Are there specific clauses in a property management agreement to be mindful of?
Investor · Los Angeles, CA · Member since 2023 · 10 posts · 3 votes
Here are some topics in an agreement that have my concern:
- Waive the requirement for approval from owner for any repairs or maintenance of any one item under a specified amount (one company is asking for $600…). There is no monthly cap.
- Indemnify, defend and hold harmless the management company.
- Name the management company as an insured part on insurance policies.
- Serve all documentation, records and disclosures in owners name.
- Grant access to regular credit checks on the property owner.
Are these typical in a property management agreement? The asks seem extreme in my opinion. However, that being said, this is my first time requiring the assistance of a management company due to relocating out of state.
Here are some topics in an agreement that have my concern:
I would never agree to any management company that wants to run regular credit checks on the owner. Its simply none of their business what my credit score is and may impact my credit score and thus ability to buy additional properties depending what type of credit report they are pulling.
The rest of the stuff looks fairly standard, if you don't like the $600 limit you can likely negotiate that lower as previously mentioned. Mine is at $500 which is fine considering I don't want a phone call to authorize a repair every time a plumber needs to be called.
One big thing that I would check is their fee structure, both to you and to the tenant. I've seen numerous management companies keep pet deposits and pet rent for themselves even though it is the owner taking the additional risk from potential damage. I've seen companies keep early termination fees for breaking a lease early, and then of course turn around and charge the owner full price to place a new tenant. I've seen companies charge a 10% fee to 'supervise' even the most basic of repairs done to the property. I'm sorry but you don't need 10% to supervise a guy coming to the house to plunge the toilet, that's what I pay you a 10% monthly fee for to handle basic items such as this. Supervising major renovations is one thing, but not for a toilet.
The more fees that a management company charges the tenant, the less rent you will ultimately be able to charge, else you risk tenant turnover every year once the tenant realizes just how expensive living in your unit is once all fees are accounted for.
You can negotiate the repair budget down, mine is $300. The rest of your concerns are standard verbiage.
I'm in the middle on a few of those - they do look to be more liberal than other PM contracts I've seen before.
I suggest you bounce your concerns off a local RE attorney and get his or her input. If they agree it's standard, great, if they think they're overly liberal, explore other PM options or just edits.
Good luck!
Here are some topics in an agreement that have my concern:
I would never agree to any management company that wants to run regular credit checks on the owner. Its simply none of their business what my credit score is and may impact my credit score and thus ability to buy additional properties depending what type of credit report they are pulling.
The rest of the stuff looks fairly standard, if you don't like the $600 limit you can likely negotiate that lower as previously mentioned. Mine is at $500 which is fine considering I don't want a phone call to authorize a repair every time a plumber needs to be called.
One big thing that I would check is their fee structure, both to you and to the tenant. I've seen numerous management companies keep pet deposits and pet rent for themselves even though it is the owner taking the additional risk from potential damage. I've seen companies keep early termination fees for breaking a lease early, and then of course turn around and charge the owner full price to place a new tenant. I've seen companies charge a 10% fee to 'supervise' even the most basic of repairs done to the property. I'm sorry but you don't need 10% to supervise a guy coming to the house to plunge the toilet, that's what I pay you a 10% monthly fee for to handle basic items such as this. Supervising major renovations is one thing, but not for a toilet.
The more fees that a management company charges the tenant, the less rent you will ultimately be able to charge, else you risk tenant turnover every year once the tenant realizes just how expensive living in your unit is once all fees are accounted for.
Here are some topics in an agreement that have my concern:
Thanks a ton for this input! I will be sure to get the fees information and have them remove the credit check requirement.
I'm in the middle on a few of those - they do look to be more liberal than other PM contracts I've seen before.
I suggest you bounce your concerns off a local RE attorney and get his or her input. If they agree it's standard, great, if they think they're overly liberal, explore other PM options or just edits.
Good luck!
I do have an attorney I’m bouncing ideas off as well, he suggested a monthly or daily cap even to the fees they can charge. Though, also to his point and that of the management company the contract is month-to-month so I could cancel it at any time if there are unreasonable fees racking up.
Has anyone had any problems with not specifying a monthly cap on fee charges or the itemized fee cap has been enough?
- Waive the requirement for approval from owner for any repairs or maintenance of any one item under a specified amount (one company is asking for $600…). There is no monthly cap. - don’t waive this they want you to do this so they can save time and headaches but make it at least something like $1000 and above needs approval
- Name the management company as an insured part on insurance policies.- this is necessary to ensure smooth communications between PM and insurance company to do their job
- Grant access to regular credit checks on the property owner. - I feel they may have been burned in the past maybe because a previous owner had a foreclosure or couldn’t maintain expenses. This one sounds odd to me
As others have said, there has to be a number that the PM doesn't need owner approval to spend each month. What that number is will vary PMC to PMC and market to market - our standard number is $500 but I'm open to lowering that down to around $300 if an owner wants more input/communication.
An owner credit check seems silly to me, and I'm curious about why they have that in their contract - did you ask them?
The other clauses are pretty standard and I think you'll find them with any (reputable) PMC.
Something else to look for is the termination clause - if you aren't happy with the service the PMC is providing, how easy is it to get out of the agreement?
Good luck!
"- Indemnify, defend and hold harmless the management company."
From what exactly? It may be a "standard clause" as others have alluded to, but the precise language of what it says can be very important from a risk management perspective. It is generally fine for language that is consistent with an owner's insurance policy covering the management company as well but does the language extend beyond that for claims not covered by insurance? Are you now the effective insurance company that covers the management company's screw ups for non-covered claims? If the management company screws up and makes a claim on their own E & O policy is the language something that the E & O carrier now subrogates to and comes after you for? These are questions worth investigating if you don't understand the language of the hold harmless clause.
Thank you all, you have been very helpful!
I would be looking at all of the added fees. I have a client and business partner on one of his 4plexes that although the property management fee is 10% of the rents, with finding tenants and upcharges for maintenance, it is almost 16%. This is common but you need to factor it into your calculations.
Here are some topics in an agreement that have my concern:
- Waive the requirement for approval from owner for any repairs or maintenance of any one item under a specified amount (one company is asking for $600…). There is no monthly cap.
- Indemnify, defend and hold harmless the management company.
- Name the management company as an insured part on insurance policies.
- Serve all documentation, records and disclosures in owners name.
- Grant access to regular credit checks on the property owner.
Are these typical in a property management agreement? The asks seem extreme in my opinion. However, that being said, this is my first time requiring the assistance of a management company due to relocating out of state.