Aligning Investor's Goals with Property Manager's Goals

[Josh Dotzler]

Hello BP Investors,

I have been in debate with another property manager about the merits of an alternate pricing strategy. I would like to hear the opinions from investors and other PMs out there.

Typical PM Charges for the DFW area:

- 7%-10% of rent collected as monthly Mgt Fee

- 50%-100% of one Month's Rent as Placement Fee for new Tenant

How to align Property Manager's Goals with Investor's Goals

- No Placement Fee for finding new tenant

- In order to offset the loss in income from replacing tenants, charge a slightly higher monthly management fee (ie. 12% vs 10%)

The reasoning behind this change would be to better align the goals of the PM with the goals of the Investor. Investor's hate turnover, but PMs love it (they get paid a lump sum). PMs love to say that tenant placement is a lot of work and demands a high payment, but for anybody who has invested in great PM software (ie Appfolio) this process is really not as difficult as they would make it sound. I use Appfolio and they have made it incredibly easy to post a vacancy, syndicate to the major sites, have tenants fill out/pay applications online, and finally screen tenants (all within the system). So to say it takes too much work and demands a whole month's rent in the DFW area is outrageous (even if posted in the MLS).

So if Property Managers didn't actually get paid an extra amount for placing bad tenants (that regularly turnover) then they would have incentive to place great tenants that stay there for years.

Downside: Rental units that regularly turnover due to atmospherics of the neighborhood and conditions outside the control of the PM (ie college towns, war zones, etc). The PM would have to actually evaluate each property they took on to see if they needed to charge a placement fee or if an increased monthly management fee is all that would be needed.

Would investors pay a higher monthly management fee on rent collected in order to alleviate the placement fee? Or would you prefer to pay a lower management fee and roll the dice on the frequency and cost of placement?