Research Question - Red Flags when interviewing Property Managers?
What are some red flags to watch for when interviewing Property Managers?
Great Question! I think it comes down to good communication both ways. Here's an article I wrote a few years back:
https://www.biggerpockets.com/forums/52/topics/402958-investors---are-you-a-c-class-landlord
Brad
Lack of experience or qualifications, poor communication skills, Inadequate screening processes, lack of transparency in fees and charges, negative reviews, high turnover, lack of proper accounting/financial management and unprofessional behavior to name a few.
#3 Buying & Selling Real Estate Discussion Contributor
Quote from @Nathan Gesner:
What are some red flags to watch for when interviewing Property Managers?
- if everything is too cheap
- if they mention more about their acquisition rather than how to maintain your property
- if they only have two people in the office
- they don't know how to manage property.
- no bookkeeping.
I am looking to put a property on the rental market in VA and received a contract from Property Mgt Company that wants 6% of the total sales price if I sell to a tenant they screened for my rental. And in their contract, this clause is in effect for 180 days after the renter exists the lease but then buys the property. They would not act as the buyers real estate agent, they just want 6% as the procurement agent. Is this legit?
I've been using LLMs to help me improve my decision making on stuff like this. It's not the end all beat all but it certainly gives you a framework to start from. I would do something like this into chat GPT or goggles bard:
Act as a real estate expert specializing in property management, and a consultant in business analysis and decision-making. I am in the process of interviewing property management companies to oversee my rental real estate portfolio and require your expertise in the following areas:
- Develop a detailed interview framework that I can utilize during the interview process. This framework should be comprehensive, covering all key areas of property management including financial management, tenant relations, routine and emergency maintenance, legal compliance, and property marketing.
- Identify the critical traits, skills, experiences, and credentials that distinguish a high-quality property management company. Please elaborate on why each is essential and how they contribute to a company's overall performance and reliability.
- Similarly, provide a list of red flags or negative traits that indicate a subpar or potentially problematic property management company, with explanations on how these might negatively impact my real estate operations.
- Create a scoring or rating system that I can use to objectively evaluate and compare each property management company based on the traits and skills identified earlier. This system should be easy to use and interpret, and should also include weightings for each category or trait according to its importance in overall property management.
- Lastly, provide a list of questions or checks that can help me determine if a property management company's ethos and operational style align with the values and objectives of my own company.
I would like this information to be detailed, practical, and grounded in real-world property management contexts."
If you want a better output you can always add more details.
Potential Improvements:
- You could specify the types of properties (residential, commercial, etc.) or the size and diversity of your portfolio to receive more tailored advice.
- You could provide information about your company's specific objectives or values for a more aligned recommendation.
- If you have preferences for how you'd like the scoring or rating system to be (numerical, grade-based, color-coded, etc.), that could be included.
- If you have had previous experiences with property managers that you found particularly beneficial or problematic, including those could provide context and help tailor the advice more specifically to your needs.
- If there are particular areas you are concerned about (legal issues, maintenance, tenant relations, etc.), emphasizing these could provide more detailed and relevant advice.
Quote from @Jannine Rebman:
I am looking to put a property on the rental market in VA and received a contract from Property Mgt Company that wants 6% of the total sales price if I sell to a tenant they screened for my rental. And in their contract, this clause is in effect for 180 days after the renter exists the lease but then buys the property. They would not act as the buyers real estate agent, they just want 6% as the procurement agent. Is this legit?
As a general rule of thumb, they found the Tenant and would be considered the "procuring cause" for that Tenant to purchase the home, so they should be compensated.
6% when they didn't have to do any marketing and they only represent one side? That's ridiculous. Then again, the law allows them to set their rate at whatever they want and you agreed to it.
I have something similar in my agreements, but it's significantly lower becuase I don't have to market or show the house, there's usually little/no negotiation, and it's basically a paperwork game.
Thanks Nathan. Appreciate the response!
Yeah, in our area definitely if they pride themselves on being the least expensive. The good thing of living in Hawaii is that there are tough names to pronounce so if they can not pronounce the name of where your property is then run....lol.
Quote from @Jannine Rebman:Yeah, I am same as Nathan. 6% for minimal work is ridiculous, but it seems to vary on sales price where we live too. In Hawaii prices are high and if the price is under $500K you are probably going to pay 6% no matter what. At $1million you may pay 5% and at $2million you may pay 4%. Costs to do anything are high in Hawaii so I know what you see here is not normal everywhere.
I am looking to put a property on the rental market in VA and received a contract from Property Mgt Company that wants 6% of the total sales price if I sell to a tenant they screened for my rental. And in their contract, this clause is in effect for 180 days after the renter exists the lease but then buys the property. They would not act as the buyers real estate agent, they just want 6% as the procurement agent. Is this legit?
Would you consider a Management Agreement with these characteristics to be a red flag?
General Contract Language
- Broad language allowing PM to receive and collect fees from tenants so long as it doesn't explicitly conflict with said agreement (meaning any additional fees can be added even if not in contract)?
- Broad language excusing PM from any responsibility (including that of anyone they subcontract out to)
- Charging the owner additional "convenience fees" if they "fail" to perform according to an agreement (with broad language about what that means)
- Making the owner pay for any mediation / attorney fees for both parties (with no cap specified)
Specific fee structure:
- Management Fee: 10% scheduled rents (up to 3 units); 8% up to 15; 6% up to 35
- New tenants placement (not renewals): 50% first month rent
- 10% mark-up on all service fees (no receipts required)
- 15% mark-up on total cost for any capital expenditures
- Flat turnover fee
- Flat evictions fee
@Nathan Gesner These are a few things I ran across that were early indicators of a bad PM.
Ditzy staff. That person answering the phone in the office should be professional and clear. They should be able to give a message to the PM. They should have an idea when you should expect a call back. They should be able to give you some basic info. If the PM can't hire good staff they probably can't manage a property well.
Accurate office hours. - if the office is randomly closed when you stop by during business hours its not a good sign.
After they are hired:
Following the lease- if you don't allow pets and your neighbors say hey they have a dog and the PM says yes they asked....
Common sense.
#1 Tenant Screening Contributor
- Property Manager
- Honolulu, HI
Lack of long term experience. As every newbie LL/PM on these boards has revealed, there is a LOT to learn about a variety of laws; major routine processes; types of materials; contracts (all sides...tenant, management, contractors); financial reporting and management; construction methods; project and time management, and much more. Therefore, amount of experience is KEY. There is a huge difference between managing 30 or fewer units for less than 3 or 4 years (perhaps even on a part time basis), vs. over 100, 500, or more for 10 years or longer. You WANT experience. Granted, that is still not a guarantee...but the bad PM's usually don't last that long unless most of the properties under management are their own.
Another important factor...what is the company's primary focus? Sales, or PM? If you have Sales people chasing big commissions, your rental issue will take a back seat. You need a PM whose primary focus IS PM. They may still handle occasional sales, but only for their PM Clients or Tenants...not constantly and actively "farming" for sales leads.
I have been a landlord and investor for over a decade AND also work as a senior/regional property manager so I feel like I see both sides and have some good insight on this
- manage yourself if you have the time and fortitude to do so, you will make mistakes but it will pay off, get a real estate license (not hard to do plus you can sell and buy properties and get commission) and know the laws, be willing to do the research, NO ONE IS GOING CARE AS MUCH ABOUT YOUR PROPERTY AS YOU
- that being said, not everyone wants to has the time ect or headache or likes asking for rent…FIND A MANAGER THAT ALSO IS A LANDLORD INVESTOR, I can't tell you how many property managers I've tried training and that failed at our company because they just don't get it from an owner or investor side, like "no tenant we aren't going to come replace your stove again, no we aren't going to clean your bathroom cause you didn't , ability to analyze when to do maintenance and not, ability to explain to tenant owners POV, I tell every owner I am not telling you anything I haven't done or I'd do my self, a lot of property managers are blue colar type workers and have never invested in their life and just done get it, 4 out of 5 property managers fail at my company because of this especially for single family homes, find a PM with speciality in SFH for your area, for example, a PM in Birmingham MI (upscale area) will fail in Detroit or lower end markets (but that's were the best ROIs are)
Oh one more tip, ask specific questions, like who is going to not say “yeah im great with communication” , be wary of this trap too because you want the PMs to focus on doing their jobs rather than answering 20 emails from each investor each week, time is our most valuable resource please don’t take up too much of it, when you say “yes” to something you are also saying “no” to something else (opportunity costs)
Questions to ask:
- what is the eviction process like after COVID 19 in your city (ask for details and differences beforehand)
- what are the city rental regulations, what is the process to obtain a rental license, how would you rate this city compared to surrounding cities on difficulty with this process and working with landlords
- how do you handle late fees and payment plans, if a tenant calls and says they’re going to be 5-9 days late but have been on time for 6 months what is your response
- if multis - how do you handle tenant conflicts
- why do they work in property management and how did they get there
- if you could invest in any city in the state where would you and why (I love this question because it will tell you if they know where the most profitable areas are for investors and ROIs and hidden costs)
- how is water/water bills handled in this city
#1 Classifieds Contributor
@Robert Ashton most of this is acceptable, although the "broad language" issue is up for interpretation as you haven't presented an example.
Hello,
I am currently conversing with a PM to determine if they are a good fit to manage my property. One specific thing that stands out as a red flag among many is the agreement they sent over to me states that they receive 35% of security deposits collected as a sign on bonus. Is this even legal? The security deposit belongs to the tenant not to myself (owner) or the PM.
Has anyone ever heard of anything like this before?
Quote from @Terri Jefferson:I can't imagine this is legal in any state (as written), I would assume they are saying that their admin fee is equal to 35% of the security deposit, which is quite excessive in high-rent cities.
Hello,
I am currently conversing with a PM to determine if they are a good fit to manage my property. One specific thing that stands out as a red flag among many is the agreement they sent over to me states that they receive 35% of security deposits collected as a sign on bonus. Is this even legal? The security deposit belongs to the tenant not to myself (owner) or the PM.
Has anyone ever heard of anything like this before?
#3 Managing Your Property Contributor
- Property Manager
- Grants Pass, OR
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#3 Managing Your Property Contributor
- Property Manager
- Grants Pass, OR
Quote from @Terri Jefferson:
Hello,
I am currently conversing with a PM to determine if they are a good fit to manage my property. One specific thing that stands out as a red flag among many is the agreement they sent over to me states that they receive 35% of security deposits collected as a sign on bonus. Is this even legal? The security deposit belongs to the tenant not to myself (owner) or the PM.
Has anyone ever heard of anything like this before?
There's no way they are taking 35% of the security deposit itself, that would be illegal everywhere. But their fee might be equal to 35% of the security deposit amount whereas the fee is charged to the owner (not against the tenant's security deposit balance). PMs can get creative I guess. I usually see the fee being a percent of rent, not the deposit. But the deposit is often higher than rent so maybe they are being creative in ways to increase their fees.
Watch out for indemnification clause. I think another red flag is look for language in their agreement that states you will indemnify them from everything. A lot of PMs try to slip this in and it means even if they make a negligent mistake, or fail to follow the letter of the law, you are on the hook to pay for their lawyer.
