The Fine Print: 5 Items to Look for BEFORE You Sign a Property Management Contract

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Songwriter Pete Seeger once said, “Education is when you read the fine print; experience is what you get when you don’t.” With all the fine print that contracts bring, at times we’re tempted to take our chances and just learn from the “experience.” But it’s obviously better to walk into a deal understanding the details above the dotted line.

Once you’ve researched property managers and compared prices and locations, reviewing the contract is the final step. Before you sign on the dotted line, take a look at the following five property management contact specifics to be sure you’re truly getting a good deal.

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1. What ISN’T Included

Ironically, you should first look for what’s not included in the fee a management company quotes. For example, they may charge a 7% monthly management fee, but then charge extra per inspection.

As you read your contract, look to make sure the services you’ve been sold are included in the price of the management fee. You don’t want to deal with a laundry list of extra charges at the end of each month. It’s better to wrap them all in one price.

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2. Fees in the Event of a Sale, Insurance, or Legal Matters

If you sell your property, what happens to the management company? Most (but not all) will charge a fee in the event of a sale.

Related: Which is Better: A Large Property Management Company or an Individual Property Manager?

Also, insurance claims can be a nightmare to handle. If a storm causes damage to the house, will the property management group handle it? And will they deal with home warranty issues like a leaky sink or malfunctioning AC unit? Some of those who do charge an hourly rate for dealing with insurance companies. Sure, it’s a headache, but the best property management companies don’t charge extra. As a benefit of your contract, they should handle these issues without a fee.

As for legal matters, look specifically for the eviction policy. If you have a tenant that needs to go, will your company only give you the attorney’s contact information, or will they take care of the process? If they do, will they charge you for it?

Look for a property management company that’s confident in their screening. If they place the tenant, they shouldn’t charge you for an eviction. Companies that charge you for evicting their chosen tenant are double-dipping.

Each of these scenarios brings extra fees with some management groups. Where they may seem to have a lower price, these extra charges add up quickly if circumstances demand it.

3. Indemnity Clause

The indemnity clause goes hand in hand with evictions. All contracts have it, but some are a little stronger than others. There’s a standard agreement in Texas that we use, but not everyone does.

Some indemnity clauses exempt the management group from liability, even with manager negligence. Make sure you’re aware of the responsibility your management company will assume.

4. Authority of the Broker

How will the manager handle repairs? Are they authorized to spend an amount without your approval? Some automatically repair any expense under $250, which adds up over time. Others don’t spend a dime without your approval. If you’re paying the bill, you most likely want to approve charges.  

Related: The 5 Levels of Property Management Expertise

When your management company lets you make the call on each expense, you choose what repairs are worth making. If it’s an issue caused by tenant negligence, you can have the tenant held responsible. You can also decide who you want to make the repairs. Some companies have an in-house maintenance department that could cost you even more, while raising the question, “Are they fixing something that doesn’t need to be fixed?”

When you’re kept in the loop, you keep them financially accountable. The more you know, the more wisely you can spend your money.

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5. Termination Clause

How do you get out of the contract if you need to? If the property manager is negligent and you decide to switch, know their stance on terminations. Will there be fees for early termination? What notice will you have to give? Will you need to provide reasons? What are your obligations upon termination?

Being able to get out of a contract also lays another level of accountability for the management company. If they set too many stipulations on terminations, it raises the question of how many people are trying to switch to another company.

Know the fine print of your contract before committing to it. When you look at these 5 areas, you’ll most likely catch the glitches that make a “good deal” not so good anymore. Enter into the agreement with your property manager with your eyes wide open. The risk involved in skimming your contract isn’t worth taking.

Investors: Anything else you look at when reading through a property management contract?

Be sure to leave a comment and let me know.

About Author

Jason Falcon

Jason Falcon is the owner of LEAP DFW, a full-service property management company in Dallas-Fort Worth. LEAP manages over 70 million dollars in real estate, and their transparent process helps clients boost their revenue, lower operating expenses, and ensure high-quality tenants. You can follow Jason’s property management blog here.

9 Comments

    • Jason Falcon

      To answer your question, very few… and it’s the companies that understand the importance of vetting applicants.

      Vetting applicants is by far the single most important part of the entire property management experience/process.

      All of the horror stories you hear about non payment of rent, property damage, unauthorized person/pets all stem from the tenant.

      If the management company clearly understand the process and knows what to look for when screening a tenant, an eviction is very unlikely. Therefore, they are happy to manage the eviction process for no charge.

  1. leo Khmelniker

    Another bullet point I look for is a “lease renewal fee” or a “tenant placement fee”.

    I’ve found some PM’s will charge a fee of 1/2 month’s rent to renew an existing tenant or place a new tenant – even if the prior one which they placed vacates.

    The tenant placement fee essentially incentivizes the PM to allow an existing tenant to move.

  2. Andy H.

    Something else to watch for is the way the monthly management fee is worded. For example…
    – “X% of monthly rent collected” = they only get paid based on the actual rent amount they collect in a given month
    – “X% of monthly rent” = unless clarified elsewhere, this could mean they get paid even when rent is not collected in a month (ie. property is vacant or tenant doesn’t pay); if they get paid regardless, what incentive do they have to find a tenant for a vacant property or get rid of a deadbeat tenant?
    – “X% of monies collected” = unless clarified elsewhere, this could mean they get a percentage of ANY money collected, rent or otherwise. We were bitten by a similar vague wording. Tenant skipped out early, forfeiting security deposit. PM returned the security deposit to us minus X% since they “collected” the security deposit.

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