It seems some property managers look to charge one months rent to find a tenant, on top of the 10% of rent collected. Is that normal? It seems that a property manager should be incentivised to keep tenants long term, rather than get paid for regular turnover?
Hi @Nathan J. ,
I totally agree with your thought process, but it has become very common for property managers to have additional charges for tenant placement and renewals.
As an investor myself, when I started my property management company I wanted to change the compensation structure to be better aligned with my clients. I recently wrote an article about this very topic, you can read it HERE.
Hopefully more investors will educate themselves before hiring a property manager and understand that they can, and should, negotiate the property management contract to better align interests of the manager with their own.
Ahah! Herein lies a little conflict of interest in my view. They are rewarded financially (twice) for each turnover. At the move-out for work they do, then a nice little placement of new tenant bonus. One month sounds really high. I charge myself (thru my own little mgt co) an advertising/placement fee of $150. I think that's fairly standard for my area. If you are renting an NYC penthouse apt, 1 month may be the norm. If I were hiring a property mfgt firm, I would look for one that owns rental property themselves. My biggest lead source is landlord's tired of being raked over the coals by bad managers. If the property is in your area, do it yourself a while and learn what to look for in your mgrs!
Ive never heard of a property mgmt company that did not charge a placement fee.
That would be a terrible business plan.
I agree with @James Wise What you forget is that a good property manager is going to spend money to place your house on sites, then we pay to get them featured, then put in the news paper, don't forget we don't work for free so we have to make something our selfs. so lets see you want your house featured on trulia, thats 30 dollars, now u want it on zillow anther 30 don't forget homes.com and rent.com... then you have 5 showings to rent out the house well that 15 mins drive there 30 mins to show the new client the property and 15 mins drive back so an hour of my time, gas out of my car, don't forget i have to have a cell phone or landline for them to call me so i can rent out your property. Now do not forget the time it takes to load all the specs of the house on to all the websites. 30 mins per site unless you have a client site the already has agreements to put them on ll the other sites... don't forget that costs a nice chunk of cash also.
Now i realize that a lot of those items work for a lot more than just your one rental such as my cell phone but don't forget i use my sell phone fore your property and convinces.
we generally charge 1 months rent for a leaser/renewal of lease, then 10% to PM it. If you don't want me to PM it for you then if you call me to do anything my fee is $40 an hour. just keep in mind we don't just sit around and wait for your property to be rented out a lot more work then you think goes into it.
Because my rentals are spread out I have the benefit (good, bad or otherwise) of dealing with different managers. I have two mangers who charge 10% placement fee on top of the normal 10% management fee. My other manager charges 1/2 months rent placement fee with a max of once a year (so I don't get double hit if I have a tenant move out early) but, she only charges me 8% management fee. I have talked with a few other managers in my area, it seems that most of them charge 1/2 months rent for placement, which includes any marketing fee's, time for showings & time for screening tenants.
People who do not go through the process of getting good tenants do not know what it is like -- advertising, returning calls and emails, having showings, taking applications, screening, calling those who are denied back, calling those who are approved, collecting security deposits and first month's rent, etc.
It's a lot of work and I can't imagine anyone who would do it for free.
That being said, the PM should be able to justify in writing why they think the applicant would be a good tenant for the rental. They should have written screening criteria and the applicant should meet all the criteria. E.G. Credit score of X, or no money judgements, no evictions, etc.
You literally cannot predict human behavior ... a good tenant can turn into a bad tenant through no fault of the PM. If the PM turns over the unit once a year then they don't seem to be a very good PM -- unless yearly turnovers are common for the area (for example, student housing).
It's pretty common to see leasing commissions or tenant placement fees of 1/2 to 1 month's rent. I agree with the others that have chimed in that the amount of work involved in marketing, showing, screening, and leasing is often underestimated.
In my opinion, there are a few ways to determine if the property management company's interests are misaligned with the owners. For example, if a property manager wants to set the rent at the top of the market or includes substantial automatic rent increases in the lease, they might have high turnover (and a lot of leasing commissions). You may be able to find a tenant who will pay top of the market rent, but they probably won't stay very long when they start comparison shopping during the 1st year.
Tenants are shoppers. If they feel like they are getting a good deal, they will stay longer than if they feel like their getting squeezed. Consider setting the rent just a tad below market rent and getting rid of any automatic rental rate increases. If you have to raise the rent because the market has increased substantially, take the time to explain the increase at lease renewal time and have comps available to show the tenant you are treating them fairly.
My opinion is that charging a fee for getting a tenant is definitely a conflict of interest. This will in many cases lead to turnovers every six to twelve months so the PM can rake in some more fees. In most cases between turnovers how much work does a PM really do? Most have the rent mailed to them or dropped off at an office. Maybe one or two service calls during the term and they will charge you for those anyway. Yes there are costs associated with getting a new tenant. This means that they would want to minimize turnover so they have few costs and if those costs are spread over several years between turnovers they come out ahead and you come out ahead because of not having to pay repeated make ready costs and vacancies between tenants. So a flat 10% fee is a win win for everyone.
Based on my experience, all property managers charge a leasing fee of 50% to 100% of one months rent in addition to 6 to 8% for property management. FYI: this applies to SFR's only. Multifamily goes from 7% down (I've seen property management fees as low as 4% for large properties).
I don't get the fee to list on Zillow or Trulia. I use postlets and it automatically posts there for free.
Thanks everyone. I haven 't seen any PMs charge 6 to 8% for SFR. Most I have spoke to charge 10% of the monthly rent. In that instance I feel that should include finding new tenants. 10% plus a potential one month rent every year seems a lot of money to pay. However, that does seem to be the norm though,
8-10% monthly management plus 50-100% of one months rent leasing commission is a pretty common pricing structure. You probably will find negotiating room with larger portfolios or nicer properties that have higher rents.
What you are describing is why I self-manage from a distance. When I was looking for a property manage a little over two years ago. They wanted 10% per month plus one month placement fee. Plus they kept the pet fees and a bunch of other buckle and diming charges. While I know everyone needs to be paid for their time for me this was rediculous. Plus they had an average of one month vacancy. I have became a great out of state self-management landlord. Not because I wanted to but because it saves me over 15k a year in my portfolio.
It is very normal, but you are right it seems kind of counter-productive that a PM gets paid the most when they put in new tenants but we as investors want as long of a term tenants as possible.
While it is standard, I've started learning about some companies who don't have that fee and structure it totally different, but then you are paying a lot higher fee per month. Sooo...it's kind of a lose-lose.
Lease up fees seems to be pretty well standard in my area.
The larger lesson is this: PMs will charge what they can get and everything is negotiable.
The leasing fee makes sense to me.
What makes NO sense to me is the annual re-leasing fee. (Tenant is already THERE. So a fee just to get a tenant signature on a new lease?)
What makes even less thatn NO sense are vacancy fees and service call overages.
Again, shop around.
My PM charges $150 per year in an admin fee for the first 10 homes, inclusive, not each, plus 8% of rents collected. And these are for detached single family. They say their incentive should be matched to mine, to find and keep good tenants, and they make sure they screen them very well as they don't want turnovers, either. They do ask, however, that I allow 2-year leases if possible, and, so far, it has worked well and I've become comfortable with them. I've used that PM for 4-5 years now and they have been much better than the ones who charged me 1/2 month's rent plus 8% in the same area. As a matter of fact, the only tenant I've had issues with paying rent so far was the one placed by the old PM before they took over, and that tenant is gone now. I do have a PM in another state that charges me $400 for tenant placement on a $1975/month rental, and a smaller yearly inspection/renewal fee if the tenant stays, and they also charge 8% of rents. When I looked in Annapolis, deciding whether to self-manage or not there, the one I would have chosen charged 10% of rents collected, no placement fee. So I would keep looking around as it makes sense to me that they would be the PMs that would screen better for long-term tenants.
@Bryan N. do you pay postlets a yearly fee at all? but the reason my zillow/trulia fees are so high is because my clients want the house as a featured listing, This results in about 33% more views ever week. I personally use point2 and it auto puts it on all those website to include 36 others, but to make the listings featured or in the top 10 i have to pay extra.
I've never paid. I wasn't a "featured" listing but I got tons of traffic regardless.
@Bryan N. thats awesome they are great sites to have. not everyone agrees with paying for it but i found it helps me and my clients so its a service i charge for and pay for. wether my own properties or a clients property. If you are doing great without it then i say keep doing what you are no need to waste your money on something you don't believe in.
I always find these discussions interesting.
I analyzed the property management business 10 years ago. It's a loser from what I can see.
Other colleagues I know that do it on the residential side have a large number of properties and after reporting and having associates and a structure in place make what I consider peanuts for the headache. Some might consider it a generous living. I mean they would manage hundreds of houses with employees to pay themselves only 80,000 a year after expenses.
Now I am on the commercial side of things. In commercial you can make more and have regular hours but I let my friends do that and I stay on the transacting side of things with my brokerage. I just love the art of the deal and they love the management side of things more. Different personalities from different parts of the industry.
In commercial I have seen PM fees as low as 3% for larger retail centers of 8 million or so and up.
It's funny that nobody wants to do property management but they do not want to pay for it either! lol
Sometimes a good manager it doesn't seem like they are doing anything until you have to do what they were doing and then you see all the crap they were doing to keep the asset performing. Just remember that if people want to manage themselves they are buying themselves a job.
If you make 10 dollars an hour it might make sense. If you are making much more than you really are taking a step back. With my skillset to close commercial transactions I make thousands per hour return on my time. So definitely I would use a manager for any of my investments. Now I do agree you still have to manage the manager but it is less intensive and as long as you have aligned interest it can work well.
The problem is many residential PM people are not professionally trained and do it on the side while trying to sell houses etc.
In commercial these PM firms are highly specialized and go through constant learning and improvement. No matter the asset class there is always bad PM companies. The good companies I know do not lock you in for a year contract. Instead you can cancel at any time. The PM's that offer this know they have to be on point at all times or they stand to lose the account.
Certain rougher areas investors buy in you will get crappy tenant bases who turnover more and that's just the way it is. Those people's lives tend to be more unstable with income and the job situation. One minute they are on cloud nine and the next their whole world is destroyed etc. It's a balance of how much return do you want versus grief in your life.
Another addition to this story is that most people who used to do property management are moving on to just the tenant placement portion and call it a business. I have several calls to manage properties from ex-managers who just want to place tenants. They are charging the full 1st month's rent just to place and then move on to the next. If there was no need for this then it would not exist. Some people would rather use a PM or tenant placement services than to do it themselves. Therefore whether or not the price warrants the work is up to each individual investor.
@Nathan J. - We own two management companies that manages over 2600 properties in two states for investors and ourselves. You have received some good responses on here, but I thought I might be able to shed a little more light as well. Here are my quick thoughts on this.
1. There are lots of options for investors when it comes to property management companies, but MOST of the time, a higher quality company is going to have higher fees. Not always, but most of the time. Why? They have set up a fee structure that allows them to provide better service to you as a client and allows them to keep you as a client for the long-term.
It is a double edged sword for a new management company. Too often, they think that their only competitive advantage is to go cheap. Lower monthly fees, lower (if any) placement fees, etc., etc... Every fee they charge is lower and often they ignore other fees all together such as a maintenance fee or application fees for tenants. When this happens, they may attract business, but it is almost impossible to grow because you perform an inordinate amount of work for the small revenue and there is no capital left after expenses to grow your staff or improve your company. It is a real catch-22 for new companies and even some old-timers who have been in business for a while but cannot get out of their rut. Many, like @Joel Owens points out, end up working for peanuts.
A good quality management company is going to compete on the value they bring and not on the how low the price is that they offer. In order to do that, they will have a higher schedule of fees, but @Dawn A. already pointed out that they will be able to justify that to you as an owner and if you are serious about out of area ownership and using a property management company, you would be wise to choose value added benefits over cheap pricing all day long.
2. You will know when you are dealing with good business persons and the whole question about a conflict of interest will disappear from your mind. If the company has high fees and high turnover then they are the wrong company. The ownership of that company has a mentality that we call "stay small and keep it all!'. It is a short-sighted mindset and hurts both clients and tenants and ultimately will hurt the management company.
When you have a good company, they will be able to show you how your higher fees translate into fewer turnovers - not the opposite. They will provide you with a high-level of comfort and show you where they have a full staff and they have a departmental structure so that not only you are satisfied, but your tenants are satisfied as well. You will recognize when someone operates as a business built to last instead of one built to profit as much as possible. The profit comes for a management company when they are scalable and they only become scalable when the value they provide and the fees they charge are in line.
Two quick numbers for you to be able to model your decision making on when talking to other management companies. In Memphis, we manage 2100 properties and add between 25 and 35 each month. We have a sub 5% vacancy rate consistently, only offer two year leases, have an average length of stay of over 4 years per lease and only 3.87% of collected rent (January - September) went to maintenance including our maintenance fee. We charge 10% management on collected rent, a full months rent at beginning of lease and 15% on maintenance. So our fees are high, yet we are not the highest in Memphis and it would be tough for any other management companies to match or beat the performance numbers I just listed. That comes from putting that revenue to good use by hiring great team members and instituting programs for that attract great tenants and make them never want to leave.
In my opinion, I will pay a higher fee (on anything) for great service and value. Good luck and be sure to challenge any management company to justify both their high fees and their low fees. It will save you a lot of headache in the future.
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