Getting out of PM Contract

4 Replies

Hello BP Friends,

I could use some advice.  My father (who lives in NC) has a rental in my home town (Indy).  Over the last two years, he has been having some problems with the Property Management company.  Prior to this week, the issue have been small i.e. they have nickel and dimed him on several things, they were not following up with potential tenants quickly enough and didn't seem to vet potential tenants to his desire.

This week brought his concern to a whole new level.  When he received a call from the PM company telling him that there was a leak/flood coming from the bathroom with raw sewage.  They told him the tenant was threatening a lawsuit if they couldn't break contract and get their deposit back.

When my father went to the property, the tenants (who happen to be amazing) said that the PM are doing my dad a disservice.  The tenants only wanted out of the house temporarily because of the raw sewage in the house.  They never threatened a lawsuit and told my dad that IF they needed to move out because of the flood, they would like their deposit back.  But most importantly, they told him that that they reported the flood immediately and at the time it was not severe, but they noted with the PM that it was worsening.  It wasn't until they called back 12 hours later that the water had begun to run into the walls/basement.  It wasn't  until then that the PM called a plummer.

So here is my question.  Does my dad have a case to get out of his PM contract?  This company has not seemed willing to allow him to break his contract in the past.  But this seems like complete negligence and also a misrepresentation of facts.  Any help or advice is greatly appreciated!

Thank you so much for your help!

Brian

I obviously don't know both sides of the story and there are a dozen things I would like to know. However, I'll base my response off just what you've told us and assume it is all correct.

Your father should have a written management agreement. That agreement should have a termination clause, specifying how he can terminate the contract. There may be penalties or fees involved but those should be waived if he the property manager is not doing his / her job. Read the contract and find the termination clause. Then give the manager notice of termination in writing with a specific termination date and instructions on where to send the paperwork, keys, etc. They should provide him with copies of all documentation in the tenant file: applications, lease agreement, addendums, any correspondence, keys, tenant payment ledger/history, security deposit, etc.

If he intends to hire another property manager, have him start researching for one now. If you make a mistake and hire a bad Property Manager, it can ruin you for life. Learn the difference between a good PM and a bad one, try to interview at least three, and then make an educated decision. Remember: the PM with the highest fees may be the one that makes you the most money.

Things to do:

1. Review their management agreement. Ensure there are no hidden fees!

2. Calculate the total cost for a year. Some will charge a percentage of rent and nothing else. Some will charge a percentage each month but also a start-up fee, a leasing fee or lease renewal fee each year, administrative fees, maintenance fees, etc. Every fee should be fully disclosed!

3. Review their lease agreement and addendums.

4. Interview them about how they handle maintenance, late rent, unpaid rent, lease violations, evictions, etc.

5. Ask to speak to some of their current owners and tenants.

6. Google them and see what kind of reviews they have.

Brian,

It generally all depends on the wording of the contract. The PM I deal with has a 30 day out clause. If for any reason, I am not satisfied with their service, I can terminate on 30 days notice (I've now been with them for 3 years).

Is the contract for a specific term? 

Has the original term expired?

Did it become MTM or auto renew for another term?

What does the contract say regarding renewal?

Do you have to give written notice? How much notice?

What does it say, if anything, regarding termination for cause? What causes?

Do you have another PM lined up & can they help with the transition (they generally all know each other)?

If you are not comfortable with these issues, go to a lawyer (preferably an RE lawyer in the market) for a consultation / review of the contract. 1 hour of their time may save you a lot of aggravation / headaches.

PM's know that client come and clients go so while they are never happy to lose a client, their reputation also matter.

Also, if you have 'made' the decision to switch PM and have another one lined up, get them on going ASAP. You don't want the current PM to be collecting any more rent, overseeing any repairs or dealing with your tenant. You will have to deal with the fall out but for me the value of the property takes priority.

Oren

@Oren K. and @Nathan G.

Thanks so much.  I suggested that he look at his contract.  He will do so as soon as he gets home.  My wife and I have decided to manage the property for him.  We have a RE attorney that I can put him in touch with if he has push back.  

I believe his current contract is 1 year and is on auto-renewal.  He has explored the option of breaking contract in the past but didn't feel there was quite enough "ammunition" to be considered a breach of contract.  At this point, he does.  Thanks for your advice!

Brian

I like the 30 day option of cancellation. If in the future you decide on a new PM besides yourself demand the cancellation clause. I have a manager handling one in TX and I believe the fee is one months rent. So far they are doing a good job. I just had them do an inspection and sent a list of several items that need fixing...which is MUCH better than the last company that let my property go to hell telling me it was not their job to inform me!

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.