Property manager pocketing late fees

71 Replies

@Michinori Kaneko we are not discussing my management style or particular prices, this is the question in general: why PM pocket the late fees.

That’s why:

1. To train Tenants to not be late

2. Because it involves extra work and somebody has to spend time - extra time in comparison to what it’s normally takes.

3. I sure do give discounts: if there are few properties, if properties are located in A-B areas. But we don’t discuss me here - all that discussion for YOU to understand WHY your PM pocket the late fees.

I think there are plenty of good answers but you feel like reading only these which you like.

Good luck with that: this is a free market and you’re free to find a PM which will be up to expectation. I’m just stating what the market dictates. 

BTW, my friend in Cali has a rental and her PM charging $70/mo. In Cleveland it's 10% or $100 for SFR whichever more.

If you have multiple properties, you might negotiate better rates. I have my own agreement and never force anyone to sign, however, I don’t negotiate on PM fees on $800-900/mo rents - most tenants in that price range has family emergency every first of the month. I spend hours every month talking, driving etc - if not the fear of the late fees, they all would pay next month.

If I wouldn’t get paid for all that extra work, I’d rather go through eviction - it’s my lawyer job and the owner pays. If you don’t like the rules - I can’t help, DIY. There are plenty of PM in the world - choose whoever fit your bill

I spoke with a PM friend and yes, they also collect late fees. If you feel uncomfortable or think there's a better PM out there for you, that might be a good step in the direction. You can also self-manage your own properties like @Al Pat said above and use software like Buildium or Tellus.

Originally posted by @David Stumpf :

i forgot to mention I did not really expect a PM to actually pay rent from their pocket if they wanted to keep the late fee.  It was more of A Modest Proposal solution meant to be satirical, but it is interesting that someone does have a PM that does that.

 Check back in a couple years. That PM will have long 86'd that policy or gone out of business. That just a ridiculous and stupid business decision.

Originally posted by @Michinori Kaneko :

@Irina Belkofer if you were to self manage, wouldn't you charge a late fee to your tenants for not paying rents on time? wouldn't that mean making sure you collect the rent (whether or not its collected late or on time) part of managing the property? In your mind, why would that extra work not fall into what we are paying for the property management fee? Not all tenants are easy to manage, not all properties are easy to manage.  I don't pay just to manage just the easy ones. i pay a flat fee to manage for good and bad because there will be some that are easy and some that are bad.  If they get to keep fees just for the bad ones, then i shouldn't be paying them flat management fee for tenants that don't ask much and always pay on time? Have you heard of PM giving a fee break because the tenant was so easy to manage? then why should they get to get compensated additional for the hard ones?

PMs aren't going to go around "making sure" tenants pay on time. We aren't talking about a live-in PM who goes around putting post-its on your door reminding you that your rent is due tomorrow. A professional PM has hundreds of properties under their management and either the payment arrives in time or it doesn't. If it doesn't, the PM will then follow-up and collect the rent and pocket the late fee as compensation for the extra work they do.

If you think this policy warrants a PM giving a fee break on tenants that are easy to manage, I don't think you realize just how razor thin the margins are on each property being managed. I honestly don't know how my Midwest turnkey PM stays in business. 10% of $700/month for my property? Seriously? $70 friggin dollars a month for responding if I have any questions, running the owners packet and then ACH'ing me my funds? I would say that my PM would have to manage at least 250 properties to break even. Let's say they aggressively grow their business and add 50 more SFR's. Then their monthly gross would increase by $3,500. Yippee.

I think the bottom line is that you have to accept the fact that PM's collecting the late fee is an industry standard. And if you happen to find a PM that doesn't charge that, you'll be getting very substandard service.

Originally posted by @James Wise :

Why do you think your opinion of what is overpaying a Property Manager applicable to anyone? I am not arguing whether or not the Property Management Company keeping the late fee is a justifiable fee. My opinion on the matter is irrelevant, as is yours. 

 Well, with that philosophy, BP should close the forums and we should all go home.

Lucky I guess.  My PM doesn’t and wouldn’t be in business if they took the late fees.  

To the OP I’d go back to them and say they can keep 10% of all gross rents and late fees collected.  I’ve said it pages ago that my business is buying and owning the property and the PM is there to manage it. Not my fault they can’t scale their business to X amount of units to be more profitable. If you have to raise your prices then you lose customers. A PM’s customers are the owners, not the other way around.  

There is no where anywhere that is “industry standard”.  The Only people saying the PM should keep the late fees are surprisingly PM’s.  It’s laughable.  

     One day I’m sure I’ll scale large enough to run my own PM business or at a minimum hire a single employee to rent out and manage the units.  I’m here to make money not spend my time bickering with some other businessman of how I have to give up more of my pie to them because they dropped their pie on the ground and now want to take my piece.  Get a grip, the PM needs me way more then I need them.  

It's common for the manager to keep late fees or split them with the owner.  It sounds like they are growing their operations and learning.  It's a change of policy and it's your choice to stay or go.  

We always kept late fees -- justified as payment for the extra work to collect. But we had a strong screening process and some pretty lofty hurdles, so late rent was less common. It doesn't make for much alignment between PM and owner.

For lease renewals we actually charged a 50% fee. Which at first seems exorbitant, but it's probably the most aligned fee in the game. You get more time/money for your last turnover cost, and no vacancy. They get paid sooner, and have (more of) a reason to keep your tenant happy and actively pursue a renewal.

Originally posted by @Dylan Kennedy :

We always kept late fees -- justified as payment for the extra work to collect. But we had a strong screening process and some pretty lofty hurdles, so late rent was less common. It doesn't make for much alignment between PM and owner.

I'd be good with the PM keeping the late fee after 12 months.  Stand behind your tenant choice and do the extra work (lol, mine are usually a friendly text reminder) for choosing a slow pay tenant.

A main reason I continue to DIY is because poor tenant selection has no consequence for you PMs.  On paper, you benefit and it's also less work for same pay to accept the first mirror fogger to come along.

Place a bad tenant and owners on the other hand are screwed. 

Stand behind your tenant choice by eating slow pay work and spread the placement fee over the 1st year of tenancy already.  

@Michinori Kaneko

1. They disclosed the changes in their the contract which they sent you for your review and signature. This is business, where every party has the goal of shareholder value maximization and no one has the responsibility to look out for your best interests besides you.

2. C'mon man, you are rationalizing. Why do you care about what type of offices chairs they sit in or your PMs employment circumstances with her boss? You don't and you can't. All you care about is the level of services they provide you at a given price point. As long as they aren't doing anything illegal or immoral what you believe about their new hires or offices is inconsequential.

I'll circle back to my previous comment, PM services are not a commodity. If this is a good PM, you will have to pay more for their services. Just like it is possible they are overcharging with the new contact, it is also possible they were undercharging before and now have raised their prices to market.

Given the fact that you both have the stated goal to maximize shareholder value, the question hen becomes, how to you best align the two parties stated goals? I believe a flat fee structure does that better than the a la carte system you see a lot of places. You may not. To each their own.

Best of Luck

@Steve Vaughan Totally agree with you. This was all from when I was a PM years ago. Happy to see the industry from the inside, managers do an often hard job and I believe they get paid accordingly (as I hope you pay yourself!)

Alignment is a tough cookie. You want to be able to rely on the PMs reputation being on the line, but isn't always enough. Money is a good driver, but hard to posture without leaving some loophole or perverse incentive. I liked the lease renewal fee, because at the very least we were both aligned in trying to get more time from the same tenant...which hopefully means the PM would be more rigorous when picking a resident.

Originally posted by @Dylan Kennedy :

@Anthony Rosa PMs will bend most rules if you're significantly adding to their management portfolio.

Id agree with that.  PM is a business, the better the client the better the treatment.  


@Irina Belkofer you say extra work and extra time. I work for a salary. i don't get extra pay for staying late to do a project or covering someone else work while they are on vacation or something. that's part of the job.  I may get a year end bonus, but i also send a gift to my PM (not the company, the person that's actually managing my properties) numerous time during the year. You are a RE broker. you do lots of showing for "free", until one of them actually goes through and you get paid the commission. it's the same concept to me. I pay a flat fee for management, that includes rent collections.  I think it's just a rationalization that "i should get paid for extra work".  Some properties are easy, no maintenance, no late rentals, you don't spend any time on some of the property and you are still collecting management fees (it doesn't even have to be in A or B neighborhood for that).  So in my mind, that's like saying i'll take full compensation when there's no work needed, but i'll take more $s when its a little harder. that just makes me question why i'm paying the management fee then?  isn't the flat fee to even out the easy and the hard ones?  

My opinions may be biased as i am an investor trying to maximize my returns, and as yours, as a PM defending your fee structure.  it's a free market so i can go wherever i want sure, but the reason i don't want to because my manager is good. i don't like the management style of the company and it's owner. If i didn't think my PM was awesome i would have left in a heart beat. Maybe a flat fee structure like Bill mentioned is the easiest and simple way, that ways you can avoid some of your investors complaining or disliking certain parts of your agreement. 

in any case, i was thinking i would get a vast majority of people saying PM do not pocket late fees, but this thread was a little eye opener. guess i need to look at it from every angle when i expand into a different market.

I agree with the original poster and most people on the thread.  The late fees should not go to the property manager, they should go to the Owner.  The property manager needs to increase their percentage if they aren't making enough money for the scope of work being performed.  This is clearly in the original scope of work.  If rent collection was easy and didn't take any phone calls, site visits, etc. we as landlords would do it ourselves.  Finding/evaluating renters and collecting rents are the two primary job duties of a property manager and why we pay for the service.  Also, there's too much of a conflict of interest for them to keep the late fees.  In most cases, they've selected the renter, so they shouldn't profit when the renter defaults and "causes them more work".  It was built in already.  

Additionally, the vast majority of renters pay on time and have minor interactions with the management company on a daily/weekly/monthly basis, so the workload to profit ratio should be pretty good.  If they have too many problem tenants, then it's incumbent on the property manager to either; work with late payers (like having them pay weekly rent, on the day they get paid), replace the late payers when their leases come up, and/or help the landlord understand that they need to up their repairs/capex budgets so the properties are in better shape so tenants are happier, not complaining as much and paying on time.  All of which was in their scope when they agreed to the 8-10% management fee.  

Just my $.02.  

I worked for a PM company that charged a "posting fee" in addition to the late fee. We kept the posting fee. So, if we had to send staff to post a 3 day (or 10 day) notice or any notice for non compliance of the lease, and additional fee was added that the PM kept. The actual late fee went to the owners. So, if a tenant was 1 day late, and we had not yet posted a notice, they paid a late fee and we kept nothing since we didn't really have any manhours in it. I still employ this in my business especially if the "posting day" is a weekend or holiday - the late tenant is paying for my / my staff time

@Michinori Kaneko it’s fine with me if you don’t agree with the market - I’m not your PM and I won’t be.

Just negotiate the terms of your PM agreement and move on to the next PM.....what the problem?

You asked a question, I answered: you don’t like the answer - too bad.

Market is what it is. I don’t have to take anyone under management, especially C-D areas. For B an A I won’t even charge 10%, leave alone late fees - there is no such thing.

If you want someone to manage your properties where late fees might be potentially incurred - get ready to part with the money.

My best Tenants direct deposit rents well before the first of the month and there is nothing to discuss.

I don't take on rentals in certain areas at all because I don't have to - it's my business and work only for the clients who bought properties with me. I do not advice to invest in 25-30% ROI areas and that's where all the money grow: late fees, eviction fees, 1&last month rent+Sec.dep. If owner wants to risk - it's his problem.

Your comparison with your job is not relevant - you get paid for the job done, I don’t even have to take any client with attitude I don’t like. Too bad. 

There are plenty of PMs - choose these you like and be happy!

Market will beat anyone - that’s why new PM changing the agreement - they can’t pay their employees to do the job.

I self manage.  But when my tenants are late I have to spend time talking to them, writing and properly mailing legal notices in case i have to evict and its a lot of work.  I dont want the stupid late free.  I want my tenant to pay on time.  But you can bet your boot I'm collecting that late fee to cover my extra time.  If you have to do all the work yourself when a tenant is late than you should get the late fees. That's what the late fee is for.  I think its fair that it goes to the person who does that extra work. 

There were a few issues in regards to property management fee structure I simply could not get comfortable with, including late fees.  I simply let my contract expire so I did not have termination fees.  Now I self-manage.  It's more work but I also earn more.

If you can't get comfortable, change.

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