Property Manager Question

[Alex K.]

Hi,

I have property with a PM....as part of the agreement any late fees go 100% to the property manager.......my tenant moved out without paying last month's rent and the property also had a bit of damage and repair expense (3-4x monthly rent.)  The security deposit was about 1.5x monthly rent..... the PM attempted to collect the final rent payment but was unsuccessful.....Now according to the property management company they need to technically apply the security deposit to the rent (according to them is part of some sort of fair housing law or something etc.) vs applying it to the damage caused by the tenant.  It's the same thing from a dollar perspective as it's just the accounting classification of funds, but since they applied the security deposit to the rent they also took part of the security deposit as late fees for themselves which just feels wrong since they didn't actually get the rent, but just applied the security deposit.  The late fees are only 100-$200, but just feels wrong.

What do you guys think, does this seem reasonable?

[Nathan Gesner]

Quote from @Alex K.:

It's a personal decision for the PM.

Personally, I apply income to "must-pay" charges first. You must pay someone for cleaning. You must pay the electric bill. After the must-pay items are handled, then I will apply remaining funds towards rent, late fees, etc.

[Adam Bartomeo]

We do not run our business the way you PM does. We feel that it is unethical to retain the entire late fee but it is fair to apply the commission percentage (10%) to it. As for the security deposit, it will depend on the title that it was collected under, security deposit or advanced rent. If it was collected as security deposit than it should be used toward damages and advanced rent would be towards rent.

Like @Nathan Gesner alluded to, we tend to use the total funds towards what the "right thing" is and the most important first. I would question the "Fair Housing Law" statement as I have read (although I do not know it verbatim) and I do not remember seeing anything about applying security deposits towards rent.

[Drew Sygit]

@Alex K. There are many issues like this, where trust, credibility and fairness come into play.

Our company management contract has a list of what rental income will be applied to and in what priority. This is also programmed into our PM software, so it happens automatically.

Our lease also states what rent will be applied and in what order and also a security deposit.

So, you may want to check these documents to see if this is covered with your PMC.

While we always try to be fair with our clients, we also have to generate enough income to pay our bills. 

In your case, you mentioned your PMC tried to collect the final rent payment. How were they compensated for their time spent on this? Typically, it would be covered by the late fee income. 

Perhaps you could discuss this with them and they may decide to adjust the charge. They are within their rights though to deny your request. 

In a perfect world, PMCs would be able to track exactly how much time their staff spent working for an owner and then charge based upon those hours & an hourly rate.

Pretty sure most owners would end up paying more if this was could be done.

[Alex K.]

Quote from @Drew Sygit:

@Alex K. There are many issues like this, where trust, credibility and fairness come into play.

Our company management contract has a list of what rental income will be applied to and in what priority. This is also programmed into our PM software, so it happens automatically.

Our lease also states what rent will be applied and in what order and also a security deposit.

So, you may want to check these documents to see if this is covered with your PMC.

While we always try to be fair with our clients, we also have to generate enough income to pay our bills. 

In your case, you mentioned your PMC tried to collect the final rent payment. How were they compensated for their time spent on this? Typically, it would be covered by the late fee income. 

Perhaps you could discuss this with them and they may decide to adjust the charge. They are within their rights though to deny your request. 

In a perfect world, PMCs would be able to track exactly how much time their staff spent working for an owner and then charge based upon those hours & an hourly rate.

Pretty sure most owners would end up paying more if this was could be done.

Great sales pitch and many valid points! But I’m not currently looking for a property manager. 

[Alex K.]

@Drew Sygit that's a good point re: the PMC. and fairness, was curious what others thought, especially those that are significantly more knowledgeable.  Typical assumption is that security deposit would 100% go to cover property damages - that's the whole nature of the deposit IMO.  It's a learning experience to find out it may not be the case - and a good question to ask in the future.

From an owners point of view I feel interest should be aligned and PM's get paid parallel to owners.  Thats at least how most PM's pitch their business' - owners have bills to pay as well, in the case here the PM failed to secure the rent payment but still took their fees out of the security deposit.  While yes they spent time on something they were unsuccessful and still got paid, while me as the owner is out thousands of dollars due to tenant not paying rent and causing quite a bit of damage.  

I will be asking them to credit me back any fees they took for themselves out of the security deposit - well see where we land.

[Nathan Gesner]

Quote from @Alex K.:

From an owners point of view I feel interest should be aligned and PM's get paid parallel to owners.  Thats at least how most PM's pitch their business' - owners have bills to pay as well, in the case here the PM failed to secure the rent payment but still took their fees out of the security deposit.  While yes they spent time on something they were unsuccessful and still got paid, while me as the owner is out thousands of dollars due to tenant not paying rent and causing quite a bit of damage.  

Yes, it is important to review the PM Agreement and its policies to ensure they align with your interests and protect you as their fiduciary. If they put their own financial interests ahead of yours, I suggest you look for a new PM.

[Drew Sygit]

Quote from @Alex K.:

Quote from @Drew Sygit:

@Alex K. There are many issues like this, where trust, credibility and fairness come into play.

Our company management contract has a list of what rental income will be applied to and in what priority. This is also programmed into our PM software, so it happens automatically.

Our lease also states what rent will be applied and in what order and also a security deposit.

So, you may want to check these documents to see if this is covered with your PMC.

While we always try to be fair with our clients, we also have to generate enough income to pay our bills. 

In your case, you mentioned your PMC tried to collect the final rent payment. How were they compensated for their time spent on this? Typically, it would be covered by the late fee income. 

Perhaps you could discuss this with them and they may decide to adjust the charge. They are within their rights though to deny your request. 

In a perfect world, PMCs would be able to track exactly how much time their staff spent working for an owner and then charge based upon those hours & an hourly rate.

Pretty sure most owners would end up paying more if this was could be done.

Great sales pitch and many valid points! But I’m not currently looking for a property manager. 

My message was not intended for you. If you bothered to read the thread, I was replying to a different Alex K.

[Drew Sygit]

Quote from @Alex K.:

@Drew Sygit that's a good point re: the PMC. and fairness, was curious what others thought, especially those that are significantly more knowledgeable.  Typical assumption is that security deposit would 100% go to cover property damages - that's the whole nature of the deposit IMO.  It's a learning experience to find out it may not be the case - and a good question to ask in the future.

From an owners point of view I feel interest should be aligned and PM's get paid parallel to owners.  Thats at least how most PM's pitch their business' - owners have bills to pay as well, in the case here the PM failed to secure the rent payment but still took their fees out of the security deposit.  While yes they spent time on something they were unsuccessful and still got paid, while me as the owner is out thousands of dollars due to tenant not paying rent and causing quite a bit of damage.  

I will be asking them to credit me back any fees they took for themselves out of the security deposit - well see where we land.

 While many PMCs try to align their interests with those of owners, it is impossible to do so 100%.

At the end of the day, the owner is the INVESTOR and thus has a lot more at risk than a PMC. For this risk, only the owner benefits from their property increasing in value and any positive cashflow.

Correspondingly, only the owner takes a hit if they bought the wrong property, overpaid, picked the wrong PMC, etc.

Over the years, we've had numerous owners try to get us to share more of their risk - for free. How you ask? By asking us to fund repairs and then recoup them from future rents. Some have even told us this arrangement will make us more motivated to find a tenant faster and a good that will pay on time! We politely point out that we'd require ownership to do this and they always drop their request.

This is even the case with Flat Fee PMCs. An owner trades the predictability of a low Flat Fee (which is typically charged every month whether property vacant or occupied, tenant paying or not), for less PMC alignment with the owner's interests. We've taken over properties with owner horror stories about their Flat Fee PMC letting their property sit vacant, or with a nonpaying tenant, for months without doing anything about it.

So, where does the line get drawn between the focus on an owner making money and a PMC making money in the context of trying to align both parties' interest as much as possible?

[Chris Grenzig]

Quote from @Alex K.:

@Drew Sygit that's a good point re: the PMC. and fairness, was curious what others thought, especially those that are significantly more knowledgeable.  Typical assumption is that security deposit would 100% go to cover property damages - that's the whole nature of the deposit IMO.  It's a learning experience to find out it may not be the case - and a good question to ask in the future.

From an owners point of view I feel interest should be aligned and PM's get paid parallel to owners.  Thats at least how most PM's pitch their business' - owners have bills to pay as well, in the case here the PM failed to secure the rent payment but still took their fees out of the security deposit.  While yes they spent time on something they were unsuccessful and still got paid, while me as the owner is out thousands of dollars due to tenant not paying rent and causing quite a bit of damage.  

I will be asking them to credit me back any fees they took for themselves out of the security deposit - well see where we land.

@Alex K. we started out managing our own properties and now we also manage for other owners too. We've always applied deposit towards owed rent first then damages. In this scenario I personally as the PM would probably opt to not apply it towards the late fees since we didn't collect the rent, even if our PMA said we could, because I understand that sending an outstanding balance to collections has a low likelihood of success. 

Also, I probably know that the owners is going to have to come out of pocket with thousands of dollars in the next couple months, including a fee for us to place a new resident. $100-200 in this scenario is an easy chip-in for us when a situation goes bad to ease the owner burden slightly. However, there is also a very fine line for this as the PM can only do this so much and so often because our margins are not ridiculous and since we aren't the owner we don't get any upside appreciation when money is being spent to potentially fix things and make the unit better, rent for higher and/or be worth more. We understand this since we're owners ourselves, but it's definitely a fine line to walk.

[Alex K.]

Quote from @Chris Grenzig:

@Alex K. we started out managing our own properties and now we also manage for other owners too. We've always applied deposit towards owed rent first then damages. In this scenario I personally as the PM would probably opt to not apply it towards the late fees since we didn't collect the rent, even if our PMA said we could, because I understand that sending an outstanding balance to collections has a low likelihood of success. 

Also, I probably know that the owners is going to have to come out of pocket with thousands of dollars in the next couple months, including a fee for us to place a new resident. $100-200 in this scenario is an easy chip-in for us when a situation goes bad to ease the owner burden slightly. However, there is also a very fine line for this as the PM can only do this so much and so often because our margins are not ridiculous and since we aren't the owner we don't get any upside appreciation when money is being spent to potentially fix things and make the unit better, rent for higher and/or be worth more. We understand this since we're owners ourselves, but it's definitely a fine line to walk.

Each PM does it differently I've had this situation before and in prior case the full deposit was applied to damages vs rent.  I think you hit the nail on the head here, PM will make $ on the placement fee and in this case, they provided the work for the turn which wasn't minimal, so they made $ there as well.  I have another PM which charges 15% on any work when using their services but because they get such great deals I still benefit.  To the broader point there are many avenues for a PM to make $.  Nickle and diming on questionable charges such as late fees for funds that were never paid, but rather taking out of funds that you had possession of the entire time just leaves a bad taste.  Easily the difference between getting referrals for new clients and getting unfavorable reviews.

I also do respectfully disagree with the idea which many here echo'd that there's 0 benefit to a PM when owners property appreciates....when properties are worth more they rent for more, and PM's will earn higher mgmt fees and higher placement fees all while providing the same exact service.  Many PM's provide traditional realtor services so when an owner is looking to sell they would earn higher commission as well, and can easily double end the deal as they have huge rolodex of investors for the area.  So there is that.

[Bryan Montross]

This just shows the importance of the contracts we put in place. All of my leases state how payments from the tenant will be applied. I always apply rent to past due amounts, then late fees, then current amounts due. This is spelled out so we don't have issues. My property management agreements have similar language. Again, so there are no issues. The contracts are always negotiable, and if you don't like the terms than you find someone else that will give you the terms you like.

I don't know if there is a set standard for how a security deposit is applied. I have seen it both ways and I think from the responses above many people here do not agree on a set standard. If this is something that bothers you enough, then try to renegotiate your contract, or find a new manager that has the terms you want. Also, think about the likelihood this situation comes up again and the cost it is to you, especially if the manager is doing a great job everywhere else. If they are worth the money, then just know this is how they do it. If not, again, maybe look somehwere else.