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.
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
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.
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.
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.
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.
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.