Could Your Property Manager Rob Rent Money From You?

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When I walked out of the classroom after an intense 3 hour lecture I checked my cell phone. I had 23 missed calls and 18 voicemails. My stomach jumped. I figured someone must have died. Why else would someone be so intense about calling?

Property Management ScamsI scrolled through the missed calls and most of them were from my tenant at a Triplex we owned. Maybe there was a fire at the house? That would explain all the calls …

About four or five months before that day we’d purchased this property in the Little Italy area of Toronto. It was our fifth investment purchase (my husband Dave and I), but it was the first one we thought we would manage ourselves. Our rationale was simply that we lived close enough to this one to oversee it, it would cash flow better if I managed it and my schedule was fairly flexible given that I was doing my MBA full time.

I read up on what I should do to manage the property, met with the tenants, had new leases signed, made a repair list and got to work on making the tenants happy within our budget.

Things went ok for a few months but then one guy downstairs moved out and the guy remaining wanted to get a new roommate. The new guy checked out so we updated the paperwork and he moved in. But he was a smoker and the problems began. Our tenant claimed he was smoking in the house and it was bothering her son’s asthma. We asked the tenants to smoke outside, as per the lease, and they did. They also began harassing the son when he’d come home from school calling him a tattletale and other not so nice names.

I was getting a couple of calls a day from the tenants. It was stressful. I didn’t want to mediate their problems.

Over a month or so, as the weather got colder and the downstairs tenants tried new and creative ways to smoke outside while remaining mostly indoors, the tension between the tenants increased to where it was the day I received the 23 voicemails. Turns out the tenants had called the cops on each other! The fighting and threats had reached such a level that they were now involving the Toronto Police!

My final exams were a week away and the stress these tenants were putting on me was just too much.

I cracked. I absolutely totally cracked. I wasn’t sleeping. I was crying almost non-stop and I could barely eat. It was great for weight loss, not so good for studying or getting anything important done.

So Dave hurried out and hired a property manager to take over from me. He found options online, checked the better business bureau and a few references and then grabbed the best priced guy he could find. The property manager took over, the calls stopped, and life got quite a bit easier.

Uncovering the Scam

Fast forward about a year and a half. Two of the units in the triplex were about to be vacant. The property needed some serious upgrading. A friend of ours was looking for a place to live and said he’d move in to the top unit if we moved in to the middle one. We offered him  a very good rent rate in exchange for his support in the renovations (which at times meant we were actually cooking and using the bathroom in his unit and vice versa). He agreed and we all moved in and dismissed the property manager.

We started collecting rent from the other tenants directly. Imagine our surprise when the check was for for $100 more than we expected! The property manager had lied to us about the amount of rent we were getting, and he had been pocketing the difference. He was probably doing this for all three units since all three leases had turned over since he’d taken over. We figure he stole at least $2,000 from us in that one year. The worst part is that his scam was easily preventable.

Prevent Your Property Manager from Robbing Rent Money From You

Besides the fact that you should never hire a property manager just because their rate is the best you can find, you also should only hire from a referral from someone you trust (if possible). At the very least, no matter who you hire, make sure this doesn’t happen to you by asking for copies of every lease agreement. And ask for photocopies of the checks. If the tenant pays by cash or some other method (we use a lot of e-mail money transfers with our tenants), get a printout of the transfer or get copies of the receipts given to the tenants for cash payments. It’s good to have this documentation for tax purposes… and it will help prevent your property manager from taking an extra cut off the top.

Sounds simple now. Looking back it’s hard to believe we would ever let a property manager run our place without getting leases, receipts and other proof of the rent that was coming in. But, at the time, all I cared about was getting my life back and getting through my final exams without failing!!

Image Credit © Christos Georghiou | Dreamstime.com

About Author

Buy and hold real estate investing in Canada since 2001, Julie Broad is now a full time real estate investor and investing educator.

27 Comments

    • Thanks Josh!! Sorry to hear you’ve had the same issue arise with Property Managers. I guess that makes it all the more important that we share this story with others. I never would have thought something like that could happen. Even when we discovered it – for a short while – we thought maybe we’d misunderstood. It took a few days to REALLY set in that we’d been robbed!! He actually had the nerve to send us a bill for something small after let him go. Maybe he thought we would not figure it out. I am not sure. Anyway we told him our discovery and that we were reporting him to the Better Business Bureau. He didn’t try to collect on the bill. But I think that bill was less than $100 … less than one month of his “profits” from us!!

      • You are definitely not cut out to be a property manager if you were crying over a couple of infighting tenants. But as you found out the buck doesn’t stop there. You cannot be a landlord without managing something; your investment, your tenants or your manager.

        • You got that right – the good news is that just because I am not cut out to be a property manager it doesn’t mean I can’t own millions worth of real estate!! Thankfully there are great folks out there that will manage the properties so I can do the things I AM cut out for!!

  1. Not surprising. I knew of a property manager who “surcharged” tenants for the additional electricity used for their air conditioners. The apartments came with electric included, and, needless to say, the surcharge never hit the owner’s checkbook. And this was a huge apartment complex of over 150 units.
    Another variation is the property manager collecting a finder’s fee for outside lawn and plow contractors, etc., which essentially means the owner is being upcharged by the outside contractors to cover that. While that’s not as bad as stealing, the net effect is the same to the owner. But at least the owner is agreeing to the contracted price.
    When you think about all the hard work it is to manage property, why would anyone in his right mind be willing to do it for 5% of the gross, getting all the aggravation and none of the benefits of ownership, if there weren’t other ways to add to that?
    Maybe $1200 was a fair price to pay to accomplish two things: learn a lesson, and have peace of mind to complete your MBA. You could’ve paid that much for a college course that didn’t teach you as much.

    • Hi Mary –
      Thanks for your comments. It was a lesson I am grateful to have learned – absolutely.
      He was actually the only property manager in that area that charged 5%. All our property managers since then charge 10% PLUS a full months rent placement for a tenant when they have to fill a vacancy. It’s a steep price to pay … but we’ve learned that it’s better to pay for quality.

      Regards,
      Julie

  2. I’m a property manager and am VERY open with my owners. I make it clear that they are welcome to drop in – unannounced – any time they want to check my records. I will also provide scanned copies of lease agreements or checks, and they always get a copy of every invoice pertaining to their property. I’ve been so open with them that not one has tried to follow up on my offer, but it still stands.

    As for the smokers, you did the right thing by warning them but then you should have kicked them out when they first threatened the son. Had the threats turned to violence, you could have been held partially liable for failing to take action. It’s also important to take care of your tenants by providing them with a safe, peaceful environment. I don’t mean to sound judgmental because I don’t know all the facts; I’m just sharing some opinions that might help you or others in the future.

    • Hi Nathan,
      Thanks for your comment. And it’s a great point for all investors and landlords out there … you also have to know your landlord and tenant law for your state or province because every area is different. I could not have evicted the second time. I could have filed a notice that would have required a second offense (and possibly a third) before I could then file for eviction. PLUS – there were definitely two sides to this story … the cops were called to EACH UNIT on separate days … in other words it was not just the smoking tenants doing things wrong. Not saying I was helpless to all that happened but I can tell you that it would have taken several months to evict them and even then … they may not have been evicted if I couldn’t prove what was happening. I wasn’t going to wait that long. It was too much stress already. Better to hire a PM and let him sort it out … and that much he did do. I am sure he earned his extra $100 a month for awhile. 🙂

      Cheers,
      Julie

  3. Julie,

    I think many landlords have similar horror stories. Mine happened within the last 6 months. I’m out 2k, plus have had a vacancy for 4 months in market that has less than 6% vacancy. Its very stressful indeed, especially when reserves that were so diligently saved are gone.

    You hit the nail on the head with documentation. I will likely not recover 1 red cent because I have no proof anything is missing.

    Something important to note though. This is 100% my fault for not having the best systems in place like any business should. I wish more landlords would share their mistakes like this, and how they corrected those mistakes. Thank you for your openness.

    Jason

    • Jason thanks for your note – unfortunately for us but fortunate for everyone we can reach with our stories – almost 100% of the things that have happened to us are preventable!! So good news for the other real estate investors … you don’t have to experience all this stuff the hard way if you get a good mentor that’s already done that for you!! 🙂

  4. OK. We all like to think we’re smarter than the others, so here’s my, if not “horror” story, at least wake-up call. We owned and managed about 175 units at the time. I did the oversight myself, with an assistant and crew. Everything ran pretty smoothly, and we decided to start a completely different business, which required most of our time away from the rental office. I figured I had a good staff in place, and they could take care of most of what came up. But without a leader, the guys were running around chasing their tails, parts were being bought but not installed, nothing was getting fixed, and my assistant ended up out of the office more than in, with strange ailments. She had our calls forwarded to her house, but that didn’t replace having someone on site. We put up with all of this until the day my assistant told me that somebody had called for me, and she told him “she doesn’t work here any more.” That was my wake-up call, because the staff actually felt that way, and were rudderless, hence their inability to get work done.
    While running two full-time businesses was stressful, to say the least, things calmed down once we were back in control.

    • Wow Mary! That’s quite a story too!! Sounds a lot like why I say real estate investing doesn’t give you passive income … even when you have systems in place and people running things you still have to stay actively involved. As soon as you step away for too long things start to fall apart! Great story. Thanks for sharing.

      • I am reading all these horror stories and I am thinking why on earth do you let others manage your stuff? Read one of my last posts and you can see you can manage any property no matter how busy you are or where your real estate is located. I think a lot of begainners get scared and think PM is sposed to be hard

        • Hey Steve- the only resource I have in limited quantity is my time. I can always make more money but I can’t make more time … it’s just not worth my time to manage all our properties. That’s just my preference!!

      • melissa alvarez on

        Hi julie im in a situation where my property manager has taken multiple condo fee payments in one month. I have tried contacting him but i constantly recieve the same excuse that they are investigating the situation. What further legal action can i myself take?

  5. Interestingly, I did manage my own properties on a daily basis. Just took my eye off the ball for a few months while we were pursuing the other business, and it all fell apart in that short time. Mostly, in my case, because there was no “boss” around, our staff wasn’t able to work independently, nor would they “take orders” from each other. Guess that serves us right for micro-managing in the first place!

  6. Thanks for sharing this story, Julie. I know it’s hard to admit to errors in RE transactions especially in a forum. However you overcame that and decided to help others out by making us aware of the kinds of crazy things people do. We will all consider this lesson.
    Thanks!
    Donna
    Business Builder –
    South Carolina Branch President

  7. Great post Julie! Especially for those just starting out. Obtaining lease agreements and proof of income is essential. As a real estate investment firm, we know there is value to be obtained when you hire “the right” 3rd party manager, whether the property is located in your backdoor or another state.

    One thing we always strive to obtain is a management firm that has obtained Accredited Management Organization designation (AMO) through the Institute of Real Estate Management (IREM). This designation sets apart other property mgmt firms due to the rigorous qualifications required to be awarded the designation. This is aside from reviewing their website, BBB standing, referrals, taking drives by the properties they currently manage, and even speaking with the larger brokerage firms in the area.

    Thanks for the post!

    • Edwin – thanks for the additional advice. We don’t have the same organizations in Canada – or at least I am not familiar with them if we do – but that is absolutely FANTASTIC advice. Thank you so much for your additional contribution!

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