and the mistakes I’ve made on this, so based on that alone should I just sell this property and never get into real estate again?

The information you sent me is very valuable and I’m currently implementing them but if it’s just a waste of my time because you don’t think real estate is for me then I should probably quit now.

Nathan Gesner · Answer

You should take an hour to sit down and consider the cost of this investment. You bought it, paid two years of PM fees, paid about $11,000 in repairs and appliances, and it sat vacant for at least 4-5 months out of the 24 you've owned it. Based on just the vacancy rate, I can safely predict this has been a loser, and that's before adding cost of renovations, regular maintenance, PM fees, or anything else.

If you put $100,000 into a mutual fund and earned a conservative 5%, you would be miles ahead of where you are with this rental.

Irene Navasca · Answer

@Nathan G.

Thanks for the advice.  I’m having the locks changed, I’ve shut off utilities and notified my ex PM that she isn’t allowed on the property and that she cannot move forward with the lease.  I am in the process of filing a complaint with the licensing department and attorney general.

My follow up question is to ask what you think makes someone not qualify to do real estate and what reasons you think someone should quit and look into other options? This is a serious question too, especially with a platform like bigger pockets that is geared towards new and aspiring real estate professionals.  At what point would you say real estate isn’t for someone?

Is this even legal? Ex PM takes entire portion of PM fees?

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