Property Management Renewal of Lease Fee
Rental Property Investor · Torrance, CA · Member since 2017 · 33 posts · 35 votes
Property Management Renewal of Lease Fee
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Property Manager · Cleveland, OH · Member since 2019 · 446 posts · 566 votes
6yIf that PM can justify it with their process, there is nothing wrong with it. I know many PMs who don't charge this fee and also don't have a good renewal process. Or if they do renew, they send a 1 page letter without evaluating for market rent increase, reflecting on the tenant's payment history or unit condition, etc. If they're in the same market as a PM that charges $250 but actually puts work into every single renewal, who is to say that this is "penny pinching"?
A PM needs to make a profit to survive. Every single PM you are working with should be a profitable company; if they're not profitable, you will have the worst client experience. How a PM structures their fees will always vary from company to company, even within one market. Also, keep in mind that within a market there are many submarkets and a great PM will usually specialize in one or a few and not be a jack of all trades. So what processes (and fees) work great for C/D class rentals won't work well for A/B class, and what works for managers dealing with SFRs also won't work well for managers who specialize in mid-size apartment complexes.
Instead, vet the PM on their processes and procedures. They should be able to explain what work goes into earning each and every fee they plan to charge you. Vet their portfolio. Is it similar to what you own?
At the end of the day, any price is fair if you are willing to pay it and it provides you value.
26 Replies
- Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes6y
@Edward Brewington I have seen this fee with PM companies. Not all charge it, but if the PM is doing a great job (and the property can support this) then I wouldn't worry about it. I have also had PM companies that don't renew the lease and I would have been happy to have paid them!
- Lender · Chicago, IL · Member since 2020 · 53 posts · 30 votes6y
I'd say there isn't a hard rule on lease renewals - some PM's don't charge, some charge a flat rate, and some even on a % of monthly rent basis based on the renewal documents / resources involved. If you're happy with the rest of their services, I reckon it shouldn't be much of an issue.
Likewise, PM fees and how they're charged tend to differ based on local competition etc. Ultimately as long as they're open and transparent upfront about what the fee includes - i.e. all the expectations are set and met well throughout the life of the relationship, a healthy PM-landlord relationship should involve no ugly surprises. Hope this helps!
- Property Manager · Cleveland, OH · Member since 2019 · 446 posts · 566 votes6y
If that PM can justify it with their process, there is nothing wrong with it. I know many PMs who don't charge this fee and also don't have a good renewal process. Or if they do renew, they send a 1 page letter without evaluating for market rent increase, reflecting on the tenant's payment history or unit condition, etc. If they're in the same market as a PM that charges $250 but actually puts work into every single renewal, who is to say that this is "penny pinching"?
A PM needs to make a profit to survive. Every single PM you are working with should be a profitable company; if they're not profitable, you will have the worst client experience. How a PM structures their fees will always vary from company to company, even within one market. Also, keep in mind that within a market there are many submarkets and a great PM will usually specialize in one or a few and not be a jack of all trades. So what processes (and fees) work great for C/D class rentals won't work well for A/B class, and what works for managers dealing with SFRs also won't work well for managers who specialize in mid-size apartment complexes.
Instead, vet the PM on their processes and procedures. They should be able to explain what work goes into earning each and every fee they plan to charge you. Vet their portfolio. Is it similar to what you own?
At the end of the day, any price is fair if you are willing to pay it and it provides you value.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes6y
@Edward Brewington You can't pick out just 1 fee feature from a PM company and say "XYZ dosn't charge this", as there is different pricing models that have different means of accounting for these items. I can guarantee you that you are paying for lease renewals, only question is how.
With that, yes it is a normal standard PM pricing structure to have a lease renewal fee, as the PM is doing an updated lease, negotiating rent increase, reviewing historical performance and advising on adjustments forward from that, and getting all doc's completed, it requires labor hours and therefore requires compensation. Generally speaking, you should be paying a lower ongoing monthly PM cost in reflection.
- Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes6y
@Edward Brewington it depends, some companies do it some don't. Does your management company charge on the higher end or on the lower end? For example, it makes more sense for a company charging 7% to have additional fees on top because they still need to be making money at the end of the day.
I do Property Management in Connecticut, and this is not a service that we charge for. That being said, we do charge 10% of the collected rents, so we're not at the bottom of the pricing ladder either.
Personally, I think it's a bit of a joke to charge a lease renewal fee. The property manager should already be staying on top of market trends, and should be doing inspections of the unit once a year anyways to keep track of ongoing maintenance tasks. How is he or she incurring extra work that would justify charging a lease renewal fee? If the tenant is there during the inspection, have them sign the lease renewal at that time. If the tenant isn't there, an e-signature document takes about 15 minutes to set up.An entirely new lease should not be necessary for a lease renewal.
- 6yPeter TverdovBusiness MemberDeveloper · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
I hate fees like that and our company doesn't charge it, but the devil is in the details. Does this company charge you 6% a month to collect rent? Because companies like that make up for low monthly fees on the backend. I actually got a lot of my property management business model from listening to tenants on this forum. We do a flat fee, no hidden fees and a small Leasing fee. KISS method. Works well here in NJ!
- Rental Property Investor · Torrance, CA · Member since 2017 · 33 posts · 35 votes6y
Outstanding responses and I really appreciated everyone's input!
I pay 9% of the rent at $950 a month. The rent stayed the same and he resigned the renewal at the same conditions as before......that's why I thought this charge was a bit ridiculous.
As for their service, I'd say the PM company is ok and at times frustrating to work with. They can be difficult to get a hold of sometimes, although I call when they open in the mornings or send an email.
The contractors they hire are expensive compared to the PMs who have their own contractors....much more than the ones I have in Ohio.
Their website portal that we correspond on is old and needs to be updated....they forgot to put my 2019 tax docs as well as an end of the year report....I had to request that after a few tries.
I like the guy who monitors my property, but the company and the accounting divisions seem to be slow and I need to be persistent if I want answers.
I'm actually shopping around now and I did talk to a few PMs and they do charge a renewal fee, but I think I found one that doesn't and has good reviews.....I'll be talking to them tonight my time.
The fact is.....I need a PM that has my best interests but also doesn't overcharge me on what I think are charges that are questionable.
Thanks everyone!!!
- 6yDick RosenPro MemberProperty Manager · Gilbert, AZ · Member since 2009 · 1k+ posts · 451 votes
After reading all of the responses there was one thing that wasn't noted. Are they renewing and keeping good tenants for you? Not that I would ever promote this shady approach but I have heard of some PM's that would prefer not to renew, they would rather chase the tenant away so they can get you a new tenant with a new lease up fee. So, if you factor in the turnover cost, almost any renewal fee is worthwhile.
- Rental Property Investor · Torrance, CA · Member since 2017 · 33 posts · 35 votes6y
@Dick Rosen The tenants have been late on their rent for more than half the time they have been there in a year. They just tried to have me fixed a window they broke, and the funny thing is, they would not say they broke it until we said we would not replace it without knowing how an attic window broke. I guess he slipped and fell and broke the window, that's what he eventually told the PM, but he would not tell the contractor, so the PM had to push him for an answer. They've broke a faucet and dropped a lotion bottle in the toilet.....the house was fully remodeled before they moved in.....so....I'd say the tenant is flawed in some ways compared to the other properties I have. Hardly any issues with my other properties.
- Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes6y
Another thing that hasn't been mentioned is your increase in operating costs every year. If the PM raises rent by $20/mo. on renewal, their $250 fee isn't even covered by that increase. Meanwhile, your taxes, insurance, etc. continue to escalate upwards. In your case, the PM didn't even raise the rent and charged you $250 to boot. Your NOI is eroding with this model. Pretty soon, there will be only one person making money off your property, and it won't be you.
- Rental Property Investor · Torrance, CA · Member since 2017 · 33 posts · 35 votes6y
@Wesley W. Wow! Outstanding point there.
- Property Manager · Cleveland, OH · Member since 2019 · 446 posts · 566 votes6y
@Wesley W. the decision to raise rents (or not) is not a unilateral one made by the PM. In fact, this decision is guided by market conditions and the specific circumstances of that tenancy, and we have had many situations where owner's chose not to increase rents, or increase them by less than they could have per market conditions, to keep a great tenant happy and help ensure they would stay.
Even if the rent doesn't increase, there is substantial work put into the lease renewal process, especially when you work with average working class renters. There is negotiation back and forth. The fact is, even if you do ask for a rent increase, if the tenant doesn't sign, very few investors in my market are eager to give them a notice to vacate.
If the lease is not renewed for another term, your tenant should either receive a notice to vacate at the end of the current term, or the tenancy becomes month to month and the tenant can give 30 days notice any time, including in the dead of winter. Then you have vacancy, turnover repairs expenses, and a brand new leasing fee. Or pay a much smaller flat fee for the work the PM does to get written commitment for an additional term.
As others have said, every PM's fee structure is different, but one way or another, you are paying for all the services they are providing you, all the work that goes into it behind the scenes, however it is packaged. Either that, or your PM is not profitable, and then they're not returning your calls or emails, not keeping up with renewals (or maybe even rent collection efforts), etc.
- 6yDick RosenPro MemberProperty Manager · Gilbert, AZ · Member since 2009 · 1k+ posts · 451 votes
Originally posted by @Edward Brewington:
@Dick Rosen The tenants have been late on their rent for more than half the time they have been there in a year. They just tried to have me fixed a window they broke, and the funny thing is, they would not say they broke it until we said we would not replace it without knowing how an attic window broke. I guess he slipped and fell and broke the window, that's what he eventually told the PM, but he would not tell the contractor, so the PM had to push him for an answer. They've broke a faucet and dropped a lotion bottle in the toilet.....the house was fully remodeled before they moved in.....so....I'd say the tenant is flawed in some ways compared to the other properties I have. Hardly any issues with my other properties.
That doesn't sound like a tenant that I would want to renew. I would have asked you if it was okay to not renew him and find someone better.
- Property Manager · Groton, CT · Member since 2017 · 130 posts · 81 votes6y
My company, also based in CT, does charge them. However, as many said, it's part of a bigger fee structure. We are trying out a progressive leasing fee schedule where we charge very little to place a tenant in comparison to many, but charge renewal fees that eventually grow over the next 5 years to 50% month's rent for life of tenant occupancy. This is as long as the same tenant re-ups. If they leave, it starts over.
The idea is to remove the PM's ability to chase away tenants to pad their income. Since I started my company as an investor first and PM second I tried to do everything as I would want. I wanted the PM company and investors interests to align. We therefore don't get compensated until about year 5 for the work it takes to place a tenant. However if we're doing our job and the tenant is happy they'll hopefully stay for many years. At this point, we as the PM start making out a bit better. I've got quite a bit of literature to explain in to my clients, but once they see how it works, it's been received quite well.
I also re-create a new lease each time because I think it's cleaner over an addendum. I'm beyond particular about my paperwork. HAHA
Who knows, perhaps once I get larger I'll find out why everyone does it one way or another, but so far it seems to be working.
- Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes6y
Originally posted by @David Wolber:
My company, also based in CT, does charge them. However, as many said, it's part of a bigger fee structure. We are trying out a progressive leasing fee schedule where we charge very little to place a tenant in comparison to many, but charge renewal fees that eventually grow over the next 5 years to 50% month's rent for life of tenant occupancy. This is as long as the same tenant re-ups. If they leave, it starts over.
The idea is to remove the PM's ability to chase away tenants to pad their income. Since I started my company as an investor first and PM second I tried to do everything as I would want. I wanted the PM company and investors interests to align. We therefore don't get compensated until about year 5 for the work it takes to place a tenant. However if we're doing our job and the tenant is happy they'll hopefully stay for many years. At this point, we as the PM start making out a bit better. I've got quite a bit of literature to explain in to my clients, but once they see how it works, it's been received quite well.
I also re-create a new lease each time because I think it's cleaner over an addendum. I'm beyond particular about my paperwork. HAHA
Who knows, perhaps once I get larger I'll find out why everyone does it one way or another, but so far it seems to be working.
Great counter point, and dare I say I like the structure of it. But... It's my opinion that any professional has an ethical requirement to do what's best for their clients first, and themselves second. That's just basic good business if you ask me. If a client finds themselves questioning the intent of their PM and who is benefitting from their PM's decision making, then it's probably time to get a new PM. If the PM is shuffling through tenants on a regular basis, I'd say that's a red flag.
I believe that placing tenants is by far the most labor intensive part of the business, and typically a loss to your overall time/profit. You're most profitable when you aren't answering phones and showing units (duh, right?), so I'd say it's actually in the PM's best interests to renew leases and not have to incur the work that it is to place tenants. The PMs shouldn't be chasing away the tenants because that also costs them money.
Let's break it down.Let's say you have to show a unit 10 different times before it rents out and that the unit is 20 minutes away.
Coordinate photographer / gather photos / get the unit rent ready. 3-5 hours?
20 minutes there, 20 back and 20 mins showing. 1 hour minimum, each time you show. Ten showings = 10 hours.
You likely got more than a couple applications, so let's say an hour per each tenant screened. 3 hours.
Negotiate lease / term / details. 1 hourCreate security deposit account / distribute executed lease materials. 1 hour
So on a average day you're probably spending 18-20 hours minimum to place a tenant. Let's say that place rents for 950 (probably not too far off the average). $475 / 20 = 23.75 an hour. Even if you charge the full month rent that's $47 /hr. Once you deduct the income taxes you pay, software to stay open, potential office rent, insurance, gas / vehicle expenses, etc. you quickly see how it's just plain difficult to see where a PM makes money here.
Don't take this as a counter to you specifically, David. Your post was just an easy one to quote. This is for anyone who bounces on this thread and thinks paying 1/2 or a full month to a professional PM firm to place a tenant is too much. I'd say most of the time we are losing money, unless we get lucky and find a tenant in the first few showings. I'm definitely not targeting $24/hr to operate my company with all the liability we face. Need to bring in more than that to make it worth it.
Devil's advocate point here for those saying that a PM that charges a renewal fee (and by that logic isn't "chasing away tenants") is the preferred option:
You could very well be incentivizing the PM to keep crappy tenants (which sounds like the case for @Edward Brewington) because the PM wants a quick and easy lease renewal fee instead of dealing with the hassle of replacing tenants - which as I mentioned is not difficult to take a loss on as a PM.
6 eggs in one hand, 1/2 a dozen in the other. All about perspective, trust and the relationship with the PM... - Property Manager · Groton, CT · Member since 2017 · 130 posts · 81 votes6y
@Filipe Pereira what a great break down! You forgot about the 60% no-show rate though! Ugh!
- Rental Property Investor · Torrance, CA · Member since 2017 · 33 posts · 35 votes6y
Yeah.....I've known for some time that this PM is not working in my best interests.
Yes....the tenant pays each month, but since he's a contractor, his pay is erratic and he's been late several times. Likewise, his kids seems to be doing silly things like putting lotion bottles in the toiled.
The PM did not hire quality contractors or do a thorough enough job because immediately we had issues with the pipes under the kitchen sink, the toilet (before the lotion incident) and the outdoor lawn faucet......this is after I spent well over 7K to remodel the whole place after the previous renter moved out. I created an attic room as well to give more storage or an extra room as well.
I asked for licensed contractors but I'm not sure the work was quality because I would think they would bring any possible problems to my attention. It seems that they were ignored. That's a problem of not being physically there to check their work or to look at issues myself.
I really enjoyed reading your comments Filipe because it shows I have a lot to learn.
I told the PM I'll be moving on after this contract....I could not give a 30 day notice because they would charge me fees for leaving early so I have to wait until December to change PMs. Lesson learned!
Thanks.
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes6y
@Edward Brewington Do you have a breakdown on the other fees the property manager charges? That will help give some context because PMs have different pricing structures.
For instance he may charge this fee, but may not charge full market rate monthly % on the gross rents and their lease up fee may not be a full month, making this fee not sound that outrageous, etc...
- Rental Property Investor · Torrance, CA · Member since 2017 · 33 posts · 35 votes6y
Here you go:
Leasing 100% of 1st month's rent
Monthly management 9%
Maintenance Oversite 15% (only billed if job is completed)
Legal $329 start or legal process for non payment of rent. $350 for 30 day notice. $200 for written. Eviction TBD
Hourly $40
Tenant move out $50
Lease Renewal - $99.00 (Found out my contract says $99 but they recently raise new owners to $250)
Tenant Late Fees 25% of tenant late fees is paid to MPM
Deed Purchase $50 (only if not provided w/management agreement)
Administrative Billing - Not to exceed $35 per tansaction, unless biling is charged back to tenant, then the agreed upon oversight fees will apply. (utility/municipality charges)
Minumum Escrow Account $300 with additional $100 per month until escrow reaches $500
Owner will pay a penalty of 1% interest/month on any negative balances in accounts over 30 days
Owner will pay a $375 documentation fee on any Section and tenancy
***As you can see they charged me the new owner renewal fee instead of what my contract says.....they did reverse this, but I just said...ok....but I'm moving on after this contract is over. They said I'd have to pay fees if I break the contract early. There is no 30 day notice.
- 6yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
Filipe Pereira was right on point with his analysis and I only wish every property owner would take the time to read his post, to better understand the PMC business. Too many owners are penny-wise looking for the cheapest PMC, but dollar-foolish because you ALWAYS get what you pay for.
I'm guessing your property is in Detroit, so the only addition I can add to what's been posted already is that Renewal Fees, and most PMC fees, should correspond to the market where the property is located. It takes a lot LESS resources to manage a class A property than a class C property. Most of the City of Detroit (not to be confused with Metro Detroit) is class C. Of course class C properties imply class C tenants - which are not fun to manage as nothing is ever their fault or responsibility.
Regarding the fees you posted, most of them are common for the City of Detroit market, except:
1) "Owner will pay a $375 documentation fee on any Section and tenancy" - I think you mean they are charging a flat fee to deal with the extra headaches for setting up a Section 8 lease.
2) Legal Fees: are the $329, $350 and $200 progressively added together? If so, that's reall high. We tell our clients their fees will be up to $400 to the Writ stage. If tenant pays during the process, the fee will be less.
3) No idea what Administrative Billing fee is for.
You didn't state what the maintenance threshold is that requires your approval. We've seen a lot of Detroit PMC's deliberately break a big job down and send multiple bills under the threshold, so they can bill without owner approval.
Logical Property Management4.9451 Reviews - Rental Property Investor · Torrance, CA · Member since 2017 · 33 posts · 35 votes6y
I'm copying this directly from the contract.....that was the outline of costs on the contract I wrote.
You're correct. It's in Warren, Michigan, basically Detroit. It is a C class neighborhood, but the previous tenant I had when I first bought it was quite responsible; rent always prepaid, few issues and quickly resolved, and just a hard-working family man. At that time, I corresponded with him directly to make a smooth transition when I took over the property, and eventually got a PM....so I built up a relationship with him. He stayed there for almost 2 years under me. The PM at first did not have much work to do with the previous tenant because he was stable....that last about 2 years.
Here is what it says exactly about maintenance:
"Owner hereby authorizes the Manager to approve all work orders that are under $200, anything above said amount will require approval of the Owner within a 72 hour period after notice (entered into the system). In the case where the work order has yet to be approved or declined withing the 72 hours, the manager has constructive acceptance and is authorized to approve the work order. the work shall only commence if there are adequate funds available in the account with the Manager. Failure to have sufficient funds will result in a delay of the work being performed. It is the sole responsibility of the Owner to keep sufficient funds in the Manager's account. Manager shall not be liable for but not limited to, any injury, damage, loss rent etc. from failure to perform work order not yet authorized by the Owner. (If tenants are responsible for a portion of the repair, amount will billed to tenants ledger)
Out of curiosity, what kind of cost structure should I expect in a class c neighborhood?
Do you think this PM is warranted to raise the renewal to $250 a few months ago? I just think it is excessive.
To me, the most important thing is "who" you put in the property that makes the property an asset. My property I had in Las Vegas had an outstanding renter who I worked with during the crash (back in 2010 until I sold it in 2017). No issues other than a boiler issue that I simply replaced. The renter made that property an asset!!! Of course, that property was a better neighborhood, a class B place, 3br/2ba, two story SFR.....so yeah a different circumstance. Screening tenants is the most important aspect to being a rental property owner....no doubt about that!!!
- 6yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
@Edward Brewington this makes no sense:
"In the case where the work order has yet to be approved or declined withing the 72 hours, the manager has constructive acceptance and is authorized to approve the work order."
So, if you DECLINE a work order, they can still approve it and charge you for it? We do understand the 72 hour stipulation for an owner to respond or they can approve it, because many owners don't respond quickly, or at all.CLASS C COST STRUCTURE: this still depends on the market as costs will most likely be different in Detroit versus Los Angeles, etc. For Detroit, these costs are within normal range except for the ones I've already questioned.
Increasing the Renewal Fee must be done within the framework of the management contract. If the contract does NOT have a provision that allows them to raise their fees, then they cannot legally do it without your written agreement - else they've violated their own contract, which may allow you to terminate it immediately without penalty.
In our opinion, the most important issues for a PMC regarding Class C tenants are:
1) Tenant screening to avoid bad tenants (it's important to understand that a Class C property will attract Class C tenants, so great screening is needed to weed out bad prospects. A "good" prospect will be relative to the Class C tenant pool.)
2) Robust processes to address past due balances
3) Clear policies & procedures regarding maintenance, so issues are handled promptly AND tenants are held accountable for damages they cause.Logical Property Management4.9451 Reviews - Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes6y
@Edward Brewington
How much are rents? This seems “reasonable”, I guess. But I agree that it requires very little work for them.
- Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes6y
@Edward Brewington
After reading through the comments I now have a problem with this PM. They are charging you $250, not raising rents, and are recommending renewing a tenant that doesn’t pay on time quite a bit AND is damaging the property? I don’t think I’d want this tenant or this PM.
- Rental Property Investor · Torrance, CA · Member since 2017 · 33 posts · 35 votes6y
@Anthony Wick Yeah....I came to the same conclusion. The rent at the moment is $950 a month and the mortgage/principal/insurance/PM fee are not that much since I paid almost half of what the property was worth at the point of sale. The passive income is very good.....just some headaches in the last year.
I need to find a better PMC and I think I found one.....just need to finish this contract.
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