Renting using Realtor and management company - commission $$$ ?
Hi,
We're considering renting our home using a realtor and their management company and I have a couple questions regarding commission and tenant credit rating.
First, as written, the realtor get's 1/12 of my annual rent as commission for a 12 month lease, which is fine for a one year lease. The part that bothers me is that if the tenant wants to renew, extend or even sign a multi year lease, the realtor would get a commission each and every year for doing little to nothing?!?! Is this common and is this negotiable?
Here's what the agreement says.
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Compensation. Broker shall be compensated by Owner on the following basis:
A. For Leasing. Upon receipt of the first month's rent for any lease executed during the term of this Agreement, Owner shall pay Broker a commission fee of equal to 1/12 of the total rents expected to be paid by the tenant during the initial term of the lease. Should initial term be for more than twelve months owner shall have the option to amend listing agreement to pay the first twelve months commission at signing of the lease and the remainder of the commission on each anniversary date thereafter. UPON LEASE EXTENSION, RENEGOTIATION OR RENEWAL, OWNER SHALL PAY BROKER A COMMISSION EQUAL TO 1/12 OF THE TOTAL RENTS EXPECTED TO BE PAID BY THE TENANT DURING THE EXTENSION, RENEGOTIATED OR RENEWAL TERM OF THE LEASE. Broker shall have no obligation to share said commision with any cooperating broker.
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*Term is defined in agreement as no more than 12 months nor less than 12 months.
And on top of the broker commission, the management company gets 8% per month for their services, which appears to be the norm in the Industry?
Finally, nowhere in this agreement does it state that the tenant must have a minimum credit rating of x. Would it be reasonable for me to ask them to add a stipulation clearly stating that any prospective tenant must have a minimum credit rating of 700 to lease the home?
Thank you!
Hi @David J., as with most things in real estate, you can negotiate. The 8% of rents collected is reasonable, as is a one month's lease up fee. I would recommend that they cannot charge you that lease up fee more than once per year in case you have tenant move out early for whatever reason.
As for the renewal/extension fee, that is where I think you have an opportunity to ask for a reduced fee. Yes, it can seem like less work, and maybe they get a renewal after one phone call, but sometimes it takes our company months to get a resident to renew. And more importantly, the costs that you would incur with a move out such as repairs, lost rent, mortgage payments, etc would far outweigh the cost you would pay to renew even if you paid a full month's rent renewal fee.
The most important thing to look at is confirming that you are dealing with a reputable management company who can give you referrals and examples of properties they manage in the area. I would also ask (If you don't know) what the tenant market looks like for the house you have. Obviously, area economics will weigh heavily on minimum credit scores. Most renters are renters for a reason, so that factors in as well. If the house rents for $800/month, then it's probably going to be hard to find someone with a 700 credit score. If it rents for $2,500, then that's a different story.
Great info Brett, thanks! I should have mentioned that this home is in an upscale community with an asking rent @$4K per month so I believe the 700+ credit rating isn't too much to ask.
Haha! Well, that changes the narrative a bit! I agree on the credit rating. I also think this opens room up for you to negotiate fees since every charge will be so large.
@David J., I self-managed for years after firing a series of property managers. I think your instincts are on target by wanting to question what they are telling you, but I would recommend that you go a little deeper. The person you ultimately hire needs to be more than someone who can fog a mirror - they are the most important factor in whether your rental is successful long term or not.
First, I'd start with asking for referrals, and you want to call at least 3 and ask them about their experience. You want to get to whether the PM is competent and proactive. Some questions that might get you there- Does the PM communicate with you proactively on issues you need to know about, or have you been surprised when you got your monthly statement showing rent wasn't paid? Are your emails and phone calls returned on the same day? Do you have one point of contact that you talk to, or a different person every time? How often does someone from PM company actually walk into the house? (most good PMs nowadays have an annual inspection performed that you pay around $100 for, but is 50 pages long or more with pictures of everything). What is your biggest aggravation with PM?
If all that passes the smell test, interview the PM. What are their rental criteria? (Should be comprehensive and well beyond just credit score). What is the average length of vacancy from the time they take over a property? Do they do any extras on marketing such as a video or floorplan? How long is the eviction process in your county? If you have bad reviews online, how did they respond? What is the process for onboarding a new owner? (There's not really a right answer here, just so long as there is an actual process). Is maintenance done internally or do they use an outside vendor? If they use an outside vendor, what are the qualifications for working for them? (Should definitely include proof of workers comp and liability insurance). How does a tenant qualify for one of your properties?
These questions are just examples. The ultimate goal is to get to whether the PM has systems and sound operations in place. Management is built on systems and consistency, and it's a very different skill set than sales. Many brokers who do both struggle with one or the other. Figure out what yours is good at.
Finally, if they are locked on and operationally sound, they aren't going to let you change anything about their rental criteria for you. In fact, if they did, it could open them up to fair housing accusations - the very thing they are supposed to be shielding you from.
Hope this helps! Good luck.
Dan
Real estate commissions are negotiable. This mgmt company might have a set rate and may not negotiate. I would call other agencies and check what it typical for your area. I know many who do not charge for renewal or charge a small set fee if there is a rent increase , but not the full fee.A few other questions to ask: How do they do their move in inspection? Photos? video? thorough?
Do they upcharge for repairs? What other fees? What is there isa n eviction? Who keeps late fees / etc