Property Management Fees: Conflict of interest?
Property Manager · Houston, TX · Member since 2020 · 7 posts · 11 votes
Property Management Fees: Conflict of interest?
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Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes
5yWe charge 10% for property management, one month's rent to place a tenant, and don't have any other fees @James Ma. Almost any other type of fee can be twisted into a conflict of interest, or the "perception" that we are doing something just to make an extra buck.
I don't want that misstrust, or the perception that we may be doing something one way merely to benefit us, so we just don't use a fee based model. There are plenty of property managers here in Connecticut that do, however.
"Beware of PMCs that don't upcharge maintenance / repair items" @Bob Collett? LOL, that's a good one. The PMC should just send the invoice that their contractor supplied. Problem solved.
As for late fees - here's a suggestion. If the PMC collects a late fee on a tenant they placed, the owner keeps it. If it's an inherited tenant, the PMC keep it.
Fair is fair, but beyond that life circumstances can change from when a tenant was placed to the current day. Job loss, medical issues, etc. There is risk in REI and if you're concerned about not getting the $75 late fee, don't be. Be glad that the PM was able to actually collect the rent!
42 Replies
- Burnaby, BC · Member since 2017 · 283 posts · 268 votes5y
I've hired a property manager before to manage my primary when I moved away for work and was pretty displeased with the whole experience.
Conflicts of interest that popped up in my mind:
1 - they charge a lease up fee for new tenants (1/2 month rent) so its actually beneficial for them if the tenant leaves. There was some forgiveness if they left before 1 year but after that it would be fair game for them.
2- Markups on any repairs. I had an extreme charge for replacing a battery in my fire alarm (tenant complained the alarm was going off and not sure why they didnt just tell the tenant to change the battery as I had done it myself before...) so they said they were going to send someone to resolve. Fine, but then I get a bill for $200
3- Lack of perks for PMs to maximize rent. Since they only took 8% of rent, increasing rents don't make much of a difference for them if its a small increase (ie $20/mo would be about an extra $220/year for me and only $20 for the PM company) so I had to stay on top of them to do the increases annually as they didn't seem to care.
Those were the biggest concerns for me.
The icing on the cake was they botched the moveout inspection by signing off on the tenant leaving saying the property was okay but then we found the blinds were bent (tenant taped it with scotch tape so it would look okay but once removed was clearly bent), a washroom door handle lock was no longer working as it was broken, there was damage to the FOB (more than wear in tear as there was a hole in the button like it was stabbed with something sharp) and there was also damage to the granite kitchen countertop (not even sure what chemical was cause it to become rough in a spot). I had to complain about this before they apologized and said they would inform the tenant that the damage deposit would actually have deductions. The tenant ended up suing us over it since they said they had a moveout inspection signed off on as having no damage, and the PM company tried to get me involved and I simply told them that I hired them to do the management and the move-out inspection was their job so its really none of my business to get involved in the law suit - I have no idea what happened in the courts.
- Property Manager · Plantsville, CT · Member since 2016 · 84 posts · 66 votes5y
I have internally debated who should get the late charge for years. Currently, all late charges at my management company get passed on directly to the property owner. My logic was just as you posited. However, what we just went through and still going through with this pandemic the burden on our collection process increased 10x. More delinquencies, more calls, more conversations with tenants, more payment plans, more interpreting executive orders.
I am thinking of doing a hybrid process where the late fee is split between owner and property manager. Once the dust settles on this nightmare I will make my final decision.
- 5yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
We used to charge the same percentage on Late Fees, as we did on rent. After running numbers that covered several years, we found we were losing money on chasing late rents. So, we changed to a 50/50 split with owners.
@James Ma some comments:
1) This will always be a point of contention between PMC's and owners, unfortunately. We used to charge a Renewal Reward Fee of one month rent to owners - only if we were successful in getting tenants to renewal for a 3rd year. Guess what? Numerous protests from owners that other companies only charged an annual flat renewal fee! Also, if we had to evict a tenant in the middle of the 3rd year, eveyone wanted a refund.
*What we learned: owners are NEVER satisfied.2) PMC's can't survive without markups for maintenance. $200 to change a smoke detector battery is insane! Wondering if there was more to it or if you're in a market with crazy high labor costs.
3) A good PMC should provide a market analysis for lease renewals and vacancies.
Sounds like your PMC in general was a bit unorganized and lacking in the proper systems.
Logical Property Management4.9459 Reviews - Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes5y
I don’t use a property manager so that may make me biased but there are a few that raise eyebrows for me. I’ll list them in order.
I had a friend who wasn’t getting any applications but a lot of interest in the property. It was a duplex he was still living in and one of the applicants reached out to him questioning a 300 fee to the pm on top of rent and deposit on move in. My friend was already paying a 1/2 months rent and found this extra cost was scaring people off so he fired them.
A re-leasing fee, there really isn’t much to this more than an inspection and some new paperwork. A couple hundred for your time is fine but some charge way too much.
Markups on maintenance just encourage maintenance and make the pm more likely to agree to repairs or upgrades when they aren’t needed. These costs can add up quickly and kill your profits.
I think the owner should keep the late fee but am not completely against a 50/50 split. You selected a tenant that is late so the owner should be compensated.
After complaining about fees though the pm does need to earn a profit or they won’t be around long. I think fees like this exist so that when we are shopping we can be impressed with a low monthly expense but I really question what this monthly cut is for if they are going to charge every time they do something. I would be more interested in just a higher % of monthly rent as I see this aligns our interest. If I don’t get paid they don’t and if they can keep maintenance low and select good tenants they can ride out their monthly expense.
- 5yBob CollettPro MemberProperty Manager · Brecksville, OH · Member since 2014 · 486 posts · 464 votes
Hi Everyone
I am a property manager in the Cleveland area. I always keep 100% of late fees. These cover just a portion of the cost of collections. Often, we offer to waive late fees if tenant honors their promise to come current.
With respect to maintenance, I charge a 15% markup. Most charge 30% markup or more. Beware of PMs who claim no maintenance markup... they might not be telling you the truth. I always suggest asking a PM what they typically charge for a hot water tank? What is minimum service call fee? What is typical cost for a new furnace? What is typical cost of an eviction?.
These answers will give a good idea of what the reality will beBob
- Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes5y
I am starting a PMC in Nashville and it is because of the many reasons listed here that we will be offering a unique pricing model for our services. I've noticed that managers seem to charge so many fees almost forgetting that they already get paid a percentage of the rent they collect. And they want to charge extra fees for doing their job.
the conclusion I've come to is charging a percent of collected rent with no fees. Perhaps 12%.
that seems to remove most conflicts of interest. If a tenant is paying rent late, that takes more time for me and my staff. So we are incentivized to get them to pay on time which is better for the owner. If they pay late, our over head gets more expensive. After all we placed the tenant, so it is our fault for an underperforming tenant. It's not easy to make tenants pay on time, but it is our job as the Professionals in the industry.
- Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes5y
We charge 10% for property management, one month's rent to place a tenant, and don't have any other fees @James Ma. Almost any other type of fee can be twisted into a conflict of interest, or the "perception" that we are doing something just to make an extra buck.
I don't want that misstrust, or the perception that we may be doing something one way merely to benefit us, so we just don't use a fee based model. There are plenty of property managers here in Connecticut that do, however.
"Beware of PMCs that don't upcharge maintenance / repair items" @Bob Collett? LOL, that's a good one. The PMC should just send the invoice that their contractor supplied. Problem solved.As for late fees - here's a suggestion. If the PMC collects a late fee on a tenant they placed, the owner keeps it. If it's an inherited tenant, the PMC keep it.
Fair is fair, but beyond that life circumstances can change from when a tenant was placed to the current day. Job loss, medical issues, etc. There is risk in REI and if you're concerned about not getting the $75 late fee, don't be. Be glad that the PM was able to actually collect the rent!
- 5yBob CollettPro MemberProperty Manager · Brecksville, OH · Member since 2014 · 486 posts · 464 votes
@Filipe Pereira I am curious... what are the typical rents in your market?
bob - 5yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
I think James Ma did a great job of outlining conflicts. I have a PM for one property. They don't charge a fee for lease renewal, they don't do mark ups on repairs, and they charge half a month's rent plus advertising costs when it becomes vacant. When it is vacant, they get nothing. They do charge the tenant a fee every month for some extra perks (optional). All of their fees are listed on their website for the tenants and owners which I like as it is transparent.
- Burnaby, BC · Member since 2017 · 283 posts · 268 votes5y
I self manage my rentals and I can see both sides of things for sure. I'm not necessarily saying these fee structures need to change as I can understand how it works well in theory if the property manager is doing their job well and has their client's best interests at heart since this format of fees minimizes the costs but due to the conflict of interest I mentioned it has potential for the property manager to do things that are not in their client's best interest that make it more profitable for them.
I know leasing tenants does take a lot more time and effort so the idea of adding more compensation towards that action makes sense. But if I were a shady property manager it would not be hard for me to pick good tenants but are likely to leave in 2 years and then find a new tenant again to pick up the 1/2 month of rent fee.
Same for maintenance and repairs, I understand that's more work (although not much to call a trade) so there would be time costs associated but the trades used by the property manager may not be the best or cheapest if they work with someone who gives them a lot of kickbacks or in my case marked up an extreme amount on the work.
As mentioned by others above, I think the best structure and one that I plan to use for my syndicates as well, I would rather sign a term contract with a flat % fee of gross rent to cover the property management services including lease ups, maintenance, evictions, etc. This removes most conflicts of interest, other than hiring of trades for repairs, encourages the property management to find great long term tenants, and also helps align the interests of the property manager with the landlords/investors since if rent is not received, rents are not maximized, or there is vacancy, that also impacts the property manager.
This may result in a higher overall expense to the investor at the end of the day depending on the gross rent fee % increase as the PM should charge a higher % than normal to cover their time for dealing with potential issues but its important to me that the financial interests are aligned when building a team. It's true that different people will prefer different expense structures and you can't please everyone but that's what makes the most sense to me.
- 5yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
@Leon Green Great Post.
Property Managers have Fudiciary Duty to their clients.
It's unethical to charge late fee from tenants and not delivering it to the property owners.
If I'm the property owner and I detect this kind of unethical practices.
I will make sure I confront the property manager and amicable end the contract agreement.
NETWORTH BUILDERS5236 Reviews - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes5y
The true cost of 3rd party management is in managing vacancy and maintenance costs. Lease up fees should be traded for occupancy bonuses to align interests. Everything else is just noise (including the management fee).
- Member since 2019 · 182 posts · 45 votes5y
@Leon Green I think the whole business revolves around conflict of interest. Property manager makes more money of you have more maintenance issues (most have their maintenance team), they make more money the more turnover due to maintenance and move in fees. Recent property manager encouraged me to have pets and they rented to someone with a dog and cat and when I asked for pet rent they told me they keep it.
Honestly, I am shocked. I feel like they are a scheme. There is nothing I see that aligns with owner interests.
- 5yDan DiFilippoBusiness MemberReal Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votes
@Wale Lawal unfortunately, you don't know what you're talking about.
- 5yBob CollettPro MemberProperty Manager · Brecksville, OH · Member since 2014 · 486 posts · 464 votes
In Ohio, property managers must be licensed real estate agents, and property management agreements must be in writing.
All fees are clearly described in the agreement and should be discussed with the owner before entering into Agreement.Consider that if average rents are $2000 per month, a 10% management fee would be $200 per month.
However, in a market where the average rents are $700 permonth the fee would be $70 per month.
I have had a few clients (not many) think a 15% markup was unreasonable. The truth is, a 15% markup on maintenance is barely break even. I would not accept a client who has such unreasonable expectations.
I could never properly service my clients property needs on $70 per month. It is important and required that all fees be explained before entering into an agreement.This discussion of fees is interesting, but the focus should be on meeting goals and maximizing profits for the owner... not on avoiding fees for services.
For example, what if the manager gives late fees to the owners, but places tenants without regard to credit history. Not only will the tenants fall behind on their rents sooner rather than later.., but they will likely never pay their late fees.
The management fees should be designed to meet the likely needs of the property under management. There is a huge difference in the management needs of a suburban 25 year old condo, vs the needs of a 110 year old inner city property in a neighborhood where credit scores seldom exceed 550 and where the property has loads of deterred maintenance.
- 5yTracy StreichPro MemberReal Estate Broker · Tulsa- OKC Oklahoma · Member since 2017 · 868 posts · 801 votes
What is really boils down to is - are you willing to pay someone else to do something you are not willing to do or do not want to do. When I go out to eat and pay for a meal is that a conflict of interest? No I am paying them for the convenience and time of not preparing my own meal. That value is different to everyone. You may pay for McDonalds and be happy with that meal. I may not be and want to go to a fine steakhouse. We both got what we wanted and paid accordingly. If you manage your own house great, if you go with cut rate PM you get what what you pay for. If your PM charges more, keeps fees and gives you great service and that makes you happy, that is also perfect. None of it is a conflict of interest. If you don't trust your property manager is working in your best interest you have either the wrong PM or the wrong expectations of what your PM is doing or should be doing. All PMs are not evil. They can be quality service provides and you can mange your own property and have success. These are not mutually exclusive despite many of the responses you see in the forums.
- Property Manager · Member since 2020 · 108 posts · 68 votes5y
@Leon Green
Hi Leon
I am a property manager in Tampa and Orlando
For a single family home we typically charge the following
10% management fee
75% first months rent
No repairs mark ups
The late fee charge is typically split 50/50
Personally I am not a fan of charging mark ups for repairs as it can create a sense of distrust with the owner.
A good property manager will get the highest rent because it’s helps both the company and the owner. I manage majority b and c class properties so this could have an effect on the pricing .
For multi family deals it is completely different
- Property Manager · Houston, TX · Member since 2020 · 7 posts · 11 votes5y
All, thank you for all of your feedback. At the end of the day, operating a 3rd party property management business that manages 100s or 1000s of homes is expensive to operate with excellence. When determining what fees to charge our clients I have historically focussed on (1) fees that can be connected to value we bring our clients (2) eliminating as many perceived and actual conflicts as possible (3) fees that allow us to staff and operate our business with excellence and (4) keeping things as simple as possible.
- 5yTim JacobPro MemberReal Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
The problem with the flat fee is the pm can be screwed by an owner who gives them a property with a lot of maintenance issues. Just like a home inspector a lot of problems can not be seen when they take it over. A bad BRRR reno is a perfect example of this where the reno has great finish work but plumbing, electric, etc. A pm can't be at the property inspecting work done for the first 3 months of managing it a day per week for 100 per month. In regards to the late fees I pass them along but the conflict of interest goes both ways. In general 12% sounds right and maybe less for c grade or higher if its 8% mgmt 3-4% leasing and the rest in markups but there needs to be safeguards. If a pm tries to slide in hidden fees other ways id be more concearned. Its based on time. A pm deserves a certain hourly rate to be compensated. The fees need to reflect that.
- Property Manager · Burlington, NC · Member since 2016 · 40 posts · 36 votes5y
My firm takes a very simplistic approach regarding fees. Our owners only pay a commission on rent collected. We do not charge lease up fees, renewal fees, and there is no mark up on maintenance as we use 3rd party vendors. However, we do keep our application fees and late fees. This has been our model for over 40 years.
It is a no brainer, in my opinion, that a PM would keep applications fees. There is a cost associated with this such as 3rd party fees to run credit/background/criminal and of course labor for the time spent processing. Our firm does make a little on this fee but roughly 1/2 is eat up by the cost to run them.
Late fees are certainly a more debated topic regarding fees. For our residents, rent is due on the 1st and late after the 6th. Our firm keeps late fees, again, due to the cost associated with collecting late rent. This includes reaching out to tenants via email/text/phone calls, making payment arrangements, and even posting notices on individual doors. Often, it is the same problematic tenants that owners are not willing to evict that we end up chasing.
Our firm pays owners in the middle of the month and at the end of the month. Of our 800+ doors, 95%+ have all paid before we cut the first owner checks. So, our owners are rarely affected by late payments. If a tenant does ends up being evicted, we do not charge our owners fees for filing or appearing in court.
- Property Manager · Charlotte, NC · Member since 2012 · 135 posts · 156 votes5y
I am a property manager. I do not think I am in the minority if I say I greatly prefer for all our tenants to pay on time, have no maintenance calls, and stay in the property with slight renewal increases annually, indefinitely. The "incentives" noted above to have a tenant move out early so we can charge another leasing commission and marketing fees, or for all tenants to pay late so we get more income from late fees is no incentive to me.
In this business, all we have is our reputation. Negative reviews can break a business today. It creates a lot more work for us if we have to send late notices, send certified letters, make phone calls and knock on doors because a tenant is ignoring us. I get very stressed thinking about the potential eviction. There is a lot more work dealing with move out inspections, coordinating make ready work, marketing, replying to ad inquiries, showing the property, processing applications, etc. I would much rather have them stay and give up the half of one month rent we charge for leasing commission and the $100 max for marketing. There is more stress to make the owners happy by choosing a quality tenant. I vouch for the tenant to the owner, so I take some responsibility in how they perform. I truly treat our properties as though they were our own. I recently urged an owner to sell a duplex because it was nothing but trouble. We had maintenance out weekly for various leaks, maintenance calls, etc. It was a bad investment. I knew we would lose money by urging her to sell (no, we did not represent her on the sale. She already had an agent). It was the best advice for her, not us.
The fact is, having a PMC is similar to having an insurance policy. You pay for when things go bad (eviction, move out's, repairs, vacancies, etc.). Anyone could manage a rental remotely if their tenant paid on time, stayed indefinitely and never called in for maintenance. There is more work involved when things go bad, so why would the PMC not charge more for these services? I believe in fair pay for fair work. Yes, the owner gets hit the hardest when things go south, but that is part of the business. If the owner were self-managing, they would still be hit hardest during these times. They choose to pay a manager to help them deal with it so they don't have to. All this talk about beating the owner when they are down is BS. Be grateful you have someone working for you to help turn things around.
- Property Manager · Burlington, NC · Member since 2016 · 40 posts · 36 votes5y
Originally posted by @Steve Maginnis:I am a property manager. I do not think I am in the minority if I say I greatly prefer for all our tenants to pay on time, have no maintenance calls, and stay in the property with slight renewal increases annually, indefinitely. The "incentives" noted above to have a tenant move out early so we can charge another leasing commission and marketing fees, or for all tenants to pay late so we get more income from late fees is no incentive to me.
In this business, all we have is our reputation. Negative reviews can break a business today. It creates a lot more work for us if we have to send late notices, send certified letters, make phone calls and knock on doors because a tenant is ignoring us. I get very stressed thinking about the potential eviction. There is a lot more work dealing with move out inspections, coordinating make ready work, marketing, replying to ad inquiries, showing the property, processing applications, etc. I would much rather have them stay and give up the half of one month rent we charge for leasing commission and the $100 max for marketing. There is more stress to make the owners happy by choosing a quality tenant. I vouch for the tenant to the owner, so I take some responsibility in how they perform. I truly treat our properties as though they were our own. I recently urged an owner to sell a duplex because it was nothing but trouble. We had maintenance out weekly for various leaks, maintenance calls, etc. It was a bad investment. I knew we would lose money by urging her to sell (no, we did not represent her on the sale. She already had an agent). It was the best advice for her, not us.
The fact is, having a PMC is similar to having an insurance policy. You pay for when things go bad (eviction, move out's, repairs, vacancies, etc.). Anyone could manage a rental remotely if their tenant paid on time, stayed indefinitely and never called in for maintenance. There is more work involved when things go bad, so why would the PMC not charge more for these services? I believe in fair pay for fair work. Yes, the owner gets hit the hardest when things go south, but that is part of the business. If the owner were self-managing, they would still be hit hardest during these times. They choose to pay a manager to help them deal with it so they don't have to. All this talk about beating the owner when they are down is BS. Be grateful you have someone working for you to help turn things around.
Just wanted to say that I appreciate your thoughtful response on this topic. I could not agree with you more. Often people see PMs as fee hungry vultures but most really do not understand what we do on a daily basis. In truth, a tenant that pays on time, stays put for years, and hardly ever has maintenance issues is ideal for the PM and the owner. If your PM is constantly chasing fees... I recommend you find a new one!
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes5y
I've recently hired /kept on a PM of a new acquisition after 18 years going solo and I appreciate what the PM does. Their fee of 8.25% with no lease-up or renewal fees but a 10% repair/maintenance mark-up is more than fair. This is a multi community of 19 units.
To help them, we use them for landscaping and snow removal, winterizing and such. I understand they need to earn a living, too, but wish they would get more than 1 bid or at least a breakdown of larger cap ex proposals after their semi-annual compliance inspections. 3 windows and 2 patio sliders have condensation. Our glass guy recommends having them replaced at a cost of $4200 plus markup and sales tax. Oh ok...
We owners overall are cheap but I imagine those of us that have done it on our own can appreciate what the job entails more than those who haven't done it before.
- 5yTim JacobPro MemberReal Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
I think this might be the second ever pro pm thread I have seen on bp. I hope there are more. I am really enjoying it being a pm. I feel like the most negative stuff is owners getting pm in D grade areas where pm is going to take all the profits and most pms won't manage there so they get new or bad pms and are salty of the whole industry after a bad experience. Its nice to hear the other side of the story.
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