Late Fees with a PM Question

15 Replies

Hi All,

I'm super excited to be under contract for my first property.  I was reading through a PM agreement from the company I intend to use, it states that the PM keeps all late fees. Is this common practice in the PM industry? I expected it would be along the lines of a 50/50 split, as they are obviously doing additional work to track down the payment so I'd expect they'd earn a portion of it.  Or this could be the norm and something else I'm learning working through my first deal.

Larry

Congratulations on your property! Keeping late fees is a fairly common practice in the PM industry.  I wouldn't worry too much about.  But you do want to pay attention to the company's overall fee structure.  Management companies may keep all, part of, or none of income associated with returned check fees, rental income for pets, lease violation fees, unpaid invoice fees, bill payment fees, or income from laundry or vending machines.

When assessing a property management company, make sure to ask specific questions about their fee structure and the services included. Consider the management company’s overall performance and decide if it is worth paying for all their services or if another firm would suit your needs better. As an owner, you also have the opportunity to negotiate contract terms.

Hey Larry,

I use two different property managers in two different markets and both retain the late fees, so I am assuming this is common practice.  As my portfolio grows and I begin to get more leverage with these PMs, I do intend to negotiate a cut of these fees.  That said, I am tolerant of both of these PMs because they do a good job and are on point when keeping rent levels as high as possible.

Joe

The sole purpose of a late fee is to cover a landlords additional costs in chasing down delinquent tenants. If a PM is doing the work then obviously they earn the compensation. Why would a landlord that is doing nothing be entitled to compensation.

@Kaycee Wegener Thanks, glad to know it's standard. The agreement is silent about most other fees, so I will follow up before signing it. I met the PM at their office and had a good feeling after the meeting. 

@Joe Hines Glad to hear it's standard. I'd love to have a large enough portfolio to negotiate down some of the fees. 

@Thomas S. I agree that it's compensation for additional work, I just wanted to make sure it's a common practice since I've seen posts here where there was a 50/50 split. I don't have a problem with them keeping it all for doing all of the additional work. 

Interesting, the late fee is included in gross income and we take our PM fee from gross income each month so the owner collects most of it when we do disbursements.

@Eddie Werner Interesting to hear that you only take your normal PM percentage of a late fee.  Maybe splitting it 50/50 is a way for you to bring in a little extra money each month with future clients.  Though, in an ideal world, tenants always pay on time and there are no late fees to deal with, but we don't live in utopia. 

@Larry S. This will vary on area, PM and agreement but in general this js pretty common. It shouldn’t be a huge deal since you reallt don’t want late fees anyways. You want rent paid on time

The way I see it, if the PM placed the tenant and they are paying late and the PM keeps the fees, the PM and owner's goals are not aligned.

This incentivises the PM to place a marginal tenant and collect a "bonus" when they pay late.  They also get to charge for the turnover when the bum has to get evicted and - even worse - some PMs still charge their management fee for the apartment that is vacant because they placed a bad tenant.

Make sure your PM's goals and yours are aligned.

Originally posted by @Wesley W. :

The way I see it, if the PM placed the tenant and they are paying late and the PM keeps the fees, the PM and owner's goals are not aligned.

This incentivises the PM to place a marginal tenant and collect a "bonus" when they pay late.  They also get to charge for the turnover when the bum has to get evicted and - even worse - some PMs still charge their management fee for the apartment that is vacant because they placed a bad tenant.

Sometimes, that is.

Example - we just took over management of a 5 unit multi - family. We placed none of the tenants ourselves. 3 of them paid late the first month. We "chased" each one down, got the owner their rent, and retained the late fees. Is it our fault that the tenants paid late? Nope. Did we get the owner the gross income s/he is expecting each month? Yes, full 100% collection of all scheduled rents

Here at Connecticut Property Management, if we place a marginal tenant which then leads to an eviction down the road, that doesn't look very good for us. Why would the owner renew their contract with us? I hope any PM company that is placing tenants that regularly leads to one eviction after another gets fired. They shouldn't be in the business. 

Less than 5% of our tenants pay late and most of the properties we manage are in C+/B- areas. Collecting late fees is the exception, not the norm. Personally I don't understand why a landlord would rather kick someone out (and pay the fees to re-rent the unit) than have their PM collect a simple late fee, if it isn't affecting the owners finances come the end of the month (i.e. 100% of the rents are still being collected). 

Originally posted by @Filipe Pereira :

Example - we just took over management of a 5 unit multi - family. We placed none of the tenants ourselves. 3 of them paid late the first month. We "chased" each one down, got the owner their rent, and retained the late fees. Is it our fault that the tenants paid late? Nope. Did we get the owner the gross income s/he is expecting each month? Yes, full 100% collection of all scheduled rents

Here at Connecticut Property Management, if we place a marginal tenant which then leads to an eviction down the road, that doesn't look very good for us. Why would the owner renew their contract with us? I hope any PM company that is placing tenants that regularly leads to one eviction after another gets fired. They shouldn't be in the business. 

In this case, I would have negotiated with the PM to collect all late fees associated with these carryover tenants.  I agree that you've inherited the problem and don't shoulder any professional responsibility

Personally I don't understand why a landlord would rather kick someone out (and pay the fees to re-rent the unit) than have their PM collect a simple late fee, if it isn't affecting the owners finances come the end of the month (i.e. 100% of the rents are still being collected). 

Because paying late is a warning sign that there is an issue with the stability of the tenant.  It's not a "simple late fee"; it's an indicator that this tenancy might fail.  Sometimes that happens because of a job or family issue with the tenant, and sometimes it's because this tenant does not have the financial resources to afford the unit.  In the latter case, this should have been discovered during screening.  I know the spectre of the word "sometimes" is lurking in there, to which some may point out that the outcome I've portrayed is not certain for a "late payer."  It's all about business risk, though.  You know, "sometimes" people that have had evictions/criminal history/vicious dogs work out great as tenants, but I'd rather not take the risk if given the choice.

I certainly don't begrudge a PM from making a living and being fairly compensated for their work, but my point is that some management fee agreements, as written and presented to the customer, place the interests of both parties at odds.  And, human nature being what it is, makes it a challenge for all but the highest-integrity (and altruistic!) property manager to have the owner's best interest at top of mind. 

@Wesley W. lots of great points there. The one tenant that comes to mind that always paid late was because he got his pay check on certain weeks (or on the 15th of the month, can't remember). So like many other Americans he was simply living pay check to pay check. Not a bad tenant and no signs of underlying issues. It was one of my own properties, so I kept collecting a late fee, until he eventually moved out. 

Maybe I just lucked out though, the world will never know! :)

@Filipe Pereira I have one of those, too.  But I'd be lying to you if I told you it didn't make me nervous every time they pay late, as they are one car repair/medical expense/whatever from not paying at all.

Originally posted by @Kaycee Wegener:

  Management companies may keep all, part of, or none of income associated with returned check fees, rental income for pets, lease violation fees, unpaid invoice fees, bill payment fees, or income from laundry or vending machines.

I can understand why they get to keep the late fee and returned check fee.  
I'm having a difficult time with why a PM would be entitled to pet rent (pets can damage the unit, I would think that should be the owners); Laundry and vending machines?  Who bought these and pays for the water and maintenance?

What am I missing here?

I'll take 10% extra a month any day of the week, but I get Wesley's point. I have had tenants who literally forgot what their rent was because they had become so accustomed to the rent + payment. for 2 years (in this instance the $$ went to the owner and not my PM co). So, the owner made $2,400(ISH) in late fees, but guess what?? We had three months of vacancy as a result of them leaving... It all works out in the end, sometimes...

In Bridgeport Connecticut at Idoni Management we add the late fee to gross rent collected and take 10% of the total.

This creates more alignment between PM and owner goals.  Similar situation with maintenance markup fees which we do not charge.