Alternative Fee Arrangement for Property Management

5 Replies

Hello, 

I was wondering if anyone here has experience with alternative fee arrangements for property managers, specifically for a small portfolio of single family home rentals. 

Traditionally, PM's will charge a management fee as a portion of rent plus commissions on various functions such as placing a new tenant, etc. I find these arrangements to have a conflict of interest where the property manager can earn additional profit at the investor's expense, such as frequent turnover. 

I would prefer the management's compensation to be aligned with the performance of the property for the investor. I believe this can be achieved by having the success of the property, measured by line items the management has influence over, determine the management's fee. 

I was thinking the manager could take a percentage cut, say 20%, of the following: 

Rent Collected - (Repairs/make ready costs due to tenant + HOA penalties +eviction/collection fees)

This would incentivize the property manager to place a quality tenant who doesn't break a lease early, and who takes good care of the home. This would minimize the time the manager would have to spend on the property, and minimize unnecessary costs to the investor. 

An example contract would last one year, and the investor could make a mid year payment at 6 months based on current projected performance, and then settle up at year end. 

Thank you for your time. Any thoughts?   

@Kevin Smith Solid points.  Often the property manager's incentives are counter intuitive to the owners financial interest at times.  To your point, yes there is a way to make it a better Earn-Earn relation where incentives are aligned with interest.

Has anyone ever dealt with an established PM company that was paid strictly on a percentage of  active rent? Meaning, if it's occupied - you get 10% of rents. If it's vacant - you get nothing.  That seems like a fairer incentive to do the right thing and do it well, vs. getting paid whether its vacant or not and getting extra commission every time you put a new tenant in. 

@Joe G. What your talking about are fees based on rent 'collected' vs 'expected'.  It is important to confirm with your property manager how they charge.  Not always the case, but typically you see flat rates associated with 'expected' and percentage rates associated with collected.