Hi BP! Happy new year! I own three investment properties in Indianapolis that are professionally managed. I was on the phone with my property manager the other day and he said something that caught my attention. He stated "My properties perform better than yours do because I'm not paying any mark-ups on my repairs." This immediately struck me as odd as I wasn't aware of any form of compensation to the PM for any maintenance related activities, just 8% of gross rent and 1-month of rent to lease the property, per our contract. Naturally I wanted to understand the nature of this arrangement, specifically how much mark-up is being charged, so I referenced a specific sewer repair bill from 2015 that was $2,600 and asked him if he could provide the vendor invoice so I could understand how much the vendor charged and how much revenue the PM recognized. He came back and said that discussing price discounts that he's established with vendors wasn't appropriate. This was a huge red flag for me. So now my questions are, 1. Is this normal? Do PM's typically take $ of the top of repairs after they have negotiated lower rates? There is nothing in our contractual agreement that acknowledges this type of arrangement. 2. If this is normal, is there a typical industry standard mark-up? 5%, 10%? Overall, this feels wrong to me. Fundamentally I'm paying a property manager to protect my investment, not pocket money on the side from construction arrangements with vendors. Even if he has negotiated lower rates with vendors, I would expect him to pass that savings onto the investor and not pocket the difference. Would love to solicit the community's thoughts. Happy investing! Steve

by Michael Stone Markup is a general term that applies to the overhead and profit that any business needs to realize if the business wants to stay in business. It is the amount a business charges above their direct cost. If your contractor has a 1.50 markup (which is reasonable for a remodeling contractor), that means that if the estimated cost for a job is $10,000, they'll multiply the $10,000 x 1.50 and arrive at a $15,000 sales price. Now many people who know little about business and even less about the costs of running a business will say, "Oh, look at that crook. He is making $5,000 profit on my job." Nope, not true. Your contractor gets $5,000 to pay their overhead expenses (which includes salary) and make a reasonable profit. I just heard those same people say, "But wait, contractors don't have any overhead!" Guess again. They have overhead. Advertising, sales commission, job supervision (which isn't usually a job cost), office expenses (even if they work out of their home), insurance, accounting and legal fees, licenses, taxes, employee expenses, and their own salary are just a few of their overhead expenses. The typical remodeling contractor will have overhead expenses ranging from 25% to 54% of their revenue – that means every $15,000 job could have overhead expenses of $3,750 to $8,100. Somewhere along the line, people started believing that a 10% overhead and 10% profit is the industry standard for construction jobs. Or that a 20% markup is all a contractor needs. Armed with that knowledge, owners try to get their contractor to reduce the price of the job they want done. If you think it through, it's not a smart move. Would you ask your surgeon to reduce his price before doing open heart surgery? Would you ask your auto repair shop to reduce their price before rebuilding the engine on your car? Do you really want them to go cheap? For most homeowners, your home is your largest single investment. Why do you want to use a cut rate contractor to improve or repair your major investment? Every business must make a profit or it will go away. It must price the work or services to include the cost of its goods or services as well as cover its overhead expenses and make a reasonable profit. It needs a reasonable profit to build and maintain the business, keeping it viable during the down times. Profit is what insures a business's longevity – if it doesn't make a profit, it might not be in business in six months. If it can't cover overhead expenses and make a reasonable profit, it might not even be in business long enough to finish your project. The National Association of Home Builders published a report a few years ago that stated that their "best" remodeling contractors averaged something under 4% net profit. I can tell you that in my experience, too many contractors make no profit at all. That's why so many construction-related businesses fail. So, if you're focused on finding the cheapest contractor to do your job, you have a very good chance of selecting a contractor who will go out of business while trying to build your job. There's an old saying, "A fool and their money are soon parted." Any owner who selects a contractor based on their price has no one but themselves to blame when things go sideways. Markup isn't profit, it is the money needed to make sure the contractor can complete your job, pay his bills and if he's doing things right, make a profit on the job as well. Just like your doctor, your mechanic, your grocer and every other business.

And this is the core reason I self manage. I don't make enough to give my profit away. I want to retire some day too.

Property Management - Repair Mark-ups?

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

9y

I still self-manage because mine are in my back yard, but I have shopped around a bit.

A common mark-up for scheduling and over-seeing the work is 10%. I'm good with that as long as they triage service calls. My 'sink, stove, a/c is broke' needs more clarification. Calling the plumber or maytag man at the drop of a hat is not ok. So many of my calls have been easily corrected over the phone.

That said, charging you a different amount than invoice (plus a reasonable and verifiable and disclosed mark-up of 5-10%) is gangster-esque, IMO. They a member of 'the family' or something?

I'd get to the bottom of this @Steve Cook. Good luck!

1 Reply

Leo B.

Investor · Hercules, CA · Member since 2015 · 208 posts · 47 votes

9y

@Steve Cook Totally agree. I also have properties out of state (including Indy) that are being professionally managed. Would you mind PMing me the company you are working with so that I am sure to avoid them?

Thanks,

-Leo

0 Reply

Chris Ramos

Flipper/Rehabber · South Jordan, UT · Member since 2016 · 142 posts · 37 votes

9y

Howdy

Good Question

I deal with a lot of property managers and it is the Norm for them to mark up repairs anywhere from 10% to 20%. I can accept 10% but I don't deal with anyone that charges 20% anymore.

Property management companies have slim margins and there is time involved for overseeing repairs. The justification from the property managers is that even with their mark ups you should be paying less through them than you would if you found your own contractor/ repairman, because of the property manager's relationship with the contractor. This on going relationship should allow the PM to get a discount on the repairs which should keep your over all cost the same as if you did it on your own. On large repairs like a roof replacement I would still want to get a bid of my own.

It comes down to trust, if you don't have that trust with your PM then you might shop for another PM. Also the advantage of the PM scheduling the work is that hopefully it's done in a timely professional manner.

8% is definitely on the low side of the spectrum when it comes to PM's and I would imagine that they will mark up everything they do for you. Your PM should have a set amount for mark ups for every service they provide and it should be part of your management agreement.

Hope this helps.

Please feel free to contact me with any other specific questions you might have.

1 Reply

Matt Lefebvre

Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes

9y

Its typical of property management companies to mark-up repairs or maintenance. However, my personal opinion, is that its unethical to mark them up beyond what the consumer would pay normally. I would expect a big property management company to get a discounted rate with various contractors or maintenance people... charging you a "consumer" rate or slightly below it while they only pay the discounted rate is how they make their money. I don't see anything wrong with this, as you're not losing money from them making up the difference as their profit, because you'd pay that price if you hired a contractor yourself. If they're overcharging you however, then I'd suggest getting a new management company, as I don't believe that's an ethical way to do business.

0 Reply

Michael Bowman

Investor · Charlotte, NC · Member since 2015 · 187 posts · 137 votes

9y

Good afternoon Steve!

Your situation is slightly concerning to me. Here are my thoughts:

2. I charge a standard 15% mark up on 100% of repairs we do for our clients. At first, I struggled with this concept with internal questions like: "Why are they paying me 15% when they are already paying me to manage the property?" Not charging a mark-up was cute and good when I was a one man show, however when I grew this company and had to hire a full time billing department, full time maintenance department, and full time turnover manager, the slim 8%/month would not cover my overhead.

3. I fully disclose the fee to all clients, include the original vendor invoice in their landlord portal, and make it abundantly clear to them what my mark up is both contractually and time of initial invoice. My management agreement states that the consumer will never be charged above market for a repair after my up charge.

I have no problem with making money on these repairs. The amount of man power it takes to properly coordinate renno/maintenance requests coupled with the fact that our vendors give us discounts, makes me ok with it. What I am NOT ok with is your PM company never disclosing this to you (that is illegal btw) and not working to get the best prices for their clients. I would be leery.

@David Rutledge has rentals in Indy. He's a client of mine here in Charlotte. Perhaps he can connect you with the management company he uses.

7 Reply

Steve Cook

OP

Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes

9y

Thank you for all the responses, this has been very informative.

My next steps are to determine the specific rate of mark-up, understand why it isn't in the contract and why it wasn't disclosed at the outset.

Fundamentally I don't like this arrangement as it creates an incentive for the PM to have side arrangements with vendors and not negotiate better rates on behalf of owners. If administrative costs are increasing due to the volume of total properties under management, then the monthly fee should increase across the portfolio to ensure there is no conflict of interest between the owners and property managers.

As you can see in my 2015 financials below, I paid $9,876 on repairs. I had a couple big things go wrong across the portfolio. Slightly further down you can see a "Vendor Discounts" line at $3,669, which is attributable to the mark-up on the repairs or 37%. They are making more money from mark-up on repairs then their management fee "Commission Paid" at $2,280.

0 Reply

Michael Bowman

Investor · Charlotte, NC · Member since 2015 · 187 posts · 137 votes

9y

Steve, if you are working with an ethical property manager, you have nothing to worry about. My goal is to limit repairs as best as possible for our property owners. I understand what you are saying about increasing management fees, however our competition does not do that. So on paper, a 12% management fee would lose us business because my competition is charging 8% but still doing mark ups.

Again, everything rises and falls on ethics and transparency. That is key.

1 Reply

Steve Cook

OP

Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes

9y

Based on my personal experience, owners seems to evaluate two primary cost criteria when comparing PM's, the monthly fee and the placement / leasing fee. Some PM's charge 10% and 50% first months rent, some charge 8% and 100% first months rent, there are a ton of potential combinations.

What this thread has revealed to me is that I've been omitting an important number, the mark-up on maintenance, which isn't readily advertised on Property Manager's sites, but it can be just as large if not larger than the monthly fee.

If I had $9,800 in repairs in a given year and you're charging me 15% mark-up on my repairs, that's $1,470. My total property management fee was only $2,300. I've learned that this figure should be front and center when evaluating PM's.

At the end of the day, I understand that you're offering is somewhat less competitive on paper if you were to charge 12% instead of 8%, but assuming cost is neutral in both scenarios, as an owner, I will always opt for the agreement that doesn't place the PM in a potential conflict of interest with the owner.

Happy to see that you are up front about this and that it's in your agreements. Lesson learned.

3 Reply

Timmi Ryerson

Property Manager · Ketchum, ID · Member since 2016 · 277 posts · 132 votes

9y

Maintenance is often the most labor intensive part of Property Mangement. As you all know, getting a phone call in the middle of the night from a tenant with no heat or water leaking is a nightmare most do not want. The industry is changing and new services are coming online to help owners and property managers to streamline this process. But the truth is that property management companies routinely mark up repair invoices to cover their staff cost fro managing the repair. This may change as maintenance management becomes more automated with software. You can google for companies that provide this kind of service.

2 Reply

Michael Bowman

Investor · Charlotte, NC · Member since 2015 · 187 posts · 137 votes

9y

hey Steve, I agree completely. One thing you are missing though is if a property manager does things right, the repair mark up will wash out. I'll give you an actual example: my hvac company charges me $3200 for a 2 ton hvac system. We do hundreds of service calls a year and 75 or so change outs. If you were to call them, the price would easily be $3800. With my 15% mark up, you're still coming out ahead.

I completely get your pause though. There is tons of ethics Conflicts in this business surrounding repairs. Managers begin focusing more on that than managing your home.

0 Reply

Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

9y

Issue a mandate to the PM that any repair over #XXX needs an Itemized Time & Materials Purchase Order to be completed by them and your signature of approval, without which the PO is denied. IMO this should be standard operating procedures.

To enable you to have hands-off REI, I would take a 10-15% markup as normal business.

Try this: Would you want to proceed on your own to find, schedule and pay for all repairs?

1 Reply

Steve Cook

OP

Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes

9y

@Michael Bowman

Not exactly. I'm fully aware that the vendor discount negotiated by the PM potentially wash out the markup. I'm not disputing that. What I am disputing is that this type of fee structure doesn't incent shortsighted PM's to negotiate better deals, because they take a mark-up off a higher price. While you clearly don't do that, it does introduce ethics into the equation and clearly not all managers are created equal.

Furthermore, let's take your example one step further. Let's say that next year your service calls to your HVAC provider increase by 50% and they in turn cut your rate from from $3,200 to $3,000. Your tenant would then be paying $3,450, not $3,800, which is awesome because you're passing on the savings to your clients. In my situation, my PM is pocketing the incremental savings for himself because that is 'market rate'. There is a fundamental difference between charging a flat fee like you are to cover administrative costs and running a maintenance arm out of a Property Management Company that encourages discounting work so they can recognize an additional revenue stream.

2 Reply

Michael Bowman

Investor · Charlotte, NC · Member since 2015 · 187 posts · 137 votes

9y

Maybe you are right. Actually in a perfect world, you are accurate. However, I go back to my original issue with that... It would take an industry change as a whole for a company doing this to succeed. I would get 1/10 of the business I do now, if I charged a higher percent but didnt charge a mark up on repairs. I believe that would be the best, most transparent way to handle the consumer, however the majority of our clients are very new to the business, so they don't understand the abuse property managers can do to a portfolio. Experienced buyers like yourself do, but sadly you are not the norm.

Hey man good discussion.

1 Reply

Tony Gunter

Investor · Canton, GA · Member since 2014 · 727 posts · 500 votes

9y

Don't forget this is potentially incentivizing the PM to have unnecessary repairs done. Increase another profit stream for the PM.

6 Reply

Steve Cook

OP

Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes

9y

Spoke with two new PM's and will be moving over my properties to one of the two in the short term. Both have 300+ properties under management and retain in-house maintenance.

0 Reply

Jason Hopkins

Investor · Memphis, TN · Member since 2016 · 549 posts · 286 votes

9y

I don't pay a market up on repairs. If there are any repairs completed my PM sends me the receipts from the vendor when they forward me my monthly account statement.

1 Reply

Jerry W.Pro Member

Moderator

Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes

9y

This is a fascinating thread. Thank you @Steve Cook for starting it. I really like the input from @Michael Bowman, you sound very competent at what you do and very transparent. Here is my take on the management company. If you take my money for managing my rental and disclose to me that you get a fee from the local vendor for giving them business, or you disclose that they give you a discount and you keep the difference between what they would have charged, and what they do charge I want it clear and out in the open. If you do not have it part of our written agreement that you keep the discount you get from the vendor you are stealing from me. It is called Larceny by Bailee. You are entrusted with my property, I pay you and you have a fiduciary duty to act on my behalf in my best interest, not yours. If you disclose it, but omit to say the amount, it opens the manager up to have the contract annulled by a court because there was not full disclosure of a conflict. How can you make an informed decision in agreeing to that clause if they refuse to tell you how much they make? I would bet money that the licensing agency requires in their rules that they must disclose in writing to the client every conflict of interest. Imagine a realtor selling your house and getting you to sign on sales contract for a certain price only to learn the realtor was getting a kickback from the buyer for getting the house bought at a lower price? Would that bother you? how do you know the property would not have sold for $10K more than the final sales price? In my not so humble opinion if the managing company will not disclose how much kickback money they get from a vendor you need to report them to the licensing authority, and demand every penny back from money they did not disclose. It is highly likely the person taking the money would be charged with a crime and lose their license. I am pretty sure this violates several federal anti trust laws as well. Anytime you take money out of the pocket of someone who pays you to do work for them you had best fully disclose when you take money from another person for doing the work you are already being paid for. There rant over!

1 Reply

William Walker

Investor · Wilmington, NC · Member since 2016 · 211 posts · 262 votes

9y

Your PM is being shady. Everything between you and the PM should be crystal clear. What else is this guy hiding or "just not telling you" about what's going on with the property? It's easier just to continue with the current PM rather than finding a new one and going through the transition, but I would start looking around if I were you.

3 Reply

Rob WittPro Member

Indianola, IA · Member since 2016 · 126 posts · 36 votes

9y

I had no idea the PM do that, then again I don't have a property yet. good to know, thanks for sharing.

1 Reply

Ntiense Inokon

Real Estate Investor · Silver Spring, MD · Member since 2015 · 19 posts · 8 votes

9y

Hi Steve! The fact that your PM stated that it's "inappropriate" to disclose the vendor invoice and the PM markup for overseeing repairs is a huge red flag! All fees charged by the PM should be disclosed to you. Review your PM contract to ensure that you didn't inadvertently agree to something else. You may have grounds for litigation against the PM. At the very least, start looking for a new PM and a way out of your current PM contract.

1 Reply

Andy Rumple

Wholesaler and Real Estate Broker · Indianapolis, IN · Member since 2009 · 438 posts · 293 votes

9y

Steve property managers in Indiana are required to have a Real Estate Brokers License
in most cases where they are managing for other people. Failing to disclose those types of relationships with vendors could be grounds for action against their license. Maybe a reminder of that could get you more cooperation from them.

1 Reply

Robert GilstrapPro Member

Residential Real Estate Broker · Cartersville, GA · Member since 2015 · 575 posts · 581 votes

9y

@Steve Cook

Aside from the issue of disclosure which should always be made it seems like you are jumping to conclusions without answering the underlying issue of whether you got a fair price on the repair work. What would it matter what "discount" the PM gets as long as he got you a market or better price? You expected to pay a market price for a repair and not to be overcharged right? Did the PM do that? What if the $2,600 sewer repair actually should have cost $4,300? Does it matter now that he got a discount from the vendor?

Now you've stated that you're moving to another manager with "in house" maintenance. Do you think this company will markup repairs?

[email protected]770-480-7301

1 Reply

Steve Cook

OP

Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes

9y

@Robert Gilstrap

Respectfully, I disagree. I'm an investor and my expertise is in investing and finance, not construction, maintenance and repairs. This is a business, and in business I've found it prudent to retain a healthy dose of cynicism. All things equal, people are usually going act in accordance with their own best interests.

With your example, how do I know what a fair sewer repair costs? Now you're telling me I have to call 5 other vendors and get bids just to determine if my property manager is pulling a fast one on me? And if that sewer repair actually cost $1,500? Just because market rate is higher, my PM is entitled to pocket the difference? At that point, you're not running a PM business you're also running a construction outsourcing business within your property management company.

Like @Michael Bowman previously stated, I am completely comfortable paying a set fee to cover administrative costs as long as that fee is reasonable, established upfront and the PM is seeking to negotiate the best rate on my behalf. What I'm not okay with is the PM pocketing the difference from their discounted rate and the market rate. Even if they are both cost neutral to the owner, at the very least it creates a conflict of interest and encourages PM's not to negotiate better rates for their clients.

0 Reply

Robert GilstrapPro Member

Residential Real Estate Broker · Cartersville, GA · Member since 2015 · 575 posts · 581 votes

9y

I totally get where you are coming from and the guy was an idiot for saying what he said about the financial return on your properties vs. his and if he made no disclosures about markups that's a major problem both legally and ethically for him.

I guess my comments were more that just because a PM was getting a vendor rebate (which is quite common for the industry) doesn't make him dishonest or not aligned with getting you a fair deal. The flip side of that is that you could have a PM who doesn't upcharge and whenever a repair comes up they simply pick up the phone and call the first person in the book with no regard for what it costs. There are LOTS of PM's out there like that and I would argue they do a huge disservice to their clients.

I think as long as you are getting a fair price you shouldn't worry. If you don't trust your PM to act in your best interest then educating yourself on what a fair price is becomes a duty for you to take on.

What disclosures has the new company you're moving to with in-house maintenance made about how they markup?

[email protected]770-480-7301

1 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

Great questions but the sad answer is that there really isn't any "normal". The PM company that I work with doesn't do any mark-ups on the repairs. However, when I was interviewing other PM agencies they said that they did. So there's not necessarily a right or wrong answer anymore than a PM company charging 10% or 15% of gross rents, it's just what is in the contract. Not to mention that some will pass through advertising costs for vacant units and others take it out of their management fee. It just depends on the agreement that you have in place (which is where you get into ethics, disclosures, etc.). All of that being said, most property management companies of any size likely have full-time or part-time handymen (for lack of a better word) that that service simple repairs across units for multiple owners. Even with an attributable labor rate attached to an invoice (which you have to trust a PM company to do fairly/accurately) it's still better than having them call a locksmith each time to rekey a lock or a plumber to install a garbage disposal. So there's an element of practicality to what you might see as a mark-up and they might see as a way to control costs in the best interests of their clients. However, you likely have a stipulation in your contract (or should ask for one) where they communicate with you first about repairs over $300 and you can definitely ask for multiple bids if you're looking to do something like replace an HVAC system. But, again, I tend to reply on the PMs suggestion as they have likely worked with multiple vendors in the past and will recommend a reliable one that does quality work. Does that hypothetical HVAC company owner take my PM out for a steak dinner? I don't know, maybe, but in the grand scheme of things I'm concerned about a quality repair at a reasonable price (practicality trumping for an out-of-state investor like me).

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Property Management - Repair Mark-ups?

Property Management - Repair Mark-ups?

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