Property management company is asking to be on the Landlord insurance. Is this normal?

21 Replies

I am looking into hiring a property management company. One of the company is asking to be on the insurance policy. Is this normal?

Also, if I fire them, they want a full rent commission until the lease end. Is this expected?

Thanks,
Pancham

Keep shopping.  Look for a PM who will work for a flat fee, and they only get paid if rent is collected that month, and they must call you before any money is spent on anything, and you get to choose the repairmen.

Most will not accept that, because most PMs make money when there are problems.  They generally make more money if they put a problem tenant in place.  They get paid extra when there are problems, they spend your money on "emergencies" without having to call you first, and in my bad experience, they call anything an "emergency," and the next thing you know all of your funds are gone.  They use their own pals and maintenance people and charge you hugely inflated prices.

And these guys even want you to pay for their own insurance.  

If something feels wrong, or seems like a bad deal, keep shopping.  Trust your instincts.  Don't fall for the "it's standard in the industry" garbage.  Until the PM industry is better regulated, yes, it's standard policy to rip off owners.  

Of course, there are exceptions, and there are wonderful PMs out there.  But, look for a deal that suits YOU.  Or manage the property yourself.

I think the majority of owners who hire PMs do not make a profit.  They are embarrassed to admit it.  But, that's what I believe is the truth.

I was horribly ripped off by a PM when I rented out my home and moved to another state.  My daughter was horribly ripped off by a PM in her own state, but in a different town.  This is unfortunately common.

So, be in charge of your own investment.  Write your own PM contract, and look for a realtor or someone to show your properties for you, and pay them a nice percentage to keep an eye on things and coordinate maintenance issues - with repairmen that you choose yourself.

Just know that when you at first glance think, hey, 10% of the rent isn't bad at all!  Be aware that PMs for the most part, don't make most of their money on that monthly fee.  They make their money by charging you every time they find you a new renter, or by charging you full lease prices even if you fire them (gee, why would they need this in the contract?), or from using their own maintenance men, or for dealing with evictions, etc., etc., etc.

I'll leave you with just one example.  My daughter's tenants mentioned to the PM that the light was out on the porch.  The PM charged my daughter $200 to have a repairman go replace a lightbulb.

Now, does that PM have any incentive to help my daughter make money on her rental?  When my daughter fired them, and threatened to sue so they forfeited the clause in the lease saying she had to pay them the fee you're talking about - they offered my daughter's tenant another property that they managed.

So, they were expecting to collect full management from my daughter for firing them, then put my daughter's tenant into another property, where they probably got paid to evict the last tenant that they themselves put into place.

And the tenant they found for my daughter were problem tenants, and they knew it, and they were ready to put them into another owner's rental, where they planned to let this complaining tenant continue to make them money on all of the maintenance calls this tenant was likely to drum up.

So, my answer to your question - sure it's standard.  But, is that okay with you?  Be one of the smart owners who manages their own properties or hires someone under a contract they write themselves.  Yes, you can find someone willing to agree to a fair contract. The PM you are considering is someone you should not hire.  In my experienced opinion.

Originally posted by @Sue K. :

Keep shopping.  Look for a PM who will work for a flat fee, and they only get paid if rent is collected that month, and they must call you before any money is spent on anything, and you get to choose the repairmen.

Most will not accept that, because most PMs make money when there are problems.  They generally make more money if they put a problem tenant in place.  They get paid extra when there are problems, they spend your money on "emergencies" without having to call you first, and in my bad experience, they call anything an "emergency," and the next thing you know all of your funds are gone.  They use their own pals and maintenance people and charge you hugely inflated prices.

And these guys even want you to pay for their own insurance.  

If something feels wrong, or seems like a bad deal, keep shopping.  Trust your instincts.  Don't fall for the "it's standard in the industry" garbage.  Until the PM industry is better regulated, yes, it's standard policy to rip off owners.  

Of course, there are exceptions, and there are wonderful PMs out there.  But, look for a deal that suits YOU.  Or manage the property yourself.

I think the majority of owners who hire PMs do not make a profit.  They are embarrassed to admit it.  But, that's what I believe is the truth.

I was horribly ripped off by a PM when I rented out my home and moved to another state.  My daughter was horribly ripped off by a PM in her own state, but in a different town.  This is unfortunately common.

So, be in charge of your own investment.  Write your own PM contract, and look for a realtor or someone to show your properties for you, and pay them a nice percentage to keep an eye on things and coordinate maintenance issues - with repairmen that you choose yourself.

Just know that when you at first glance think, hey, 10% of the rent isn't bad at all!  Be aware that PMs for the most part, don't make most of their money on that monthly fee.  They make their money by charging you every time they find you a new renter, or by charging you full lease prices even if you fire them (gee, why would they need this in the contract?), or from using their own maintenance men, or for dealing with evictions, etc., etc., etc.

I'll leave you with just one example.  My daughter's tenants mentioned to the PM that the light was out on the porch.  The PM charged my daughter $200 to have a repairman go replace a lightbulb.

Now, does that PM have any incentive to help my daughter make money on her rental?  When my daughter fired them, and threatened to sue so they forfeited the clause in the lease saying she had to pay them the fee you're talking about - they offered my daughter's tenant another property that they managed.

So, they were expecting to collect full management from my daughter for firing them, then put my daughter's tenant into another property, where they probably got paid to evict the last tenant that they themselves put into place.

And the tenant they found for my daughter were problem tenants, and they knew it, and they were ready to put them into another owner's rental, where they planned to let this complaining tenant continue to make them money on all of the maintenance calls this tenant was likely to drum up.

So, my answer to your question - sure it's standard.  But, is that okay with you?  Be one of the smart owners who manages their own properties or hires someone under a contract they write themselves.  Yes, you can find someone willing to agree to a fair contract. The PM you are considering is someone you should not hire.  In my experienced opinion.

Wow... Thanks for such a detailed post and sorry to hear your experience. I am looking for someone for my out of state property. The ones close to me, we manage ourselves.   I am going to keep looking. 

Thx. 

@Pancham Gupta I know, it's a soapbox issue for me.

I was young and naiive when I hired the PM to manage my house.  I ended up selling it because it was too hard to manage from so far away (property in WA, I was in TN).

Since I now have had PM experience, I know that I would be happy to manage a property for a fair percentage, as a side income.  Say 15%.  And only if rent was collected that month, and a bonus at end of year if there were no late payments, etc..  I'd be okay with that, because I know I could put someone into a property who would not create problems and would pay.  So, it would be easy money for me.

To me, these PM contracts just scream that they will not provide an owner with a problem-free (within reason) tenant.  When you go through their contract and highlight all of the fees, it translates into = they make money when there are problems.

Since you have experience as a manager, you should be in a great position to work something out that you can manage from afar.  Even if you go there and screen your own tenant, then hire a local realtor to just do quarterly inspections or meet repairmen, or whatever you need them to do.  You can set up your own rent collection.  

I just really think you could do this yourself, with just someone local, like a local realtor, who you hire under your terms to help when needed.  

To answer is it normal to be listed as an additional insured.  Absolutely 100%.  

As the previous poster alluded to, you are not paying their insurance for them.  Additional insured only provides coverage if it is a claim that you or your property caused, but they were added into the lawsuit.  In that case, your policy will be the primary policy to take care of the situation.  But if the lawsuit was caused fully by their negligence, your policy would not cover them.  

This makes sense, as it would not make financial sense for them to fully inspect your property for all potential defects.  

Here is a real life example on a claim we had to handle.  An owner hired an unlicensed handyman to fix a heating boiler for a 4 plex.  It was "fixed," as in it was not really fixed, in-fact the fix was very flawed, but it had the appearance of fixed (the reason to always hired a licensed contractor).  The property now being in a rental condition, they hired a property manager.  The property manager gets all four units rented.  The boiler catches fire, damages property and hurts a few tenants.  

The property manager, contractor and owner were sued.  The contractor was long gone not to be found.  So do you feel the property manager should be on this claim?  There only mistake was trusting the owner.  Luckily they had a additional insured requirement, therefore the owners policy was primary on the claim.  

So that request is just to make it that they don't have to charge you $500-1000 to fully inspect everything at a property before they take the risk of representing your home.

It is so normal, that if your property is on a commercial form general liability, there is actually automatic coverage for this situation.

Originally posted by @Derek Lacy :

To answer is it normal to be listed as an additional insured.  Absolutely 100%.  

As the previous poster alluded to, you are not paying their insurance for them.  Additional insured only provides coverage if it is a claim that you or your property caused, but they were added into the lawsuit.  In that case, your policy will be the primary policy to take care of the situation.  But if the lawsuit was caused fully by their negligence, your policy would not cover them.  

This makes sense, as it would not make financial sense for them to fully inspect your property for all potential defects.  

Here is a real life example on a claim we had to handle.  An owner hired an unlicensed handyman to fix a heating boiler for a 4 plex.  It was "fixed," as in it was not really fixed, in-fact the fix was very flawed, but it had the appearance of fixed (the reason to always hired a licensed contractor).  The property now being in a rental condition, they hired a property manager.  The property manager gets all four units rented.  The boiler catches fire, damages property and hurts a few tenants.  

The property manager, contractor and owner were sued.  The contractor was long gone not to be found.  So do you feel the property manager should be on this claim?  There only mistake was trusting the owner.  Luckily they had a additional insured requirement, therefore the owners policy was primary on the claim.  

So that request is just to make it that they don't have to charge you $500-1000 to fully inspect everything at a property before they take the risk of representing your home.

It is so normal, that if your property is on a commercial form general liability, there is actually automatic coverage for this situation.

 But wouldn't the PM's insurance cover her?

Your example still says the owner is basically paying for the PM's insurance, in my opinion. Shouldn't a PM have insurance for these type of situations?  Wouldn't insuring the PM affect the owner's limits?  

Why would a PM have to charge $500 - $1000 to inspect an owner's home?  A PM is not a building inspector.  A PM is not required to guarantee an owner's property meets all codes, etc.  That just seems like a scare tactic to get a lot of insurance sold, that is unnecessary.  In my opinion.

@Pancham Gupta

The insurance policy price is quoted for the property and thats the standard cost to the owner. When an additional insured is added to the policy the rate dent go up. Its just like adding a mortgage company as an additional insured, its no additional cost. This helps keep the management costs lower for the owners.

The clause requiring full lease term payment is to protect the manager from doing all the work to get the tenant settled and then being fired by owners trying to get something for nothing. Usually the leasing fee is small up front to ease the owners cash flow and the company makes the balance over the term of the lease. It is usually safer to partner with a manager that gets paid when you do as opposed to just paying a one time leasing fee up front and then the agent gets paid and you may not have the greatest tenant. Remember, everything in life is negotiable. A good place to look for a solid management company is NARPM or IREM. Hapi investing.

It might be normal to ask in some areas, I sure wouldn't!

You're talking about two different issues, property/casualty and liability, putting a PM on as an additional insured means the owner's liability insurance company will not subrogate against the PM for their negligence, they can't sue their insured unless fraud is involved.

There are also other issues, the PM may not be seen as having an insurable interest in the property casualty side, they only have a conditional contract. On the liability side, this becomes a professional liability policy for a PM, not an owner's liability policy or owner's risk exposure. 

Read your owner's policy, it probably excludes coverage for other risks arising from contractors, managers, employees or others, when other types of coverage are available in the market, that coverage will be required to be the first covering specific exposures.

If your PM is negligent and causes a claim your owner's liability kicks in protecting you, that coverage will "subrogate" against the PM for damages as to their professional liability. You weaken your rights to be indemnified by acts of the PM making them an additional insured, that's their purpose. If the PM thinks they are covered, they are wrong under an owner's policy, not the proper risk exposure to be covered.  :)

Keep shopping! :)    

Originally posted by @Derek Lacy :

Here is a real life example on a claim we had to handle.  An owner hired an unlicensed handyman to fix a heating boiler for a 4 plex.  It was "fixed," as in it was not really fixed, in-fact the fix was very flawed, but it had the appearance of fixed (the reason to always hired a licensed contractor).  The property now being in a rental condition, they hired a property manager.  The property manager gets all four units rented.  The boiler catches fire, damages property and hurts a few tenants.  

@Derek Lacy: In your example, what if the PM got this "unlicensed handyman" instead of the owner and this would have happened, would the insurance cover? Even though both are on the insurance. Is the owner covered?

Originally posted by @Tiger M. :

@Pancham Gupta

The insurance policy price is quoted for the property and thats the standard cost to the owner. When an additional insured is added to the policy the rate dent go up. Its just like adding a mortgage company as an additional insured, its no additional cost. This helps keep the management costs lower for the owners.

The clause requiring full lease term payment is to protect the manager from doing all the work to get the tenant settled and then being fired by owners trying to get something for nothing. Usually the leasing fee is small up front to ease the owners cash flow and the company makes the balance over the term of the lease. It is usually safer to partner with a manager that gets paid when you do as opposed to just paying a one time leasing fee up front and then the agent gets paid and you may not have the greatest tenant. Remember, everything in life is negotiable. A good place to look for a solid management company is NARPM or IREM. Hapi investing.


Thanks Tiger. I will look up NARPM or IREM. This is a good tip. I understand the protection for the manager but what if after he placed the tenants, I see that there is mismanagement going on and I had to fire him because of that, is it still my obligation to pay him? 

Originally posted by @Bill Gulley :

If your PM is negligent and causes a claim your owner's liability kicks in protecting you, that coverage will "subrogate" against the PM for damages as to their professional liability. You weaken your rights to be indemnified by acts of the PM making them an additional insured, that's their purpose. If the PM thinks they are covered, they are wrong under an owner's policy, not the proper risk exposure to be covered.  :)

Keep shopping! :)    

 Interesting! I am going to keep looking. Thanks.

PMs will tell you if you owe them, if you have good cause to fire them, they breached their duties, acted illegally, fraud, tortuous conduct, tell them to hit the road without compensation, just being inept and stupid or a poor manager may be harder to get out of. Need to manage your managers too. :) 

oh boy,.... here we go again with advice contrary to standard practices. Replace PM with mortgage @bill , to say "Keep Shopping" is like unto the proverbial hunt for Bigfoot.  PM as additional insured is a standard. So if a manager isn't sharp enough in standards of practice to ask for an additional insure clause, do you want that PM negotiating and writing your lease. Thats like calling a school crossing guard instead of the cops when your house is being burglarized. You worried about the lender subrogation as an additional insured? Lets not go down that rabbit trail. Here is the Realtor standard form clause: 

Owner’s Insurance. Owner shall obtain and keep in force adequate insurance against damage and against liability for loss, damage or injury to property or persons which might arise out of the occupancy, management, operation or maintenance of the Property. The deductible required under such insurance policies shall be Owner’s expense. Broker shall be named as an additional interest on all liability insurance maintained with respect to the Property. Liability insurance shall be in form, substance and amounts reasonably satisfactory to Broker, but not less than $500,000 (five hundred thousand dollars). Owner shall provide Broker with proof of fire insurance policies in force and shall obtain adequate vandalism coverage for the Property. Owner shall furnish Broker with a certificate evidencing fire and liability insurance or with duplicate copies of such policies within 15 days after the date of this Agreement. Such policies shall provide that notice of default or cancellation shall be sent to Broker as well as Owner and shall require a minimum of 30 days written notice to Broker before any cancellation of or changes to such policies.

I think @Derek Lacy nailed it.

I'd say that's in your neck of the woods Tiger, there is a difference between an additional insured and a loss payee, what Realtor's may write to their benefit may not be seen in the same light to an owner or insurance company. But, heck, what would I know, just a lowly insurance broker in P&C and commercial lines. :)

Originally posted by @Pancham Gupta :
Originally posted by @Tiger M.:

@Pancham Gupta

Thanks Tiger. I will look up NARPM or IREM. This is a good tip. I understand the protection for the manager but what if after he placed the tenants, I see that there is mismanagement going on and I had to fire him because of that, is it still my obligation to pay him? 

A standard contract clause may not address a termination for cause so consider addressing it separately. PM has so many moving parts, its not if something goes wrong, its when. The most important part is how the PM handles the problems. If an owner calls me and says, I want to cancel because of a mistake made on the PM fault. I use common sense. If we are at fault (it happens, only Jesus was perfect), we remedy the situation and then they are fully released if not fully satisfied. It is important to protect yourself from bad PM and I understand that. I sign new owner accounts that come from bad PM horror stories more often than I would like. Call and speak to personal references and ask about the problems they have encountered and how they were rectified. Then build a relationship with the PM you select and stay involved. 

With residential houses being managed out of state you have a high chance of screw ups by a PM.

If you get 800 a month rent on a house then how much BS do you think a PM will do for getting 80 bucks a month?? For a majority it isn't much.

Most are selling houses and doing this as an after thought on the side. Being a state away it is tough because they know you are not watching over their shoulder.

In commercial I look over all the docs in a transaction and PM agreements for my clients but it is the attorney that makes the calls. We all work as a team. What I have found reviewing docs over and over again on transactions is no matter WHO the party is they will slant the contract their way to start.

If it's an insurance policy, property management agreement, purchase and sale contract, loans docs, and on and on. This is why it is so important under due diligence when buying a property to not be rushed and give yourself time to negotiate points in your favor. You might as a buyer not be able to bring back everything to your side but still likely a win if you get in the middle. If a side will let you create your doc with your attorney first then you can slant everything to your side right away and have them fight against you back to the middle.

For PM's we usually look at current PM and interview 2 to 3 others. We have made many changes before to PM's agreement they send us and if they do not change it we go with someone else if it's a deal breaker.

      

Also make sure you have a clause that if the PM releases a unit more than once in a year they do not get additional half or full months rent. They only get monthly. You do not want them slamming in tenants to evict and then releasing to get a full fee again.

For example if they got first months rent at 800.

12 months tenant 1 goes in they get 800 and then 80 next month and tenant no pays to evict for 2 months. Then you do it again and again in 4 month blocks.

PM makes 800 X 3 = 2,400 plus 80 X 3 = 240 for 2,640 and the landlord has 6 months no rent losing 2 months rent each time plus repair costs.

The other way they get 800 and the 80 X 11 = 880 for 1,680

They make a grand more per unit doing it the other way and also likely are getting kickbacks with inflated bids for each time your place is repaired to be rent ready for the next tenant.

If you say you get paid once in a year and that is it then they do not play those games and think long and hard about following protocols and placing quality tenants. You can also have it where the PM gets first months AFTER the tenant has been performing for a minimum time say 3 months. 

My husband is a contractor and works WITH a PM firm.  He quotes every project, he wins and loses some because the firm has several handymen companies or contractor's they use.  All have to be licensed and insured with proof being delivered to the firm.  In the beginning they would tell him to knock off some money cuz the bid was to high but now after 6 yrs. they all know how it works.  The firm doesn't take any repair money!  Their benefit it making the OWNER happy and the tenant so ALL PARTIES will be HAPPY!  The PM firm is also required to be licensed in their state.

My thought is for you to Google PMs in your property states or you can post for connections on this site then any good PM will give you a FREE quote for exactly what you're looking for. Get multiple quotes then decide...Also my husband as a contractor had to add the PM to his insurance in case anything goes wrong in the property the PM isn't responsible but him as the contractor is. Good luck! Oh, do you have any properties in the DC,VA,MD areas?

Char

@Pancham Gupta @Sue K.

 Truly Sue Kelly is looking out for the owner interest.  Truly most pm are on the prime look out for suckers.  The first thing is what class of property are you buying.  If A or B, there will far fewer problems with the property and tenant.  The time you spend solving the property's problem will be minimum unless you chose a problem tenant.  Your wife should have access to credit check and background check.  As a small investor managing from afar maybe foreign at first, but get easier as you gain experience.  Mistakes will be made, but many pm will only compound them.  You will be paying them for doing nothing sometimes for months at a time.  Then when there is a problem large or small, they will likely pad the job because they will use this as a profit center for themselves.  Also changing tenants frequently as @sue kelly mentioned, can also be another profit center for them.  No one will take care of your funds as well as yourself.  To learn self management at this stage of game will serve you well now and Angie's List, Redbeacon, and homeadvisor.com can be use find repairmen.  You probably get multiple bids for each job.  Also the lowest bid is not always the best.  

Thanks @Tiger M.  and @Joel Owens . Some really good pointers. I will keep those in mind. I am in the middle of negotiations. Thanks

@Char Prado

 Thanks for your reply. No, I don't have properties in the states you mentioned. 

@Joe Moore

 Joe, I agree with what you said but thing is that this is a remote property and in a different state. So, I have no choice but to get a PM. Good thing is that this in a A- or B+ area. So, that is a saving grace. Lets see how it goes...

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