Negotiating Property management fees

[Trina P.]

I have just closed on my first property in Huntsville, AL and am in the process of setting up a property management company. 

The turnkey company I purchased the home from (ROIPGM) have partnered with a property management company called Yellow Hammer. They have done this to have part control over the management company and make sure everything runs how it should. 

So, am I purchasing the property with a tenant already in place that has been renting since January. 

Now that I am starting to talk with the property manager I have all these fees popping up that were not discussed with me in prior conversations. Maybe I am just new to the game, but these fees seem crazy. What are your thoughts?

- Activation fee $150

- Leasing fee equal to one month's rent ($1,200) (is it typically a one time fee or everytime a new tenant is established?)

- Keeps 10% of months rents (not too worried about this)

- charges 10% of all repairs

- charges 10% of all materials purchased

- Charges $65 fee upon renewal of tenant lease

- Charges a 7 day "quit or Pay" notice to tenant for $35

[Curt Davis]

Never heard of an activation fee. Most mgnt companies charge a first months rent for placement.  If you purchased the home with a tenant in place you should probably not have to pay that.  Everything else looks fine. 

Good luck

[Anton Ivanov]

@Trina P.

I would not use this property management company if I were you. Here is the breakdown of your list:

• Activation Fee: I've heard of it once before, but 90% of property managers I've seen don't have one. If this was the only problem, I would let it slide.
• Tenant Placement: This is common, although pretty high, I usually see 1/2 of first month's rent. This is what you will pay the property management company every time there is a tenant turnover and they put a new tenant in the property.
• 10% Management Fee: Pretty standard, but can go as low as 8% in some cities.
• 10% of Maintenance/Materials. I've never heard of this, and it's effectively going to increase all of your maintenance/cap-ex by 10%, which seems absurd to me. This is what you're paying the property management company to do with the management fee above, they should not be charging you extra to handle maintenance.
• Lease Renewal Fee: Somewhat standard, you will pay this every time a lease is renewed with the current tenant (as opposed to the tenant placement which happens after tenant turnover).
• Quit of Pay: Seems like a minor admin fee, not a big deal.

I know property management fees vary by city, but I have some property managers that only charge me 8% of gross rent and no tenant placement/leasing/advertisement or any other types of fees. Typically when you buy a turnkey property you have an option to switch management companies at the time of purchase (although you may want to double check that). I would suggest you interview/look up 2-3 alternatives in the area and pick the best one.

[Curt Davis]

@Anton Ivanov

Show me a management company that can operate with quality employees if only charging 8% with no placement fee or repair mark up?  How do the leasing agents get paid who secure tenants? Property management companies are not no profit centers, they surely have their fees all outlined and at times can seem high but unless a person wants to self manage they are left with no choice. 

[Jassem A.]

I've had a property manager charge a flat 8% before and they also handled evictions at no cost.  I think it's pretty common.

[Anton Ivanov]

@Curt Davis

All of my PM's in CA operate this way, but rents here are higher as well, so their commissions are higher. My PM's in GA and AL do not have any mark-ups on maintenance, although they do have 1/2 month tenant placement and small leasing fees.

Like I said in my original post above, I understand that fees vary by area. I'm just sharing my experience and I think any investor should call up at least 3 local companies and get their fee structure to get an idea for how local companies do business. I would not trust what the first or even second person tells me.

[Curt Davis]

I had a feeling you were gonna say CA.  With the high rent you can justify no placement. Thx 

[Bryan O.]

I would not use them for management with those extra fees. I have seen management companies add a flat fee per callout, but they have nothing to do with the materials needed. I would either have them remove that from the contract or find someone else.

Comments like what @Curt Davis said drive me crazy: "...and at times can seem high but unless a person wants to self manage they are left with no choice." Gauging because you can doesn't make a business. Many, many management companies are profitable without adding in all the extra fees for doing the job they are already paid a fee to do. They collect a % from gross rent every month to handle those occasional calls. It's double-dipping to re-charge for every call.

[Robert Gilstrap]

Always interesting to hear what they see as "standard" from people who live a 1000 miles away from a market...

Leasing fees = 1 months rent are totally common in this market. Get a warranty on the tenant they place.

Activation fees are usually ******** unless you count an existing tenant in place in which case they are totally legit. I absolutely charge a fee for me taking on your deadbeat tenant on some BS lease (instead of mine).

A repair markup (like it or not) is totally normal but the key is they should be getting you pricing 10%-15% below market so their markup is invisible and doesn't cost you anything.

A $65 renewal fee is a godsend because you must be dealing with an inexperienced PM. Normal renewals range from 50% of 1 months rent down to a few hundred dollars.

Pay or quit notices won't matter much since they are infrequent and should be recouped from the tenant.

[John Sanderson]

Originally posted by @Robert Gilstrap:

Activation fees are usually ******** unless you count an existing tenant in place in which case they are totally legit. I absolutely charge a fee for me taking on your deadbeat tenant on some BS lease (instead of mine).

I see your lease is the only one that will ever hold up in court or protect the owner in any way. Interesting.

[Robert Gilstrap]

Yes, my lease runs circles around anything 99% of self-managed owners have in place. I'm embarrassed by what most clients show me as their lease. 

[Peter Albanese]

Seems pretty standard except for the "Activation fee" but maybe they have online payment processing for your tenants and they are passing down the fees to the property owner?

[Trina P.]

Thank you so much for all your responses! 

I'm embarrassed I didn't see this leasing fee until now. It is really screwing up my numbers on the bigger pockets calculator. How is everyone calculating this fee? This is how I am calculating it: I am adding an extra $84 (or 7%) to my monthly expenses. 

[Anton Ivanov]

@Trina P.

You're not going to have your leasing fee once a month. It will only happen when you renew the lease with the current tenant. If your property manager is giving them 1 year leases (which is pretty standard, but check with them), then you will pay this fee 1 time a year (will be 84/12 monthly). 

[Trina P.]

@Anton Ivanov thanks!  What I did was take my monthly rent at $1200 and divided got into a monthly payment. Just so I can get it in the calculator  got into a monthly payment. Just so I can get it in the Calculator. Did I Miss something?

[Shawn Ackerman]

Hi @Trina,  This is the game that's played.  The TK company knows your a newbie and to be truthfully It seems that they may be trying to take advantage.  I would never suggest keeping everything "in house" unless you have fully vetted the company.  I suggest you begin interviewing outside PM companies.  I would not use this company.  Best of luck to you!!!

[Amber Gonion]

I agree with Robert Gilstrap unless you have years of managing hundreds of units you won't have good lease that has evolved from every possible circumstance. Also most owner/managers are missing the details to be successful in court, i.e. documentation, posted notices, communication logs, voicemail recordings, etc.
I love these conversations, I am working as a property manager so one day I can just be an investor and not have to worry about my investment. I will find a good pm and retire. Many investors argue that a pm is not needed, but they are in fact just pm's.

Investments make money when the are managed by pm's, if you can't make money with a pm then you either have the wrong pm or a bad property deal.

[Robert Gilstrap]

@Amber Gonion, I'm totally stealing that last sentence because it's so true. 

[Jacqueline Peterson]

Hello Trina,

You received very good responses. However, I must ask are you obligated from your Purchase and Sale Agreement to hire the property management firm? If not, I agree with Anton Ivanov to get at least 3 local companies with references. Each company should provide you with a Proposal for you to compare. This will allow you to determine if it is 'normal' to have all the mentioned fees and the amounts. You can actually do a Comparison Chart so that you can see everything side by side. Then, I would recommend that you interview each company representative (preferably the decision-maker and the person who will actually be manageing the property). Doing this will give you an idea about personalities and interactions so that you can make a bonafide decision.

Much success to you in your endeavors!