STR Hidden Management Fees

[Sara Kasper]

I'm in negotiations with a STR management company. The bit of their contract that has me concerned is that, per their contract, they can charge any fee at any amount and retain the money while also being in control of the rent pricing. I want them to have control of the rent pricing, so they can adjust it to make sense for the market and to optimize occupancy, but I'm concerned about the unlimited control over fees, which could be a conflict of interest. Example: If they upcharge the fees or base the fee as a % of the booking or an extra $100 per cleaning, it's revenue being collected in addition to agree upon 25% of revenue generated by the bookings. And/or if the overall price of the booking is no longer competitive because of the fees, they'll lower the rate instead of their profit on the fees. I'm fine if they need to upcharge a bit, but I'm concerned that they aren't sharing exactly what fees they are going to charge or how much, or if it is really at cost to them. They say they're just covering their costs with the fees they charge to customers, but they don't seem to want to share their pricing models or even a list of what fees they will charge. We've been trying to work on a solution, but the solutions they come up with keep the vagueness of the fees in place.

I can't tell what degree I need to be concerned about this, and would like your opinions as investors and business owners. 

[Pretty Khare]

Quote from @Sara Kasper:

I'm in negotiations with a STR management company. The bit of their contract that has me concerned is that, per their contract, they can charge any fee at any amount and retain the money while also being in control of the rent pricing. I want them to have control of the rent pricing, so they can adjust it to make sense for the market and to optimize occupancy, but I'm concerned about the unlimited control over fees, which could be a conflict of interest. Example: If they upcharge the fees or base the fee as a % of the booking or an extra $100 per cleaning, it's revenue being collected in addition to agree upon 25% of revenue generated by the bookings. And/or if the overall price of the booking is no longer competitive because of the fees, they'll lower the rate instead of their profit on the fees. I'm fine if they need to upcharge a bit, but I'm concerned that they aren't sharing exactly what fees they are going to charge or how much, or if it is really at cost to them. They say they're just covering their costs with the fees they charge to customers, but they don't seem to want to share their pricing models or even a list of what fees they will charge. We've been trying to work on a solution, but the solutions they come up with keep the vagueness of the fees in place.

I can't tell what degree I need to be concerned about this, and would like your opinions as investors and business owners. 

Looks like you are giving up too much power to the property manager and your cash flow will heavily depend on their ability manage your property well. I do not use property managers for STR , so can't speak to what is standard contractual language on costs. For LTR this is not a common language you find in property management contracts.

However have you considered managing the STR yourself. With advances in technology, it really doesn’t take much time (maybe 30 mins to an hour each week) to manage a STR. This will help you retain most of the profits from your STR. Checkout Robuilt on YouTube for tips to self-manage. You can also try getting the biggerpockets book Short Term Rental Long Term Wealth to learn to manage yourself. I think it is definitely worth spending some time to research whether self management is feasible for you as you can save 20-40% of gross revenue that these property managers usually charge.

[John Carbone]

Quote from @Sara Kasper:

I'm in negotiations with a STR management company. The bit of their contract that has me concerned is that, per their contract, they can charge any fee at any amount and retain the money while also being in control of the rent pricing. I want them to have control of the rent pricing, so they can adjust it to make sense for the market and to optimize occupancy, but I'm concerned about the unlimited control over fees, which could be a conflict of interest. Example: If they upcharge the fees or base the fee as a % of the booking or an extra $100 per cleaning, it's revenue being collected in addition to agree upon 25% of revenue generated by the bookings. And/or if the overall price of the booking is no longer competitive because of the fees, they'll lower the rate instead of their profit on the fees. I'm fine if they need to upcharge a bit, but I'm concerned that they aren't sharing exactly what fees they are going to charge or how much, or if it is really at cost to them. They say they're just covering their costs with the fees they charge to customers, but they don't seem to want to share their pricing models or even a list of what fees they will charge. We've been trying to work on a solution, but the solutions they come up with keep the vagueness of the fees in place.

I can't tell what degree I need to be concerned about this, and would like your opinions as investors and business owners. 

I definitely would not use that management company. A large majority of these companies are dishonest. If you are just doing one property it’s possible to self-mamage, but when you add more units, the complexity scales upwards and it becomes more difficult to manage from afar unless you have super reliable people on the ground available at a moments notice. I’ve learned this from experience, and I self manage locally for myself and family/friends in the Gatlinburg area. Management fees range from 20-40 percent (some 50 and above with hidden fees). Based on the information you provided, it sounds like they are doing a classic bait and switch, trying to offer a competitive 25 percent management fee, but they will most likely be adding hidden fees (based on the verbiage in the contract) in the long run to get closer to that higher end 40 percent. There should be better options (flat 20-25 percent). I would look for a smaller management company or find someone in the market that successfully manages their own short term rentals themselves who doesnt necessarily “need” the money like a bigger chain - it would just be an addition to their existing portfolio.

[Drew Sygit]

@Sara Kasper great catch!

Too many owners would have just gone with this.

EVERYTHING should be in writing and clear. 

Our LTR management contract is 13 pages long - to define everything, so there are minimal surprises. We don't have one fee that is arbitrary. They are all either a specific amount or percentage.

[Anthony R.]

I interviewed one of the discount national PM companies this week. I found their assumptive sales tactic irritating (for one thing, they wanted my checking account info after the first call to start moving things forward!), and when I read the agreement I was giving up pretty much all control over my own property, and they could charge the guest a fee I don't get cut of (so common and so immoral, imo).

Anyway, good on ya for giving the agreement the stink-eye.

[John Underwood]

Find someone else. 25% is too high without the other fees. Remember the PM works for you not against your wishes.

Talk with Collin.

[John Underwood]

Quote from @John Underwood:

Find someone else. 25% is too high without the other fees. Remember the PM works for you not against your wishes.

Talk with Collin.

Sorry that's if you are in the Pigeon Forge area.

[Dave Stokley]

I think some commenters are misunderstanding your concern. The PM is not reserving the right to adjust what they charge YOU, correct? Rather, they are reserving the right to add additional fees for guests and keep 100% of those fees as their revenue.

Here's what I would do if I were you:

1. Ask them for a link to their hosting profile or one of the properties they manage. Then you can go through the booking process and see what type of fees they are actually charging. 

2. Ask them for references from other clients, and ask those clients if they've ever had issues with this clause.

[John Carbone]

Quote from @Dave Stokley:

I think some commenters are misunderstanding your concern. The PM is not reserving the right to adjust what they charge YOU, correct? Rather, they are reserving the right to add additional fees for guests and keep 100% of those fees as their revenue.

Here's what I would do if I were you:

1. Ask them for a link to their hosting profile or one of the properties they manage. Then you can go through the booking process and see what type of fees they are actually charging. 

2. Ask them for references from other clients, and ask those clients if they've ever had issues with this clause.

They shouldn’t have to ask those questions to the PM, everything should be disclosed in the contract. at a minimum, the PM should include an example of what they should expect. If you are asking someone to hand over one of their most expensive/important assets, you need to be upfront. 

And it is still a charge to the owners if the PM charges hidden fees. The person renting nightly doesn’t care how the grand total gets allocated, they just care about final price. Homeowners who use PM’s that have these hidden fees get “taxed” by having the PM shift the income from “rental income” to “fees” which the homeowner doesn’t get a cut of the inflated fees. 

[Sam Cardenas]

Hi Sara, 

It sounds like you're getting nickled and dimed without any transparency. The best business relationships are the ones where both parties win and where trust is built through transparency over time. Find yourself a new manager or get properly aligned with your current one. 

Best, 

Sam

[Andrew Street]

@Sara Kasper when it comes to an STR Management Company, it should all be about transparency. You should have control over the money spent and the fees incurred. Of course, there will be expenses incurred in the business, however invoices should be provided describing what has happened. More than happy to connect and talk through this with you!

[Sara Kasper]

Thank you, everyone, for your responses! For clarity, the concern is, as John Carbone stated, where the income shifts from "rental income" to "fees" that are not charged to me but to the guest. I'm meeting with at 5:30 est today. Their current solution is to state that they will not lower the average daily rate below $200 without the owner's consent. This, I think, may still cause an issue because the occupancy rate could be effected. It's really starting to be sketchy to me that they won't outline exactly what fees they are going to charge and how much; I'm probably going to push for transparency before I make a decision. I'm really hoping we can get into an agreement. If anyone knows a company that will service Locust Grove, VA (Richmond was the closest option) Please let me know.

[Bonnie Low]

They're basically telling you 'don't worry about those other fees. We're charging them to the guest, not to you.' The problem with that (there are many problems) is that the guests will absolutely be comparing your listing to others who probably don't have those fees associated. I know I sure do when I'm looking at properties to book. Their arbitrary fees WILL cost you bookings.

[Bruce Woodruff]

Manage yourself! It's easy with all today's tools, even those just found on the sites of VRBO and AIR.

[Nathan Gesner]

Quote from @Sara Kasper:

I wouldn't agree to such a thing. Maybe it's time to shop around for a new manager.