A quick lesson on how much damage a bad PM company can do!

24 Replies | Cleveland, Ohio

I won't go into all of the details because I would have to write a book to explain everything, but a quick background: I bought 3 duplexes in Cleveland last year, hired a PM company (Northpoint Asset Management - avoid like the plague), found tenants and all was well... until it wasn't lol.

One of my duplexes is in a good part of Cleveland, right on the border of Lakewood (affluent city).  It's not B class, but solid C working class area.  My PM company filled the down unit within a month and a half - definitely slow for the area.  The up unit sat vacant for many months until my PM lady was fired for being bad at her job.  The new guy filled the unit within weeks - great work I thought!  Unfortunately he didn't do much due diligence on the tenant.  He was in his late 40's, horrible credit (not unusual for the area), no bank account (also not too unusual for the area), no rental references because he lived with family his whole time (BIG red flag), and not enough income to qualify for 2.5x rent.  Any one of these things by themselves may not be a big deal, but all together is a no-no for me.

Sure enough, 4 or 5 months into the lease he starts to slow pay.  A month later, both front and back door are kicked in by someone, the down unit lady is complaining about cars being parked on the lawn, loud noises, violent stuff going on, etc.  We fixed the issues and sent him the bill, which he happily did not pay.  The next month, I have to ask my PM company why the rent isn't turned in yet.  His reply, "Oh, I'm not sure, I'll have to look into that".  It was the 15th of the month - just an idea of how BAD these people are at their job.  I had to request that they initiate the eviction process.

A week later I got a call from the PM that the tenant was arrested, which is a breach of the lease (we don't allow convicted felons).  We communicated with the tenant in jail, arranged for his things to be removed from the building by his friends.  I thought the worst was behind me lol it gets MUCH better!  So we schedule to have his people come remove his belongings from the building.  My PM, in his infinite wisdom, thought it was a good idea to allow everyone to have access to the building and left it unlocked and had no supervision of the process.  I'm pretty sure most of you know what happens next!

So 4 days go by and I hear nothing from my PM.  I reach out asking for an update on the unit, asking if we have the ad up and looking for tenants.  "I'm not sure, I'll go by today and have a look."  Then I get a call later that night, "It looks like someone else moved in, I guess the ex-gf decided to move in and won't let me in."  Classic!

Needless to say, that PM got fired shortly after.  The next person they hired to replace him was a very nice girl, seemed like she was going to save the day.  It was too much for her, she quit a week later because of all the issues.  Then my PM company FIRED ME! haha I can't make this stuff up!  They said they had nobody else to handle my properties and it was best to part ways.  So I started to self manage.  I reached out to the tenant, who stated she had been paying the other PM in CASH (which is not allowed on the lease, or by the PM company).  Typical hood rat trying to get away without paying.

I started the eviction process immediately.  She never showed up to the hearing and we won the case by default.  We took back possession of the unit, not too bad of shape.  But wait, THERE'S MORE!  During her short, free stay, she decided to run ALL of the water nonstop for 21 days straight.  I received a bill from the water company for $970 (typically it is $50 - $70) and a sewer bill for $1,900 (typically $70 - $90).

Let's recap the damages here so you can see what type of risks there can be in real estate:

- Lost rent due to vacant/non-payment $3,750

- Replacement of doors kicked in $650

- Cost of eviction $450

- Cost of PM company (they had the balls to charge me still LOL) $750

- Cost of water/sewer bill $2,870

Total costs - $8,470

This property fully occupied throws off about $400 per month in cash flow, so this fiasco represents about 22 months worth of profit.  That's almost 2 years down the drain because of how bad the PM company managed the property.

All of this being said, I love real estate and take the lumps, learn the lessons and move forward.  I've finally passed 100 units this year and look forward to reaching 200 in the next year or so.  Don't let the dips deter you from experiencing the peaks!

Holy cow! Sorry you had to experience that. Who are you using now instead? How has your experience with them been? 

@Matt Motil

I tried so hard to find another property management company that I could trust.  I networked with tons of people and literally NONE of them had good things to say about who they were using.  So I decided to partner with someone who lived locally and do my own PMing for now.  I handle the advertising, pricing, contracts, setting up online rent collections and quickbooks accounting stuff.  I also handle all incoming leads and schedule the showings with him, he shows the units and signs the leases.  I've been able to fill most units in 2 weeks or less, often times getting 20 - 50 leads per ad in those 2 weeks.

This whole experience has proven to me that most people just don't care or are incompetent.  I manage student houses locally, so I know how to manage college kids and I know how to setup a process to handle things, but I didn't have any experience leasing to "adults".  I've been able to learn everything on the fly and put great tenants in my units, it's not that hard...  Pretty disappointing on the PM company side of things though.  They had really good reviews online!  Just goes to show, you really don't know until you're in the thick of things.

Wow sounds terrible. Might even deter someone from getting into investment properties. Sounds like your a seasoned investor what would you have done different besides the p.m. company? If this scenario was with a beginner investor how important is it to have cash reserves for vacancies and miscellaneous fees?

@P.J. Bremner , Lokal is who I personally use to manage my stuff. They have done a very nice job for me. Sounds like you've dialed it in at this point and if it's working, no need to change it up. 

That is absolutely brutal but thanks for sharing.  That will undoubtedly be in the back of my mind when selecting property managers going forward.

@P.J. Bremner Wow! Thanks for sharing. What I love at the end is how you still pushed through and still continue to believe real estate is the way to financial freedom. I believe a lot of individuals would've handled it in another way. They would've sold their investment and went on to tell everyone around them how investing in real estate is a horrible idea. Your the man!

@Milin Butler

Hm... good question.  I had done a good amount of DD on the PM company before hiring them, had some good references and they had good reviews online.  Personally, I would never trust a PM company again to go full hands-off.  If they say they are posting an ad, ask to see it immediately when it's posted.  I have a Shaker property that they mistyped the address and it ended up in Cleveland, so it sat vacant for 2 months until I caught the typo!  So definitely inspect everything they say they are doing.

If this was a beginner investor dealing with this mess and they didn't have good cash reserves, they would probably have to sell the property at a tremendous loss.  I don't know too many people that can float a mortgage, plus nearly $10k in bills unless they have good reserves.  I have always maintained about $10k for the 3 duplexes, so I never had to dip into my personal money for it.  Actually, for all 3 duplexes I am saving all profits until I have $25k.  Once I hit that level of reserves I will funnel the profits into other properties.

@Scott Morongell

I totally agree with you on that, too many people are "one and done".  I've made my living for the past 6 years as a full time real estate investor.  It pays my bills, vacations, house, etc. and I would NEVER go back to the corporate world unless I had no other choice.  While $8k seems like a lot of money, in the grand scheme of things it's really a drop in the bucket (it's all relative).  However, I can think back not too long ago where a long stretch of bad luck like that would have really caused some pain.  

Another good thing to keep in mind, this was damage done by a duplex.  Imagine if you had a couple tenants in a 20 unit building that decided to do the same thing?  It could have easily ran into the tens of thousands.  Sometimes you get those scumbags that know the system and know how to inflict maximum pain for no other reason than they know they can get away with it.  Karma will prevail in the end : )

Yikes. I guess if you use a PM, you really really better stay on top of them.

Moot point, but being arrested does not equal being a convicted felon.

Just a thought.

Originally posted by @P.J. Bremner :

@Scott Morongell

I totally agree with you on that, too many people are "one and done".  I've made my living for the past 6 years as a full time real estate investor.  It pays my bills, vacations, house, etc. and I would NEVER go back to the corporate world unless I had no other choice.  While $8k seems like a lot of money, in the grand scheme of things it's really a drop in the bucket (it's all relative).  However, I can think back not too long ago where a long stretch of bad luck like that would have really caused some pain.  

Another good thing to keep in mind, this was damage done by a duplex.  Imagine if you had a couple tenants in a 20 unit building that decided to do the same thing?  It could have easily ran into the tens of thousands.  Sometimes you get those scumbags that know the system and know how to inflict maximum pain for no other reason than they know they can get away with it.  Karma will prevail in the end : )

I couldn't agree with you more! Appreciate your transparency and the value your adding to others on here.

@Matt Motil

After thinking about this a little more deeply, there is one thing that would have made a huge difference...  When I vetted this company, I vetted the company as a whole, not the region that I was planning on using them for.  They had sterling reviews in other parts of the US and I figured such a big company with lots of infrastructure might be better to have on my side rather than a mom-and-pop shop managing a handful of units.  My assumption couldn't have been more wrong!

So they manage tens of thousands of units across the US, but less than 20 units in the Cleveland area where I was planning on using them.  It turns out that they had ONE person managing the whole Cleveland area, which is a recipe for disaster.  The one person that had working Cleveland was awful, so they fired her.  The replacement needed a full month to get up to speed, so everything sat for an extra month.  5 to 6 months later he was fired for being bad as well, leaving me to sit for another month or two while they filled the position and trained.  Once the last lady was hired and quit, they ran out of options.  The corporate headquarters did absolutely nothing to help the local workers.  The regional manager was out of Akron and had a portfolio that was too large for a single person to manage, so he was stretched thin and couldn't help or hire/train properly.

So to recap the lesson here, be sure to vet the actual people who will be managing your properties - NOT the salesperson on the phone, NOT the corporate headquarters manager who has never been to your city, NOT the owner who doesn't even know his employee's name, you must talk to the actual person you are going to be working with.  Get references who know THAT person and can vouch for them.  Be careful of the operations who have no redundancy in place (one PM doing everything themselves will simply not work in the long run - if they get sick, go on vacation, quit, etc. you are in deep trouble).

Yikes! This thoroughly explains why I get a message on BP at least once every two days for PM recommendations! 

I work with a few out-of-state investors to stay on top of their properties since I'm now local. But this is stuff happens all the time here! 

@Ryan Evans

Yeah, likewise!  It's really sad because I have great references for everything else - contractor, junk hauling, photographer, realtor, CPA, lawyer, property tax lawyer, etc. BUT I have yet to find a PM company that I can, with any level of confidence, recommend for others to use.  I have people telling me all sorts of stories, from units sitting vacant for 3+ months to "good condition" unit still requiring $3k in rehab to get rent ready.  There is a lot of garbage out there and, as an out of state investor myself, it's really difficult to know what's really going on.

I can honestly say that the best decision I made was to partner with someone locally.  Once you have someone who has a VESTED interest (as opposed to an interest as a vendor), you will get the real story and actually have a chance to win in the long run.  For those who have found a good property manage, hold on to them tighter than your significant other lol.

P.J.,

I have had the same kind of experience with a property management company.  I have never used on again.  But I now use software to manage my own properties.  I get the rented before the previous tenant moves out and use the built in tenant screening to do background checks on all tenants.  Smart Property Systems has built in accounting system that automates rent collection and the accounting for those rents.  I love it.  

That being said, when I  have had issues with tenants who pay their own utilities, I always call the utility to see if they are signed up.  Apparently you pay your water bill and charge the tenants.  If that is the case, you can always call to check on your account, if you feel that something is wrong.  Just know that if the utility is in their name and they do something like that the utility cannot come after you for the payment.

So in this case, when there is so much damage, you may be able to go back to the judge with an update about your losses at her hands.  He may add them to the judgement.  You can fill with an attorney to get her wages garnished if she had a job.  

So sorry this happened to you.  My experience also cost a lot of money but was more of an embezzlement issue than what you experienced.

Good thread going here-concerns all of us one way or another. We self manage most of our properties and use a PM for others. The ones we manage ourselves are working out really well. As long as you screen  thoroughly it is not that hard. 

We did have an expensive disaster in a PM'd unit that is still not over. I think most PM companies try to do a good job; but finding good people and investing in their training is costly, and if staff are not paying attention we LL's end up eating their mistakes.

And this is why I don't invest in areas where I don't have boots on the ground. I learned early on that the PMs in my main market are inept. 

There are good PMs out there I'm sure... but I would rather self-manage with boots on the ground as every multi-family I've ever purchased was done so at a discount due in part to the seller being fed up with bad PM. 

@P.J. Bremner   For some reason Cleveland's property management is horrible. I started my own just to manage my investments and partnering ventures. I have staff that manages it. I basically over see things and look for new properties. Ill tell you I sleep good at night.  I really feel bad for out of town people. The realtor's make it seem like a golden goose.