Rookie Reply: Pre-Foreclosures and How to Cut Your Property Management Costs

Ashley:
This is Real Estate Rookie, episode 296.

Tony:
The property management company owned their maintenance company. You don’t want to spend time trying to call four different plumbers to get a quote on how to replace a wax seal. But when we did search for other prices, the property manager’s rates were typically more expensive because you got to think too if they’re only charging you $100 per unit, that’s not a significant amount of money.

Ashley:
That’s because you’re so used to the short-term rental. [inaudible 00:00:28] the 30%.

Tony:
Yeah.

Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we’ll bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And we are back today with another Rookie Reply episode where we’re going to be answering four questions from folks that are part of our Rookie audience. And look, guys, if you want to get one of your questions answered, head over to biggerpockets.com/reply, and us and our team will see those questions there and we’ll pick out the good ones to share on the show here.

Ashley:
And I go on to a tangent about property management fees and things you need to know about how much you could actually end up paying for property management. Just because the fee is 8%, 10%, that usually does not mean that that’s what you’re going to be paying in property management, so very important when you’re doing that deal analysis that you’re actually reporting more than whatever the percentage is because there’s always going to be these other fees that are baked in.

Tony:
Yeah. We also go on talk about what a balloon payment is and how you can strategically use that within your real estate investing strategy. We talk about how to ensure property when it’s in the rehab phase, and then we talk a little bit about buying pre-foreclosures, which honestly, some people make their entire real estate portfolio based strictly on that strategy of buying pre-foreclosure. Lots of really good information into today’s episode.
But before we get into the questions, I just want to give a shout-out to someone that left us a five star review on Apple Podcast. And listen guys, it’s literally two minutes of your life, if you haven’t taken that time yet, please do leave us a review on Apple Podcast or Spotify. The more reviews we get, the more folks we can reach. And the more folks we can reach, the more lives we can change, which is what we love doing here at the Rookie Podcast.
But today’s review comes from someone by the username of We Are Notes. Not sure what that means. No, but this person says… The title of the review says you’re saturating my sponge. That’s got to be one of the funniest titles I’ve seen. But this person says, “I’m new to real estate investing. Haven’t secured my first deal yet, but hopefully will this year and have learned so,” in capital letters, “so much from your podcast. The information is concise and relevant, easy to listen to and understand. Thanks so much. Keep up the great work.” Ash, how does it feel to know that we’re out there saturating sponges?

Ashley:
I’m going to start using that all the time now. Well, thank you guys so much. We really appreciate the reviews. And it makes our days. And Tony’s happy because then I don’t get crabby on the podcast and we can have a great show reading your wonderful reviews. Thank you guys so much.

Tony:
All right, so our first question today comes from Blake Echobarger. And Blake’s question is, “How do you go about ensuring your newly acquired properties while in the rehab phase of the BRRRR process? I’m about to purchase my first BRRRR and my State Farm agent says they can’t insure a property that is not inhabited. It will only ensure it when the rehab is done and a tenant is in place. Is that normal or is that just a State Farm thing? Are there insurance companies that specialize in some sort of interim property insurance coverage? Thanks for any ideas.” Ash, I know we definitely get insurance on our rental properties even during the rehab phase, but what is it like for you? I know you BRRRR’ed a lot of properties out in New York.

Ashley:
Yeah, we do get insurance on them during that rehab phase that the… A contractor could slip and fall, so you want some liability insurance on it there. The place could start on fire while it’s being rehabbed; so many scenarios to happen. And you do want that property insured, especially if you are using a hard money lender. You have to pay back if you are doing any financing, they’re going to require you to have insurance on the property.
As far as your State Farm agent, I highly recommend going to an insurance broker who actually works with a whole bunch of different companies. If you go to a State Farm agent, they can only quote you insurance for State Farm, but if you go to… Maybe it’s their last name agency, they’re usually a broker if they’re not affiliated with a brand name of insurance, and they’ll be able to take and they’ll be able to quote out to you.
The insurance company that I usually use here in New York is Dryden Mutual for rehab. They’ll go through and they will put insurance on it. And then as soon as the rehab is done, my insurance broker will go out and actually re-quote the insurance to Dryden and to other companies when it’s ready to be rented and the tenant is in place. We’ll do that second piece of insurance. And usually it becomes cheaper once the rehab is actually done on the property. Tony, what about you? Do you find that it’s usually more expensive to have insurance on it during the rehab process?

Tony:
Yeah, the rehab insurance policy is definitely more expensive because there’s more risk to the insurance company. But much like you, Ashley, we go with a broker here locally and she usually shops it around for us. And honestly, we usually get our policies back within a day. We’ll send her, “Hey, we just got this flip in our contract. Can you let us know what the cost will be?” And before the day is over, she has a few options for us and says, “Hey, I think this option is the best for you guys.”
And then once we sell, for us, it’s usually our flips, once we sell the flips, we will pay for that year policy upfront. And then say we only end up using four or five months of it, we’ll get a refund for whatever that balance is when we sell that property. Yeah, Blake, I’d say lots of insurance companies out there will lend… Or not lend, but we’ll ensure properties that are in the rehab phase, I think it’s just a matter of getting a wider, I don’t know, I guess a wider range of options than just that one State Farm office.

Ashley:
Yeah. And you want an agent, like Tony said, who is going to get you a quote on a pretty quick turnaround where you can just email them the information on the property. But you also want an agent that’s knowledgeable in what you’re doing too, so asking them, “How many other investors do you insurance for?” Making sure that they are asking you questions about the property. You don’t want an agent where you’re just sending the address, and they’re like, “Okay, here’s a quote.” Well, did they ask you what’s the heat source? Is there a wood burning stove? Because that could also increase your insurance policy. But if the insurance company doesn’t know that there’s a wood burning stove in it and then the wood burning stove causes the fire, they could say, “No, you never notified us there was a wood burning stove. We’re not insuring the property,” and now you’re out of luck.
Find an agent, vet them as to someone who is going to ask you those kinds of questions as to what are different things about the property? Because I’ve run into the scenario too where I’ve went and I’ve put an offer on a property, I got my insurance quote, everything is great, and then after you close on the property, the insurance company would send out an inspector to do an exterior inspection of the property. And sometimes they would bring back things and say, “Actually, we’re not going to insure this property because it’s too close to the house next to it. And our insurance company doesn’t do houses that are similar to row houses,” in a sense. You’re frantic; they’re canceling your insurance. You have to go and find another insurance policy, and then maybe it’s way higher than what you actually put into your numbers. Be very cautious of that. Make sure you are giving your broker, the agent, the insurance company, all of the information that you can so there are no surprises like that.

Tony:
And, Ash, you bring up a really good point. And this is probably the topic of an entire episode, we should probably get an insurance broker on an episode and just break down, hey, what are some of the mistakes that you see rookie investors making? Because I was at a conference this past a couple months ago and there was a guy on stage who was talking about liability as it relates to short-term rentals. And he said most people in the short-term rental industry are underinsured. And he was like, “They don’t take the time to read through their insurance policy and recognize all of the risks that they’re actually exposed to just by all the things that could naturally happen at a short term rental.”
I think one piece of advice to all of our rookies that are listening is take the time to read through your insurance policy and really understand what’s included, what’s not included so you can understand where you might want to try and mitigate your risk. For example, this guy that was on stage says that he doesn’t like having any type of large rugs inside of short-term rentals because he’s seen so many policies get called when a guest trips over a rug, their toe catches the edge of a rug and they trip and fall, and that’s not usually covered under your insurance policy. There was just so many weird stories like that where he’s like, “These are things that have happened at a property, but they’re not covered under most traditional insurance policies.” Just something for people to think about and understand, it’s like what is actually included in their policies.

Ashley:
That just reminded me of not only insurance but also when I went furniture shopping, we were telling the salesman it’s for a short term rental and things like that. And when we’re cashing out, he’s like, “We can’t provide you with the warranty coverage because this is for a short term rental.” And we’re like, “What?” And he’s like, “Yeah, we don’t provide warranty for that unless it’s for your own personal use in your home.” From then on, we learned to keep our mouth shut. But it’s just some of those things you don’t really think about that happen.
Let’s go onto our next question from Ari Hader. “What is a balloon loan? Do I pay only interest every month and pay off the entire principle after an agreed amount of time, like after five years? What’s so good in it?” Tony, have you ever done a balloon loan?

Tony:
Yeah, we definitely have. Ari, it’s really, it’s a balloon payment. The loan is a typical loan like anything else, but you have what’s called the balloon payment. And I can give you a few different examples. When I bought my very first real estate investment, I had an 18 month… Or I think, actually, it was a 12-month loan from a bank to fund the purchase and the construction, and then I had a balloon payment at the 13th month that was the principle plus any interest it had accrued during that timeframe.
The way that a balloon payment works is during the life of the loan… And you can set it up in multiple ways, but the way that this specific loan was set up was that I was making interest only payments on the balance during that 12-month period. In a usual loan, like when you have a car payment or a mortgage, your payment goes both towards your principal and your interest payments. As you make payments on a car payment or a mortgage, a percentage of it goes towards your interest, which is paying back the bank, but then another percentage grows towards paying down your principal balance. Over time, if you look at month one versus month 12, after a year you’ve paid down some portion of your principal balance. And a lot of these loans that have loan payments or that have these interest only structures, during those 12 months, you’re paying interest so your principal never gets decreased. Month one, month 12, your principal balance is the exact same thing.
And then at the end of that 12 months, you have to repay the principal balance. And you have two ways of doing that. Either you can come out of pocket, so you for whatever reason have the cash that’s needed to pay back that loan in its entirety, or what most people do is they refinance and get a long, long-term fixed debt to pay off that short-term note. That’s what we did.
The benefit that we saw, Ari, was that it was significantly less expensive. It was an inexpensive loan during those 12 months because you were only paying on the interest, whereas most payments are mortgage and interest, so you’re paying less during that time and it gives you enough time to set up your refinance, like your long-term debt and get that refinance in place. That’s how it’s worked for us. Ash, how how’s it been for you and your business?

Ashley:
Yeah, it’s great for the holding cost. During that rehab period or you’re fixing up the property before you actually go and refinance, just paying that interest only payment is lower because you’re just paying the interest and not interest and principle. You’re not paying down any of the principle at the time so you’re not really building any more equity into it by principle pay down.
One example of the first time I ever did a balloon payment was a six unit I was purchasing. It was my first time doing seller financing. We set it up for one year and we did interest only payments at 7% and then the balloon payment at the year. It kept my payments really low during that year while I did some updates to the property, and then I went and refinanced with another bank and I paid off the principal to the seller at the end of the year.
I think it’s a really great tactic for negotiating a deal, getting creative when you’re offering that seller financing as to, okay, you want seller financing, but this person doesn’t want to hold it for a long time. What you can do is even if you’re not doing just insurance, only if you’re doing principal and interest payments, you could still amortize it over 30 years so that you’re still getting a really low payment, and then just have the balloon payment maybe set for year two or year three.
I did put together this deal once for this guy where it was a balloon payment in year five and a balloon payment in year seven, and then the total amount due in year 10, I think it was. I think it was $800,000, $200,000 down upfront. And then in year five, it was another $50,000, year seven, another $50,000. And obviously the amount you’re paying on the interest, once that is paid down, is going to change when you’re making these big payments to pay off part of the principle.
That’s something else you can get creative with is maybe it’s somebody who wants to retire, they don’t want to take the lump sum now, but they do need more than what the principal and interest payments would be. Maybe you can set it up that the deal still works where in two years, you’d be able to give a little bit of a big lump sum and then later on another big lump sum. So many different ways to get creative with doing balloon payments in a loan.

Tony:
And, Ash, you should bring up such a good point that there really is no right or wrong way to set them up. I’d say the majority of balloon payment type situation that you see, especially in the residential space, it’s usually using some kind of interest only type setup, but you can really do it however you want. And you see in the commercial space when you’re looking at multifamily or whatever it is, a lot of those, they’ll go out and get bridge debt, but it’ll be for three years. And they’ll have three years of interest only, and then they’ve got this big balloon payment there. The terms can vary. Like how Ashley, said she had multiple balloon payments throughout the life of her loan, so there really is no right or wrong way to do that.
But as we were talking about this and how the balloon payments can come into play, you also want to make sure that you don’t put yourself into a, I guess, a tricky situation. Part of what caused the financial crisis of 2008 was that you had all these people on these adjustable rate mortgages that had these big balloon payments. And most people, what they were doing was they were just refinancing because property values were continuing to go up. But when you saw these property values start to reverse, people didn’t have the equity to refinance, and then their payments skyrocketed and they couldn’t afford their loans anymore. You just want to make sure that you’re still being conservative, I guess, when you’re getting into these balloon payments because you could get into a situation where you might end up holding the bag and not being able to afford it.
And I literally just read something, I think it was yesterday morning, about office space and how office space is going to get hit super hard over the next couple of years because you have all of these office spaces that were on these short term notes where they had maybe 24, 36, 5 years, and now those notes are coming due. And because the valuation of office spaces based on occupancy to a large extent, and occupancies are down across the board for office, you’re seeing valuations go down. Now people in these office buildings that have these notes are going to be in a really tough situation where they can’t necessarily refinance because the value of the property today is significantly lower than it was before. You still just want to be conservative even as you’re moving into these balloon short-term debt type situations.

Ashley:
That’s a great point because a lot of… We talk a ton on here about residential loans, but commercial loans, a lot of them do have a balloon payment. You may be amortizing the life of the loan over 15, 20 years, but the loan is only fixed for five years, and it could actually be a balloon payment. Another investor that I help out, I’m helping him refinance two properties right now where it was a five year fixed, and he has to refinance out of that loan after the five years; it doesn’t even transfer into a variable rate. He’s doing that right now. But if you were to go and you’re like, “I’m going to buy as much as I can right now,” and you’re putting all of these properties that you’re purchasing on these five year loans, in five years, all those loans are going to be due at the exact same time and you’re going to have to go and refinance all of them. And then what if rates have skyrocketed? And now every property you have, these payments are going to be huge.
I saw a lot of banks this past year offering on the commercial side five year, seven year and even 10 years sometimes. I think, as an investor, you have to be strategic as to when these loans are coming due because there’s all these different things that could come into play and you don’t want to be stuck with all of these loans that you have to pay off with not a lot of options to refinance, whether it’s because your debt to income is too high, whether you lost your W2 job and it’s hard for you to go and refinance, whether interest rates have gone up so high or lending requirements have gotten a lot stricter or you’re going through vacancies at one of your properties where nobody wants to lend on it or different things like that. Be cautious on the commercial side.
It did make me think of one benefit of a balloon payment, though, where I had worked with this investor on this deal where the guy didn’t have enough money for the down payment to purchase the property so how he set it up was he went to the bank, he did his loan, but then he did a second loan on the property that was seller financing. It ended up being about $80,000, and then I think maybe he brought $50,000 of his own for the down payment. And he did interest only payments for, I think it was seven years, maybe. And then there was going to be the balloon payment at the end of the seven years to the seller. The benefit of this, this was getting the deal done for the seller, so then moving forward he was still getting a big chunk of change from the mortgage the person was getting and then also that $50,000 that they were bringing themselves. And then he was seller financing that $80,000 and getting monthly payments over the course of seven years, and then the balloon payment was made at the end of seven years.
The bank that had the first loan on it allowed this to happen, for him to have a second lien on the property because the numbers made sense and the monthly payment was so low that the cash flow of the property could easily cover the mortgage payment to the bank and the payment to the seller financing. This is something you don’t usually see on the residential side where the bank will let you go and get a second lien or seller finance the down payment or borrow money for the down payment even unless it’s a gift from a family member or somebody else going onto the deed. That is definitely one tool, if you are going onto the commercial side of lending, is using that seller financing, doing a balloon payment so you’re able to stabilize that property, have enough time, and you’ll be able to pay back the seller financing whenever the bloom payment term is.

Tony:
That’s part of what makes real estate investing so cool is that it allows for endless creativity in terms of how to get a deal done. And the more conversations we have with other investors, the more structures and levers and creativity that we see. And as long as you and that other person on the other end of that that deal are happy and you’re not breaking any laws, obviously, then it works.
Just one last thing, Ash, that came to mind as you were mentioning about not having all of your debt come due with the same exact time and you’re on these short term notes, the same holds true if you’re a long-term rental landlord. If you can try and stagger your vacancies so that they’re not all happening at the same time, you’re also going to make your life easier on yourself.
When I worked this leasing company here locally for a brief time after college and I would see… They would give us sheets for each unit that was vacant and said, “If the tenant signs a six-month lease, here’s what the rates are per month. If they signed a seven-month lease, here’s what it is. Here’s an eight-month lease and here’s what it is.” And you would think that a 10-month lease would be cheaper than a six-month lease because the landlord is keeping you in the unit for four months longer, but you would see is that sometimes a six-month lease on that unit would be $400 or $500 more than the 10-month lease. And when I asked why, I said, “Why are we charging more on this longer term lease than we are on the shorter term lease?” And their reasoning was, “We have too many units that are coming due in that sixth month timeframe so we want to try and reduce the number of people that choose that option and push them out three or four months so that we can stagger our vacancies.” I just thought it was a really interesting thing and it just came to mind when you mentioned the whole staggering your balloon payments also.

Ashley:
Yeah, that is interesting because here in Buffalo, everybody tries to make the leases end in the spring because nobody moves in the winter. That happens where we’ll offer you instead of a 12 lease, a 15-month lease and give you a little bit of a discount if you sign so that it ends up your lease ends in spring or early summer because that’s when most people tend to move is in the spring. And nobody wants to have their lease end in the winter because if somebody does move out, it’s a lot harder to fill in the winter.

Tony:
Right. Just something that came to mind. Interesting thoughts. All right, so this question comes from Bill Hall. And Bill says, “I have a house I may be putting an offer in on. It’s a pre-foreclosure. The homeowner is $19,000 behind. My question is when calculating this bid, do I put this number in with the rest of my expenses?” I’ve never purchased a pre-foreclosure, but let me just explain, and then, Ash, I’ll kick it over to you.
When a home buyer purchases a home and they get a mortgage from a bank, they’re entering into a contract with that bank to say, “I’m going to pay you X dollars per month for the next 15, 20, 25, 30 years.” And when a home buyer defaults or stops making payments, the bank then starts the foreclosure process, and eventually, the bank might end up kicking that person out of the home, retaking possession of the property, and then they’ll sell that property on the market typically for a loss.
But there are multiple steps before the homeowner actually gets kicked out. And pre-foreclosure is the step right before the bank starts to start all the legal process of getting you kicked out of the home where sometimes people try and sell to avoid that foreclosure hitting their record. And it’s a win for the bank because if they can avoid a short sale situation where they’re selling their property at a loss, then the bank obviously gets to preserve themselves in that situation as well. That’s just what the pre-foreclosure process is. But Ash, I know you said you purchased at least one property that was in the pre-foreclosure process, so I guess give us that story. And then did you have to bring that person’s payments due, current before you were able to purchase the property?

Ashley:
Yeah, so we actually ended up doing a subject to deal on this property. If you guys go back and listen to Pace Morebe’s episode that we had him on, we talked about this a little bit. And then he goes obviously advanced into subject to, what that is. But that’s basically when you’re going to take over the person’s loan payments. The loan will stay in their name, the property will be deeded into your name, and now you own the house and you’re going to be paying their mortgage on their behalf. But you can still buy a pre-foreclosure without doing subject to deals where they’re taking over their mortgage.
In this scenario, the homeowner is $19,000 behind. And the question is, “When calculating this bid, do I put this number in with the rest of my expenses?” If you are going to purchase this property in cash, no matter what, you will have to pay that $19,000, but you’ll also have to pay the balance of whatever is due on the loan too. Just if you were purchasing from somebody who was all caught up on their mortgage, didn’t have any back payments and they owed $100,000 on their house when you bought their house from them, that $100,000 would have to be paid off. In this scenario, it’s just they are $19,000 behind. Maybe they owe another $50,000. You would have to pay that full $79,000. It wouldn’t matter if it was past due or if it’s due in the future, that whole lien, that whole mortgage would have to be paid off no matter what.
The first question would be is how are you purchasing this property? Are you purchasing in cash? Are you using a hard money lender? Are you getting bank financing? Whatever that may be, you got to make sure that you’re accounting that you are going to have to put an offer in that covers that $19,000 and then whatever the remainder balance is on the loan.
You can do what is called a short sale where you actually negotiate with the bank as to what a purchase price could be so that the bank doesn’t have to do the full foreclosure; they can recoup some of their costs. We actually tried to do this first with the bank that we ended up getting the subject to deal on and paying the back mortgage on it. We tried to do this with the bank, but they weren’t very willing to negotiate much. And then it ended up just being doing the subject to and just taking over the mortgage payments was a lot better deal for us. And we ended up paying in cash the money that was owed and got the person current on the mortgage. And then every month, we continued to make the mortgage payment on their behalf. This person also had back taxes due too, so we had to pay the back taxes. If you’re going and you’re getting financing on a pre-foreclosure and they have $19,000 that’s that’s past due, if you’re putting 20% down and then getting a loan, part of that 20%, part of the loan would be towards that purchase price.
When you’re making your offer, that $19,000 would be included. You’re not making your offer and then they accept it and you go to close and you’re paying the purchase price plus the $19,000 they owe, you want that $19,000 would be wrapped into whatever you are offering to purchase the property for. That could be part of the loan if you’re going to purchase the property with a loan.
But yes, you’re definitely going to calculate this. Most of the time, if you’re not doing a short sale where you’re negotiating with the bank, if you can go on the county records or PropStream or any other paid software that gives you property records, you can get an idea of what the mortgage balance is, if there is anything past due, what the… Usually you can’t get a very super accurate amount, it’s more of an estimate. Based on the term of the loans they got, what their interest rate was, this is what we think is owed on the loan currently. But you can gauge and see, okay, I’m interested in this property; I know it’s going into pre foreclosure. But then you look and see, okay, this property is only worth $200,000, but yet they owe $250,000 on it and they’re behind another $10,000 on it, or something like that. That can gauge, okay, I’m going to have to do a short sale because it’s not worth paying that much more for the property because they have these liens that need to be paid off. But if the numbers work and you’re still getting a great deal, then yeah, go ahead, run the numbers and make sure you’re calculating any other costs.
And if it is going into pre-foreclosure, make sure you’re looking to see if there’s other liens or judgements on the property too like the back taxes. They can’t afford their mortgage payment. Are they staying up on their taxes too? Very important to look at.

Tony:
Great breakdown, Ashley. And again, there’s so many nuances to real estate investing. I feel like that’s the theme of today’s show and knowing, okay, should I try and just do this subject to? Should I let it go in a foreclosure and then try and pick it up on the backend?
The second deal that I ever bought was a short sale. And just one caution for folks that are listening is be prepared for a short sale to take a long time. My deal, that second deal that I bought it, I think it was months and months and months in between when I submitted the offer and when they actually came back and said yes and even more months after that when we actually closed because there was an initial buyer that was lined up, that buyer backed out. Then the bank came to me and said, “Hey, you were our second offer in line. Do you want to take it?” And then the negotiation process took forever because just because the seller agrees to an amount during a short sale, the bank still then has to go back and approve that amount as well, and that can take forever. You can get a really fantastic deal when you buy as a short sale, but just be prepared that it could be a lot of song and dance before you actually get to the finish line on that one.

Ashley:
Okay, so our next question is from Kyle Consider. “For those of you who own out of town rentals, what do you typically pay for management of the property?” Tony, you had your Louisiana properties. What was the property management fee you paid for those? Because those were out of state for you.

Tony:
It was honestly pretty expensive. I think they had it at 10% of rents but with a cap of $100. All the units that I had out there, I was only paying $100 per unit. And the way that I found my short-term rental company was I literally just went on Google and I typed in property management companies, Shreveport, Louisiana; a bunch popped up. I called a bunch, and I had a list of questions that I wanted to ask every single person. I’m pretty sure those questions came from just the BiggerPockets forums. I just searched the forms to find what questions to ask a property manager. And some just never got back to me, so that’s obviously a sign. There were a couple that did get back to me that I had phone conversations with.
And then when I went to go close on the property when I flew out to Louisiana to actually close, the one that I liked the most, I just asked him for a cup of coffee. And he sent someone from his team to meet with me, and they gave me a lot of insights about the local economy, about the local city, about what works well when you’re rehabbing a property to get the best rent values. And I was very open and honest with them that I was a new investor but I was looking for someone to grow with. And they were also new and growing at the time so they were happy with that. But yeah, it was a really cool process, but it was just leveraging BiggerPockets and then going out there and meeting people in person that helped me find the right one.

Ashley:
Yeah. I always self-manage my properties. And then I did hire a property management company three years ago, and that was my first experience with a property management company. And their fee, because it was me and another investor, and between the two of us bringing our properties to them, we got a bulk discount. I believe it was 5.5% For the first year. We just did a one-year contract with them.

Tony:
That’s pretty good. 5.5%?

Ashley:
Yeah. And then it was $25 per a building a month. And that covered emergency services. If there was a plumbing issue on the weekend, they didn’t charge an overtime rate or anything like that, just every month, every building. The one 40 unit apartment complex has five buildings, so we got charged $25 per unit every month for that property, then a duplex was $25 extra.
Then there was a leasing fee of one month’s rent. And then the maintenance fee, I can’t remember what it was when we first started out, but I believe it was $40 or maybe $45 an hour for any maintenance performed. And then there was a couple other… The onboarding fees can actually add up to a lot too, so make sure that you are asking what every single fee is from the day you start to the day you’re offboarding, that you leave the property management company.
I recently decided to leave my property management company and do everything in-house. I hired my own maintenance people, I hired my own property manager. But I did talk with this other property management company. And so I just pulled up their email, and I’ll use them as an examples, go through some of their rates too, but with that first property management company I used after the first year, the second year, they did increase it to 6.5%, I believe, the management fee. And then I think the maintenance increased to $50 an hour maybe for maintenance. And then I don’t think there was any other changes in any other fees.
But this other property management, just to compare for the Buffalo area, what they had offered me was that their property management fee is 10%, which is the same if you don’t have… If you don’t have a lot of properties, if you’re not getting the bulk rate, the previous property management company charged 10% to other people. The loading fee is $895 per a unit. That includes advertising, showings, tenant screenings, and lease document generation. And then maintenance services are billed at $52.50 per an hour with a one hour minimum and billed in 15 minute increments after the first hour. That was just the basics of their fee there.
I think it definitely varies from market to market. And I 100% think that the cheapest way is not always the best way to go. Just like using contractors, the cheapest is not always the best. I often wonder, okay, so for my properties, I was paying this very discounted percentage where other investors were paying a lot higher percentage, that 10% to 12%, obviously their units were worth more to the company because they were getting paid so much more for that, so I wonder if that does reflect on some kind of service. But maybe not at all, but just some of those things to think about.
And then also the maintenance services as to what maintenance do they actually do in-house? One thing that I typically saw a lot was a maintenance tech going out, charging for the hour or whatever to assess a situation, and then it would be sent to an actual plumber or things like that. I’m getting charged just for somebody to look at it and then getting charged for the actual person to come and fix it. For what I do now, doing everything in-house is we have metrics set. If a maintenance request comes in and it is a plumbing issue that is not a toilet running or a faucet leaking but it’s anything other than very simple plumbing task, the work order gets emailed directly to our plumbing vendor, and they schedule, they set it up, and then they go. I think it’s very important to understand how their systems and processes work in all aspects too, not even just maintenance, so that you’re not getting billed for all these little things because they have this whole process.
Another thing too that came up was before we left the property management company, we started hiring our own people to do turnovers in-house because they’re just getting so costly with the property management company, with them doing it. And after we did a turnover in-house, they sent a maintenance tech to inspect the property. And we were billed for him to come and inspect it and make sure it’s rent ready, but we had already hired our own contractors to make it rent ready. And it was just another fee that they were charging us to make money. But so just know every little fee that can come out of it too. And sorry, I know I keep going on and on.

Tony:
No, no, keep going.

Ashley:
Another thing to is any reoccurring inspections. I think maybe year two into the property management company, they sent out a notice to all owners that we are now requiring everyone to have their property inspected, I think it was semi-annually. And we’ll send a tech out. It’s going to cost $70 for the inspection. We’ll write up preventative maintenance things, which in general sounds like a great idea. For the 40 unit apartment complexes, really wasn’t a great idea. They went through, and these apartments are pretty well done, everything like that, and would go through and then give us… We’d be charged $70 per unit, which ended up being a lot when you have a whole bunch of units. And then also, they were saying, “Okay, these smoke detectors need to be placed, this GFI needs to be placed,” all things that are safety issues. But the problem was they were charging us rates of… We could go to Lowe’s and buy that. When you’re replacing 20 smoke detectors, you go to the Lowe’s, the Home Depot bid room and you bid out those 20 smoke detectors get way it cheaper.
Understanding the material costs of when you are being charged materials from your property management company, do they get discounts on that? Different things like that. Really, there’s a lot I could keep going on and on about that I’ve learned over the years about the billing and the fees and the costs that all add up and are associated with property management companies. And if they do a good job, it is 100% worth it.

Tony:
Yeah, Ash, you bring up so many good points. But that’s honestly one of the reasons why long-term rentals at times can be difficult to be profitable is because of the fees that rack up from your property managers. I actually pulled up one of my PM agreements. I was right, it was $100 per month to manage the property. The lease up fee was cheaper than what you said. Ours was only $350. And if I remember correctly, this unit was renting out for $1,200 or $1,300 per month, so a little more than 1/3rd of one month’s rent.
But one of the other things that happened was the property management company owned their maintenance company as well. And they always gave us the option of, “Hey, here’s a quote from us. If you want to get outside quotes, you’re more than welcome to. But you’re busy working, you don’t want to spend time trying to call four different plumbers to get a quote on how to replace a wax seal so just say, “Hey, you take care of it yourself.”” But what we found was that when we did try and search for other prices, the property manager’s rates were typically more expensive, but it was the convenience that allowed them to scale that up. Because you got to think too, if they’re only charging you $100 per unit, that’s not a significant amount of money.

Ashley:
That’s because you’re so used to the short term [inaudible 00:42:21] the 30%.

Tony:
Yeah, 30%. But just think, if you’re trying to build a business and each property that you bring on is only $100 per unit, you need a lot for that to be a successful business that’s actually going to pay the bills so they do have to find ways to make that work for them financially. And the other thing that came to mind, I’ve looked it up in here as well, my property manager made us have what they called an owner’s account, which was basically a holdback or a reserve account of $500. And that $500 was to cover any expenses, just to make sure there was always money in the account to cover any expenses that came up. If they had to, whatever, replace a smoke detector or whatever maintenance repairs came up, they didn’t want to have to front that money. And their solution for that was making sure that there was always at least $500 in this owner’s account.
And we had two options to put that money in there. We could either just write a check, $500, put in there at once, or they would deduct $50 per month until they got to that $500. Think about if you go that route, now, not only are you paying $100 per month for your property management fee, but now you’re also tacking on an additional $50 per month for 10 months, so now you’re really paying $150 per month for your property management. And say you were only netting or say you only have a couple hundred dollars per month in profits anyway, and that $50 makes a big difference over the course of a year. Definitely read through your PM agreements and get a really solid understanding of what the different costs are.

Ashley:
And you eventually get that $500 back. When you leave the property management company, they give you those reserve funds back. You got to think of it as a savings account that’s not generating any interest for you.

Tony:
Yeah.

Ashley:
But that’s interesting that they let you pay it over a period of time because when we did it, everything had to be paid… That was part of the onboarding fee was that had to be paid upfront. And that is a great thing to bring up, Tony, is to think about that. Okay, you’re purchasing this property, you’ve dumped your money into the down payment maybe to pay your rehab to be done, and maybe you’re strapped on cash. Did you make sure that you’re going to have that reserves for them?
Well, thank you guys so much for some submitting great questions today. As always, you can go to biggerpockets.com/reply, and you can leave us a question. Or you can slide into mine and Tony’s DMs at Wealth from Rentals or at Tony J. Robinson. We will see you guys on Wednesday with a guest.