Screen a PMC BETTER than a Tenant, Part 3: The Management Contract

In this 3-part series on what to consider when screening property management companies, we’ve tackled PMC service procedures, communication systems, and documentation processes, but now we want to dig a little deeper and look at a little-considered aspect of PMC screening: the management contract.

One of the biggest mistakes many property owners make when screening a PMC is assuming that a short management contract is better. Unfortunately, the exact opposite is true! Why? Well, let’s think this through - you’re giving up control of your property(s) to someone else, so if something goes wrong that is NOT covered in the management contract, why would you assume the PMC will take the hit? And when they charge you for something you don’t agree with, what are your options? If it’s only a few hundred dollars (which it usually is), how likely are you to spend thousands of dollars suing them to recoup it? You’re usually stuck with what the PMC decides, and all you can do is terminate them, while calling it a learning experience (hopefully a cheap one).

Another aspect to consider when comparing contract lengths is, how detailed and thorough do you expect a PMC to be? What are the chances they’ll be as detailed and thorough as you expect after you hire them if their management contract is not? Keep in mind that you’ll also find the longer contract covers more issues and defines how they’ll be handled. Yes, there may be more fees involved with these “what if” issues, but at least they’ll be disclosed and defined, as opposed to becoming an ugly surprise later! Lastly, don’t assume that something verbally “promised” will be provided. It should be 100% clear in the contract, otherwise you’ll almost definitely end up disappointed down the road.

So, let’s consider some issues you should expect to be covered in a property management contract:

Fees

Most owners zero in on monthly fees when shopping PMC’s, often to the exclusion of all other considerations. Unfortunately, the lowest monthly fee doesn’t tell you all you need to know about the cost of working with them - you should look at any & all their fees:

• - Management fees
• - Late fees and what percentage the owner receives
• - Tenant placement fees
• - Lease renewal fees
• - Vacant property fees
• - Maintenance fees
• - Eviction fees
• - Inspection fees
• - Bill processing fees
• - Etc.

What you’ll usually find is the PMC’s that initially appear the cheapest, actually charge extra for services more expensive PMC’s include. Or worse, they don’t offer the same level of service! The details of all chargeable fees (and when they’re applicable) should be clearly outlined in the PMC agreement, so make sure you factor these into your calculations when comparing companies.

Responsibilities

Your responsibilities as an owner versus the responsibilities of the PMC should be clearly defined, and nothing should be left open for misunderstanding. For example, one issue that seems to always cause frustration is: what is the PMCs maintenance procedure and how involved is the owner in these steps? Does the PMC handle everything and just bill the owner, or is the owner given the opportunity to request additional bids, or even consulted for approval at all? Can an owner hire their own contractor(s)?

The contract should also say who is in charge of monitoring and paying utilities, approving rental applications and ensuring the property is in compliance with all municipal guidelines.

If a responsibility isn’t clearly stated in the contract, it’s legally open for debate, giving a suspect PMC the opportunity to duck responsibility. So, make sure everything’s 100% clear about what you’re entitled to hold your PMC accountable for.

Deadlines for Reporting

A management contract should also clearly define time frames for the PMC to inform you of important developments, and explain how these updates will be delivered to you. Is this through an online portal, via email, or by phone? When it’s something serious, like if they discover the property is being used illegally, they should have to inform you immediately, via a channel which you can easily access.

By the same token, it’s important that you note any deadlines for owner approvals stated in the contract - for example, if you don’t approve a maintenance request within a certain number of days, your PMC may have the ability to make a decision without your approval, so always be aware of these deadlines.

Maintenance & Repairs

It’s important to understand how a PMC will handle documentation and approvals for repairs and maintenance done to your properties. Who is the one responsible for final approvals, and is there a dollar limit under which they can approve repairs without the owner’s input? Will they provide you with details of contractor bids, or only the amount of the winning bid? Do they itemize maintenance and labor costs in their invoices or just supply a total figure? Will you have access to the vendor’s contact information? Do they take pictures or videos to verify work that was done?

Poor documentation and communication when it comes to maintenance is a common owner complaint when dealing with PMCs, so making sure that all of these details are outlined clearly in the management contract will help ensure you don’t run into these problems down the road.

Termination

Everyone makes mistakes. You may hire a PMC that seriously misrepresented their services or it may just be an honest misalignment of what they can do versus what you expect. No matter the reason, there may come a time when you will want to terminate your relationship with a PMC. First, you’ll want to make sure when & why you can terminate them and then how you can do so. Does the management contract require you to prove they failed to perform in order to terminate? Can you only terminate at the end of the contract? Does the contract have an auto-renewal clause? Do they require a specific amount of time for termination (often 30-days notice)? Lastly, what termination fees are required?

There should also be a provision that the PMC will agree to cooperate with the transfer of management, as long as all owed fees are paid, and will turn over all necessary documentation to the new property management company and all security deposits. For example, they should agree to provide the lease, rental ledger, any legal case paperwork, keys and other necessary documents within a set number of days of the contract’s termination. Without these, the owner and new PMC have no way of knowing if there are rents owed, or any legal means of enforcing the rental contract. It’s not uncommon for some PMCs to ghost on owners once they’ve been fired, without handing over this information, or security deposits!

A good PMC contract is one which clearly defines the roles and responsibilities of each party, and helps structure a good working relationship. As an owner, you want to make sure the agreement makes it possible for you to hold your PMC accountable for providing the level of service promised to you, and gives you an avenue for easily ending the relationship, if it comes to that.

If their contract is vague about their fees or responsibilities, or lacks provisions to ensure a smooth transition of power if you ever decide to terminate, then beware.

Any other things you look for in a strong PMC contract? Let us know in the comments

Image Courtesy of Andrea Piacquadio