Property manager pocketing late fees

71 Replies

Hi BP,

I have used my property manager for about 9 months now, so far i've been happy with what they have been doing.  I signed a contract with them back then, and every property which I have acquired and managed has been added onto this first contract i signed back from 9 months ago.  


Yesterday, out of blue, they have changed their policy and reverted to having contracts signed for each property.  That in itself was not too surprising to me, because i thought that's how it should be in the first place.  However, what DID really get to me is that they have actually increased fees, added new fees, extended period which you can cancel the contract them without paying fees. This was NOT COMMUNICATED in anyways to the investors, and they simply say I now need to sign contract for each one.  Within the list of property which I got notice for was one property which they have been "managing" already from more than month ago (it's just that they haven't found a tenant for it yet), as well.  There are many things wrong and unprofessional about this, but what caught my eyes the most is there was a line saying that any late fees collected from late payment of the rents will be kept by the property manager.  This does not make any sense to me.  As an investor, I am liable for all expenses.  If the tenant does not pay on time, 1) I am still paying all the expenses so I am the one that's hurting, and 2) the reason we have a tenant that doesn't pay on time is the managers fault to begin with (although i do get no matter how much diligence you do you will always have few bad ones).  I wanted to ask to the BP community if it is a common practice for PMs to keep late fees on rents?  If there are increases in fees or changes in agreements, do your PM property communicate to you BEFORE you sign a new contract?  Thank you for your feedback in advance!

@Michinori Kaneko The only way I would allow them to keep the late fee is if they agree to front the rent for the tenant in the event they are ever late in the rent. If the PM wants to pay me out of their pocket to make sure I don't get paid late then sure, they can keep the late fee when they do collect. I don't see that happening though.

@Caleb Heimsoth really? this is in Indiana.  First of all, why would the PM be entitled to the late fee? they are getting paid a management fee to manage the place.  collecting rent on time is part of that.  Secondly, by allowing them to keep the late fee, it's creating incentive for management company to collect rents late. the management company would have more incentive to collect late fees than to serve for investors best interest, which is collecting rents on time.  How is that professional? how is that not conflict of interest in your eyes?

Find a new property management company.  

    If 10% of the gross rents isn’t enough to run their business, then they aren’t good at running their business.  

    I would never allow a PM to keep any fees for anything.  What about pet rent? What about parking space rent, or whatever extra income you can produce from the property.  


    I would rather all my tenants pay on time, but if not I sure as heck am not going to share the late fees with someone that already has their hand in my pocket.  Also I don’t get this whole sign a year contract to get a PM?  Why?  They that bad that they need to rope you in for a whole year?  Is their profit margins all about turning over the unit after one year?  Because if that is so I wouldn’t want them as my PM anyhow.  I want LONG TERM tenants.  Not people that are just bouncing from place to place. 

Originally posted by @Michinori Kaneko :

@Caleb Heimsoth really? this is in Indiana.  First of all, why would the PM be entitled to the late fee? they are getting paid a management fee to manage the place.  collecting rent on time is part of that.  Secondly, by allowing them to keep the late fee, it's creating incentive for management company to collect rents late. the management company would have more incentive to collect late fees than to serve for investors best interest, which is collecting rents on time.  How is that professional? how is that not conflict of interest in your eyes?

You will notice if you really dive down into a lot of PM companies and think about it, their interest isn’t necessarily aligned with the owner.  What about tenant placement fees? What’s the incentive to keep a tenant? The list for that logic goes on and on. 

You can look for another PM, I’m just telling you it’s pretty standard in a lot of markets that they keep the late fee 

 

@Caleb Heimsoth i am very surprised that this is common, and that people are ok with it. tenant placement fees are very justifiable.  think about how much time they have to spend showing it to so many potential tenants before one finally signs a lease?  If i were the managers i'd rather collect $100 a month from a tenant that doesn't complain than showing the same property to 20 people and still may not find a tenant. My agreement has a clause that if the tenant leaves within a year that the second placement is for free.  You could argue that they may purposefully lower the rent so they don't have to show it many times before they sign a lease, but then on the contrary once you place them they wouldn't leave because they can't get the same rent anywhere so it works both ways.  There are companies that don't charge tenant placement fees but just higher flat fees.  

Originally posted by @David Stumpf :

@Michinori Kaneko The only way I would allow them to keep the late fee is if they agree to front the rent for the tenant in the event they are ever late in the rent. If the PM wants to pay me out of their pocket to make sure I don't get paid late then sure, they can keep the late fee when they do collect. I don't see that happening though.



You guys need to get off of Fantasy Island. The Property Manager keeping the late fees is almost industry standard. Welcome to the biz ya'll.

Collecting late rent involves extra effort for the PM, including sending / posting of notices, etc... so it is not unreasonable for the PM to keep this fee, or at least 1/2.

The "management fee" includes MANAGING the property, and that's including the administrative time of collecting rent. Collecting rent doesn't just mean watching it as it comes in. It means contacting tenants to remind them, letters, 5-day notices, etc. There should not be any additional cost for that MANAGEMENT service. PMs should NOT be keeping late fees. PERIOD!

@Michinori Kaneko

While I agree that it is very unsettling that they keep this late fee they are also in the business of making money. If property management companies sole profit was just the 8 or 10% they would not be in business because it would not be profitable. Property management companies make their money with all of the little extra fees, very similar to big banks. If investors are using the calculation of 8 or 10% for property management in their initial calculation they are extremely wrong.. It's gonna be more like 13 to 18% when it's all said and done after you add in all of the miscellaneous fees that are charged to the property owner..examples: keeping late fees, $19.99 admin fee to answer an email or take a call, tenant placement fee, extra fees on top of evictions, extra fees on top of tracking down late payers, paperwork fees like $4.99...etc..

It's all the fees, turnover costs, admin costs, and small charges that generate their profit...NOT the original 8 or 10%.

I am not a proponent of utilizing property managers for rental properties but I'm definitely a proponent for their system because it is extremely profitable and I'm honestly thinking of ways I can start my own and charge other investors all of these fees.

@Michinori Kaneko This is the time to find new property management company or start self managing until you find one. No need to debate, it’s not like you have a choice here. They sent in a contract, it will not change. So, take it or leave it and I will leave because of the terms you stated. I self manage all mine and my duplexes collect late fees all the time and it goes in my maintenance budget.

I want to clarify one thing. My manager is great. She takes good care of my properties and tenants. She is extremely good with communicating issues or updates. But she is not the one that decides these policies or additional fees. These additional fees dont go into her pocket. I would be perfectly happy if she makes all the money. She deserves for the hard work she does. My biggest concern is shes not the one getting these fees. She may see fractions of it and the rest goes to the owners of the company which helps me in no ways. By adding on these new fees she will lose investors. However i dont appreciate management company being shady and just adding on expenses and fees. It wont be the emd of it. It will continue to happen. I will have to review the contract each time to see if they added more unreasonable terms. What would you do if you had a wonderful manager but the company you work for is being shady?

So when the tenant they placed and you paid half to a full month's rent for the privilege pays late (or not at all) they keep the late fee?  Seems a bit unfair.

I can see keeping 10 or 20 bucks of it, but not the whole thing.  It seems literally in the PMs best interest to place slow and no pay tenants when all late fees are kept and more placement fees necessary.  No wonder the 'industry standard' keeps the industry where it's at.

And this is why PMs have such a bad rep, in my opinion.  Having an owner express concern over a clearly unilateral contract is not "Fantasy Island", and dismissive comments like these continue to reinforce the aforementioned stereotype.

I get that the PM business has low margin, but pocketing this fee and others (such as lease up) that are "industry standard" (@James Wise ) create interests that are diametrically opposed to those of the owner.  Here in NY (and I suspect other places) the owner is ultimately responsible for the actions (or inactions) of the PM, damage to the property, any legal expenses with evicting a bad tenant, etc.  This is all squarely on the owner's shoulders.  The PM gets paid regardless.

Many PM contracts incentivise the PM to not spend a lot of time vetting tenants (since their placement fee is X, so less showings means better return on their time) and thus choose marginal ones.  All the more reason if the PM keeps the late fees (which these people are more likely to incur) and lease up fees (which they will do after the tenant is evicted).

Some PMs do not mark up repairs nor charge a management fee for vacant apartments, so those that do not should be given credit.  Otherwise, again - if the PM gets paid the same whether or not the unit is vacant, will there be a sense of urgency (as, no doubt, the owner will have) to get the apartment rented?

Most PMs aren't evil.  It's just human nature.  If the contract rewards you for certain behavior, you are going to drawn to that behavior if it benefits your business, whether or not it is best for your customer.  No matter who you are or what your business is.

I think the problem is these contracts create differently-aligned goals.  @Brie Schmidt has a BRILLIANT model that she uses to create financial incentives for her PMs.  She discusses it on her BP podcast episode from several years ago.  If I ever turn my portfolio over to a PM, a will certainly use a similar system.  Here's a paraphrasing:

"I took 25% of gross monthly rent and spread that out over the year. So for 10 units renting at $1000 a month, I would pay $2500 vacancy bonus over the year. So each quarter the PM would get $62.50 if a particular unit had no loss of income."

Unfortunately, many PMs will resist any change to their contract from the status quo, and thus this divide and conflict will continue.

Originally posted by @Wesley W. :

And this is why PMs have such a bad rep, in my opinion.  Having an owner express concern over a clearly unilateral contract is not "Fantasy Island", and dismissive comments like these continue to reinforce the aforementioned stereotype.

I get that the PM business has low margin, but pocketing this fee and others (such as lease up) that are "industry standard" (@James Wise) create interests that are diametrically opposed to those of the owner.  Here in NY (and I suspect other places) the owner is ultimately responsible for the actions (or inactions) of the PM, damage to the property, any legal expenses with evicting a bad tenant, etc.  This is all squarely on the owner's shoulders.  The PM gets paid regardless.

Many PM contracts incentivise the PM to not spend a lot of time vetting tenants (since their placement fee is X, so less showings means better return on their time) and thus choose marginal ones.  All the more reason if the PM keeps the late fees (which these people are more likely to incur) and lease up fees (which they will do after the tenant is evicted).

Some PMs do not mark up repairs nor charge a management fee for vacant apartments, so those that do not should be given credit.  Otherwise, again - if the PM gets paid the same whether or not the unit is vacant, will there be a sense of urgency (as, no doubt, the owner will have) to get the apartment rented?

Most PMs aren't evil.  It's just human nature.  If the contract rewards you for certain behavior, you are going to drawn to that behavior if it benefits your business, whether or not it is best for your customer.  No matter who you are or what your business is.

I think the problem is these contracts create differently-aligned goals.  @Brie Schmidt has a BRILLIANT model that she uses to create financial incentives for her PMs.  She discusses it on her BP podcast episode from several years ago.  If I ever turn my portfolio over to a PM, a will certainly use a similar system.  Here's a paraphrasing:

"I took 25% of gross monthly rent and spread that out over the year. So for 10 units renting at $1000 a month, I would pay $2500 vacancy bonus over the year. So each quarter the PM would get $62.50 if a particular unit had no loss of income."

Unfortunately, many PMs will resist any change to their contract from the status quo, and thus this divide and conflict will continue.

What point are you trying to make? It's a free market product. The market has spoken on what is & is not a reasonable fee. It's fairly irrelevant that you do not agree.

 

Originally posted by @James Wise :

What point are you trying to make? It's a free market product. The market has spoken on what is & is not a reasonable fee. It's fairly irrelevant that you do not agree. 

I'm not sure I have to further clarify my point, as it seems you are doing a good job of making it for me.


 

Originally posted by @Wesley W. :
Originally posted by @James Wise:

What point are you trying to make? It's a free market product. The market has spoken on what is & is not a reasonable fee. It's fairly irrelevant that you do not agree. 

I'm not sure I have to further clarify my point, as it seems you are doing a good job of making it for me.



 

I've got a question for you Wesley. If you had a house that 50 qualified tenants wanted to rent for $1,000/mo. How much would you concern yourself with 3 additional tenants who gave you 25 reasons why they thought that the price you should charge should be $750/mo?

 

The management company that I use takes half of the late fees.  My previous company took all of the late fees as long as rent was eventually collected prior to landlord checks being issued.  I don't have a problem with this as it doesn't effect me at all.  

Rent is due on the first, but the management company doesn't issue checks until the 10th, and funds usually hit my bank by the 15th.  I know this fact and can budget accordingly so that I have funds on the first to pay my mortgage, and wait till the 15th to replenish those funds.  

So to me it doesn't matter if the tenant pays on the first or is a few days late, because I get my money at the same time regardless.  

If someone is late, I don't even notice, but the property management company has to do extra work.  I just sit on my sofa and collect a couple extra bucks for doing nothing.  Why would I complain about this?

One way or another a PM company is going to make money.  Either by random fees, or by charging a higher base price.  I would 10x rather them get their money from random fees charged to the tenant that don't impact me in any way, than have them up their base price on all of my units.  


james, to your point if you were an applicant, paid application fee, then they raised the rent to $1200 what would you do? Or if they said afterwards theres pet fees and cleaning fees and your lease is actually a three year contract? Im sure some applicants may suck it up and say fine but many wont?

@Ben Zimmerman  

I do not begrudge anyone from making a living.  Nor do I think a property manager should not be paid for professional and consistent services rendered.  However, I take umbrage with HOW some PMs are generating their revenue, with incentives placed on tenant turnover and vacancy, which are the very conditions that causes their customer, the owner, to lose money.  That doesn't make any business sense.

Sure, charge a percentage of gross collected rents (not scheduled rents), split the late fee, build in a bonus program for low vacancy/turnover, so both sides benefit from a well run rental portfolio.  The PM stays profitable when his/her customer is profitable.  In business, this is referred to as a "win-win."

Originally posted by @James Wise :

I've got a question for you Wesley. If you had a house that 50 qualified tenants wanted to rent for $1,000/mo. How much would you concern yourself with 3 additional tenants who gave you 25 reasons why they thought that the price you should charge should be $750/mo?

James, it's more the "how" of your compensation, as opposed to the "what."  Nowhere in this thread have I seen anyone imply that good PMs are getting paid too much.

I'm totally fine with sharing the wealth and giving the PM a slice of the pie as my revenue increases as he/she adds value to my business.  But as I have stated many of these contracts are written to the contrary.

 

Originally posted by @Michinori Kaneko :

james, to your point if you were an applicant, paid application fee, then they raised the rent to $1200 what would you do? Or if they said afterwards theres pet fees and cleaning fees and your lease is actually a three year contract? Im sure some applicants may suck it up and say fine but many wont?

 You're getting off track here but I will play ball. That isn't an apples to apples comparison. That is not what happened to you. A more apt comparison to your situation would be that the tenants moved in to the house at $1,000/mo & then after their lease expired they were told that the rent would be increased upon renewal.

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