Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes
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.
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.
I am a property manager in NJ and don't mark up on any repairs. I am rare though. I understand why some companies do it, but I don't see it as necessary. The biggest thing is trust, either you trust your guy or you don't.
@Steve Cook, glad you started this thread, and keep in mind not all property management companies do a surcharge for repairs. If they do, it is typically 8-10 percent and should be clearly stated in the management agreement. Also, as another member pointed out, always put a maintenance spending limit per month per property in writing Anything above that should require owner approval before proceeding, unless it is an emergency type of repair such as repairing a burst pipe indoors or removing a fallen tree limb from an upstairs window.
A good PM, however, will get detailed information of the complaint and try to solve it over the phone. For example, there have been a number of times my tenants have had trouble figuring how to work the thermostat and so wrongly assume it is broken. This does take time to address these issues but if if a PM is taking a cut, he or she should do what they can to prevent unnecessary service calls - isn't that what you are paying them to do?
In addition, providing preventative maintenance reminders to owners (gutter clean outs, HVAC tune-ups) is good management. Better yet, if you are contracting to use a certain company, see if they'll offer a yearly check up for all your owners at a discount. PMs who take time to teach tenants how to change out the air filters or how to shut off the main water or how to reset the breaker that trips will not only reduce service calls but will keep capital expenses down (changing out air filters regularly can diminish the chances of having to replace the condenser coils, for example).
Maintenance repair surcharges isn't the only charge owners should look for in their PM agreements, but it is one of the more important ones that often gets overlooked.
I work for a management company in SoCal and can not believe that a company would markup repairs without disclosing that to the owners. In California at least, that's a case of hidden profits and a major violation with the Bureau of Real Estate. Companies can lose their license for less.
I wouldn't be surprised if you PM quickly changed his tune if you mentioned that his non-disclosure is a violation.
Unfortunately many PM are less than honest, and you may have to protect yourself by filing a complaint with your state's realty bureau.
Best of luck with everything.
You PM should show you all charges for repairs on your statement. At least he should provide the original invoice per your request. Unless you specified it in your management agreement that he only pays you certain amount per month, you are entitled to see the cost of maintenance since they influence your rental income. I would change the PM and find someone honest.
@Steve Cook A lot of PM's do charge a mark up on maintenance but most will disclose what the percent is. They will argue that they need to do this to compensate for scheduling with the contractor and overseeing things to make sure the work is complete. Can you PM me with the name of the property manager you are using now?
This is a wonderful and insightful discussion. When I bought my first properties in FL, I hired a friend's PM who later turned out to be dishonest and we both fired her. This discovery took place at the same time a hurricane struck so to me it was a nightmare to fix some of the damages it caused, amidst a shortage of labor, fortunately another investor friend helped out. So, my knowledge in the PM field is limited. As such, I very much appreciate all the experiences shared herein.
I’ve typically seen 10-15 percent markup. It really all averages out between the 10 percent monthly fee and or 8 percent monthly fee.
With the discounts I’m getting because of their volume it’s probably a wash. Who gets better discounts the PM with more than 500 homes under management or the investor with less than 10? Plus if they’re doing a good job managing, you won’t have a lot of repairs as is and the markup won’t matter.
That being said the mark up should be in the contract.
There are only two ways for property managers to make more money. One way is to increase the number of properties they have under management. This takes a lot of work and effort for uncertain and unsteady benefits. The other way is to maximize their take per property. This takes no work at all.
Are you really asking your property manager to forego putting aside an extra $50 into her/his child's college fund every month in order to be scrupulously fair to you? Because I guarantee that their kid's college fund will take precedence over you every time.
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.
I am a contractor who does maintenance and repair work for a local property management company. They don't charge any mark-up whatsoever above the cost of the invoices I give them. They have about 160+ rental properties, almost all of them residential. They pay close attention to all invoices I give them, and we have a good relationship in which they feel comfortable questioning me if they need further explanation in any case that they may feel an invoice might be a bit high (by the same token, they have also brought it to my attention if they feel I have undercharged them at times...this doesn't mean they want a larger bill, they just want to be sure I am aware of it and perhaps give them an explanation why). It's a long-standing relationship based on trust and integrity on both sides.. They look out for their clients, both the landlords and the tenants, and we work together to try to save the property owners money whenever and however we can, as long as that doesn't compromise the quality of the services or repairs. It's good for their business, good for my business, and good for the clients and tenants, too...a "win-win" situation all the way around.
A few years ago I hired a property management company working for me. They did disclose they would charge 10% commission on each repair and we signed a contract. They insisted the contract containing a provision owner cannot cancel the agreement until one-year terms expires. This is already a big Red Flag! Not long I found out for every single repair, their quote was much higher than the quote I found, most of times it is 80%, 90% higher or more. For instance, for fixing an underground leaking pipe, their first quote was $1400 and second quote was minimum $750 (that might go up over $1100 depending on actual work). In the end, I found a plumber to get it done at price of $375.
Not only this, later one contractor sent by my PM to do a job complained on the site they also got charged for 10% commission for getting the job from PM. This commission was never disclosed to me. It means the property management company got 20% commission on every repair that came out of owner's pocket directly and indirectly. The PM makes another 10% for giving job out to vendors. That explains why vendor's quotes were so expensive! If this is not conflict of interests, what is it? Even though I tried very hard to finish one-year term, I had to fire them after a few months of in-contract with them because of the high cost of maintenance. As a result, the company directly deducted their future property management fee from my rent income for the remaining months left on the contract.
Now I am looking back, hiring them was a big mistake, letting them go was a hard, but very Right choice I made in that circumstance. I started learning to manage properties myself (with some helpers if needed) and it becomes a successful and profitable business for me.
My PM denies up charge on repairs. But I talked to a roofer who coincidentally was the same roofer that my PM uses. He showed me how much he got paid and I know what the PM charged. There was a clear 25% markup. And yes this is illegal. This is the number one reason that I want to sell all my 25 doors and get out of this business. The PM doesn't want me to make a penny of cashflow. They all do that. I listen to several real estate POD casts and i'v never heard of anyone talk about this topic which it seems (at least to me) to be an extremely important topic.business
This is a very common thing in the property management industry. Not all companies charge this fee, however, it should be something you discuss with your manager prior to signing the agreement. As you work through this contract, it could be a negotiating point prior to your next re-up on your contract.
I know this is an old post but I just found out my PM is charging 10% for each repair/service under $500 and 5% if over $500 even for scheduled mowing. From what I've read here it seems that is normal. What I think is not normal is it was never mentioned in our dealings, and it's not listed anywhere on the management agreement. When I brought it up and the fact that I don't see it on the agreement he stated its 10% which other companies charge 20% and it's not listed in the agreement and is not required to be listed. I don't see how it is legal to be able to add a service charge without it being listed on the agreement, this property is in Savannah, GA. They use rent manager so I can see the description and cost of repairs but no actual invoice from the vendor. I don't really have any issue with repairs but for regularly scheduled mowing which I'm paying $176 (including the 10%) for two visits a month for a tiny yard seems a little crazy to me. Im wondering what others think of this, especially if your based in GA.