PM has breached contract; legal options for Out of State Investor?

Question

Own a 4-plex in the KCMO Area. The Property Management company has breached the contract in terms of allowable expenses without owner's approval. I am also having communication issues with this PM - no email responses for days. Other lapses include forgetting to include utility fees in a new lease which was previously discussed with the owner but the new lease got signed by an existing month to month tenant and was not shared with the owner before the tenant and the PM signed it! I am an out of state Investor. What are my options ? including legal options if I need to go that route to recoup my losses?

Nathan Gesner · Answer

1. Start looking for a new PM. I'll provide some tips below.

2. Give your current PM written notice of the violations. Demand termination of the contract and transfer all documents, funds, keys, and anything else they have to you or the new PM no later than [DATE]. Be clear that you are terminating due to breach of contract, and they have no right to penalize you. Warn them that you will report them to the state commission if they attempt to charge you or refuse to comply with your demand.

3. If they do not respond within X days, refuse to terminate the agreement, or attempt to charge you for termination, consider filing a complaint: https://www.mec.mo.gov/MEC/Conflict_of_Interest/Compliance_C...

HOW TO FIND A PMStart by going to www.narpm.org to search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start. You can also search Google and read reviews. Try interviewing at least three managers.1. Ask how many units they manage and how much experience they have. Feel free to inquire about their staff qualifications if it's a larger organization.2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, especially if they violate the terms of your agreement.3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 6% management fee but the extra fees can add up to be more than the other company that charges 10% with no additional fees. Fees should be clearly stated in writing, easy to understand, and justifiable. Common fees will include a set-up fee, a leasing fee for each turnover or a lease renewal fee, marking up maintenance, retaining late fees, and more. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate, particularly if you have a lot of rentals.4. Review their lease agreement and addenda. Consider all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance, late rent, evictions, turnover, etc. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that policies are enforced equally and fairly by their entire staff.6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. A tenant complaining online might indicate that the property manager handled them appropriately, so be sure to ask the manager for their side of the story.7. Look at their marketing strategy. Are they doing everything possible to expose properties to the broadest possible market? Are their listings detailed with good-quality photos? Can they prove how long it takes to rent a vacant property?This isn't inclusive but should give you a good start. If you have specific questions about property management, I'll be happy to help!

Drew Sygit · Answer

@Hitanshu Shah we second what @Adam Bartomeo wrote!

Would you accept a tenant telling you they were going to change how much rent they were going to pay, despite what their lease contract stated?

It's no different with a PMC contract!

Owners always seem to want to tell a PMC what to do, changing their minds/expectations on the fly.

Unless you negotiate a new contract or addendum with your PMC, they do NOT have to abide by any requests/demands you make that contradict what's written in the management contract.

If they have in fact NOT followed the terms of their contract, then you'll want to send them something in writing pointing out the specific language in their contract that they violated and ask what they plan to do about it.

If they fail to correct or address the issues, then you'll want to start looking for a new PMC.

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Recommend exploring as many sources as possible to get referrals AND cross-reference them to get as much accurate information as possible.

Check out NARPM.com, BP’s Property Manager Finder (BiggerPockets: The Real Estate Investing Social Network), etc.

Also, encourage you to learn from the mistakes of others - by reading posts here on BiggerPockets about owners not having their expectations met by their current Property Management Company.

To avoid going through the same poor experience, keep reading.

Even if someone gives you a referral here, do NOT make the mistake of assuming that the PMC will meet your expectations, just because they met the expectations of the referral source.

In our experience, the #1 mistake owners make when selecting a Property Management Company (PMC) is ASSUMING instead of CONFIRMING.

It's often a case of not doing enough research, as they don't know what they don't know!

Owners mistakenly ASSUME all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY, so price is the only differentiator – so, they often select the first PMC they call or that calls them back!

So, the first question they usually ask a PMC is about fees - instead of asking about services and HOW those services are executed.

EXAMPLE: PMC states they will handle tenant screening – what does that specifically mean? What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.? You’d be shocked by how little actual screening many PMC’s do!

This also leads owners to ASSUME simpler is better when it comes to management contracts.

The reality is the opposite - if it's not in writing then the PMC doesn't have to provide the service or can charge extra for it!

A well written management contract should clearly spell out what is expected of both the PMC and the owner, to PROTECT both and avoid misunderstandings. Why do you think purchase contracts are so long and have such small print?

We recommend you get management contracts from several PMCs and compare the services they cover and, more importantly, what they each DO NOT cover.

EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!

P.S. If you just hire the cheapest or first PMC you speak with and it turns into a bad experience, please don’t assume ALL PMC’s are bad and start trashing PMC’s in general. Take ownership of your mistake and learn to do the proper due diligence recommended above😊

Kim F. · Answer

This is such a great answer, thank you!

Adam Bartomeo · Answer

What I am about to say is not what you want to hear but it is reality...

You are going to need to read your contract, thoroughly. Most PM's are able to sign in place of the owner and don't need their permission. I doubt there is anything in the contract about communicating in a timely manner. I doubt including utility fees in in the PMA. Most PMA's give a dollar amount for repairs and you would have to know what yours. If it $500 and they approved $600 there is a possibility that they may owe you $100 but it is doubtful. So, to try to go a legal route because they might have fixed something a little over the limit isn't going to work.

You will have to face that you selected someone that was not the right fit and be more hands on.

Kyle Mccaw · Answer

@Hitanshu Shah

Don’t expect to recover losses—it’s usually not worth the time or cost. Your best option is to terminate the current manager and switch to one with better processes and communication. Some of your requests may fall outside this manager’s standard practices, and customizing services for each client isn’t practical for most PMs. Focus on finding a professional with a management process that matches your requests.

Hitanshu Shah · Answer

Thanks All for your responses. We have notified the current PMC of termination, and the company has agreed to work with us to come to an amicable resolution on open issues. Let's see how it goes. We have also started the due diligence process of selecting the next PMC. Any PMC suggestions for this area would be great. The property is in Rivertown, MO.

PM has breached contract; legal options for Out of State Investor?

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