Property manager asking to be an authorized signer
Real Estate Agent · St Petersburg, FL · Member since 2014 · 116 posts · 38 votes
Property manager asking to be an authorized signer
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Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
5yHard pass. I never give anyone control of my funds. Not even my wife lol. Trust your gut on this one.
The PM should have their own business or escrow account to hold security deposits and you should be billed for expenses, not have the PM withdraw your money and pay them for you. At least that's the way I'd handle it.
36 Replies
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Mike L.:
@Joe Splitrock
I agree with Joe - if you use a reputable PM company I don’t think you increase your risk and can save yourself the time of writing checks each month. In my case I own the bank account but have granted check authority to the head of accounting at the PM company who reviews all checks before they go out. This does not negate the need for due diligence in terms of auditing monthly financial statements to make sure cash ties out and you understand what any checks written on your behalf were for. In the end, there’s risk regardless how you do it and if your legitimately worried about your PM trying to scam you I’d recommend finding another PM company that you feel you can trust. I’d focus more on which PM company you feel you can trust over the mechanics of how the money moves around.
This is a great point that you save time. My guess is this comes down to people not having experience with accounting. It is very common for companies to grant check writing capability to multiple people in an accounting department. Could they steal? Of course they could, but when that happens people are criminally prosecuted for embezzling. An untrustworthy PM company could do even more damage regardless of whether they have signing rights to your bank account. At least if they are working out of your bank account, you have full visibility to what is happening and you can catch problems quickly. If they are collecting rent into their own account, good luck getting that money if they refuse to give it to you. PM just subtract expenses out of the rent they collect, so if they are going to take money, they can take it either way. The difference is you can't see where it is going and you can't stop pay a check. Honestly, using an owners checking account is MORE risky for a PM company, which is probably why most PM don't do it. A PM wants full control of the money flow for THEIR own protection. Of course all the PM are saying "don't do it", but not for the owners protection...
- Rental Property Investor · Madison, WI · Member since 2019 · 32 posts · 28 votes5y
@Joe Splitrock
And further, when you own the account you can take away that signing authority, move money, close the account etc. as easily as you granted it if you think something inappropriate is going on. If the money is not visible to you then your main recourse likely involves attorneys.
- 5yCalvin OzanickBusiness MemberProperty Manager · Janesville, WI · Member since 2017 · 707 posts · 297 votes
This is something we have done with clients of ours. For our clients, we have done this for a litany of reasons. This often helps them secure lending, insurance or a better stronghold when investing out of state. This is a huge bonus to them as long as it is structured properly. If you have questions, feel free to let me know and I can chime in on our personal experience.
Wisconsin Property Managers4.7413 Reviews - 5yBonnie LowPro MemberLender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
Absolutely not. And I would find another property management company ASAP because if they're asking you to do that they're either shady, or under capitalized, or both!
- Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes5y
@Alexi Schreier where is this ? Again RUN,
- Real Estate Agent · St Petersburg, FL · Member since 2014 · 116 posts · 38 votes5y
@Bob S. greater Cincinnati area
- Rental Property Investor · La Quinta, CA · Member since 2016 · 103 posts · 29 votes5y
@Alexis Schreier
No. Just, no. Former business banker here.
If this came across my desk from one of my clients I would have rejected it without a letter of clarification from both parties as to why this was necessary and why traditional alternatives were not acceptable.
And I still would’ve asked the bank’s litigation risk dept. to sign off on it before updating sig cards to protect myself.
You need to understand that adding a party as a signer to an account adds a tunnel to the account for any other party coming along later. That means that your account and the funds therein become targets if somebody goes after the PM company.
Some will tell you that’s not true. They’ll say simple signing authority doesn’t increase exposure - that only account ownership does. My practical experience tells me otherwise. All it takes is for the bank to receive a subpoena for a list of all lines business pertaining to or accessible by the PM firm and your account can be named as part of a case. A claimant may not prevail, but who wants their funds locked down pending a ruling?
Even if your PM is 100% honest and forthright, they still can’t guarantee somebody doesn’t come after them. And let’s be frank, you can never guarantee that even a forthright PM won’t find itself in a jam and act stupid with your money.
If you want proof of this, invert it. Ask the PM to put you on their corporate operating account as an authorized signer, you know, to streamline transactions and increase efficiencies and all that. See what they say.
Or try to sell your tenants on the idea. Tell them you need to be added to their checking accounts as a signer so you can just withdraw the rent each month to save time. I think they’d see this as a risk and tell you no thank you, just do an auto-debit instead.
There are PMs that operate this way- but it’s a no go for me. Especially since there are many safer alternatives. PMs should have escrow accounts for contributions from and distributions to you. Use those accounts or use your own escrow service for draws on or for exceptionally large amounts.
Hope this helps.
- Rental Property Investor · Austin, TX · Member since 2016 · 361 posts · 394 votes5y
I can't speak to the legal risk as mentioned by @Travis Moe, but frankly, I find that others are blowing other risks out of proportion. Your PM is already handling all your revenue. Your PM is already perfectly capable of committing fraud w/o having signing authority on your account. Your PM also will hold all your deposits, whether that's in their own account or yours (w/ signing authority). It might not be the setup that I would choose given the option, but I also don't view it as an immediate red flag. I work with one PM that operates this way, and two that don't. Especially as you move into bigger properties, this type of thing becomes more necessary. I wonder how many PMs operate 100+ unit apartment complexes w/o using a setup similar to this?
- Real Estate Agent · St Petersburg, FL · Member since 2014 · 116 posts · 38 votes5y
Originally posted by @Travis Moe:
@Alexis Schreier
You need to understand that adding a party as a signer to an account adds a tunnel to the account for any other party coming along later. That means that your account and the funds therein become targets if somebody goes after the PM company.
I did not know this, thank you for bringing it up and for the detailed response.
I didn't realize it exposed you even further to third parties that may go after the PMC!
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Travis Moe:
@Alexis Schreier
No. Just, no. Former business banker here.
If this came across my desk from one of my clients I would have rejected it without a letter of clarification from both parties as to why this was necessary and why traditional alternatives were not acceptable.
And I still would’ve asked the bank’s litigation risk dept. to sign off on it before updating sig cards to protect myself.
You need to understand that adding a party as a signer to an account adds a tunnel to the account for any other party coming along later. That means that your account and the funds therein become targets if somebody goes after the PM company.
Some will tell you that’s not true. They’ll say simple signing authority doesn’t increase exposure - that only account ownership does. My practical experience tells me otherwise. All it takes is for the bank to receive a subpoena for a list of all lines business pertaining to or accessible by the PM firm and your account can be named as part of a case. A claimant may not prevail, but who wants their funds locked down pending a ruling?
Even if your PM is 100% honest and forthright, they still can’t guarantee somebody doesn’t come after them. And let’s be frank, you can never guarantee that even a forthright PM won’t find itself in a jam and act stupid with your money.
If you want proof of this, invert it. Ask the PM to put you on their corporate operating account as an authorized signer, you know, to streamline transactions and increase efficiencies and all that. See what they say.
Or try to sell your tenants on the idea. Tell them you need to be added to their checking accounts as a signer so you can just withdraw the rent each month to save time. I think they’d see this as a risk and tell you no thank you, just do an auto-debit instead.
There are PMs that operate this way- but it’s a no go for me. Especially since there are many safer alternatives. PMs should have escrow accounts for contributions from and distributions to you. Use those accounts or use your own escrow service for draws on or for exceptionally large amounts.
Hope this helps.
So you are saying if a PM company gets sued, that my money is safer in THEIR bank account than it is in MY bank account, with them listed as a co-signer?
Your example isn't a fair comparison. The PM is asking for a property specific account, not access to every account that he has. Any transactions in or out of the account would be documented specific to that business. It is common for businesses to have people authorized as signer on their accounts to manage their property. It could be employees, a bookkeeping company or a third party management company. If a rogue employee writes fraudulent checks to themselves, the account owner can cancel the checks and go after the employee for embezzlement.
The reality is that nothing stops a PM company from collecting rent and never giving you the money. This is no different a risk than someone having signing rights on an account. Either way, you are placing trust with the PM and they could take your money. As long as you are taking distributions out of the working account on a regular basis, the risk would be contained to a months worth of rent. Again, no different than your PM collecting rents in their own account.
The key in any case is watching your business. People only steal from you when you are not looking.
- Investor · ND · Member since 2021 · 49 posts · 16 votes5y
What great insight! I am a complete rookie, about to hire my first property management and I want to make sure I clearly understand this (because my head is pretty muddy at the moment). So, when you hire a property manager, they should set up an escrow account specifically for that property? How then does the money get into your bank account? And what recourse do you have if they decide to hold funds?
I guess I read too much and would just like a clear, step-by-step explanation of how you believe it should be set up. I can see where we are looking at worst case scenario but I would rather worry about it now and get it ironed out than wait for a problem (which might never happen...). Thanks, Travis!
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