PA - Laws Surrounding Property Management

[Samir Shahani]

Hi all,

I was approached by a family friend yesterday who wants a property manager for investment properties (50+ units).

I am a local investor in the same market, but I started thinking about property management for other local investors.

I understand for you to be an official property manager in Pennsylvania you would have to have your RE Broker's license.  

However, Is it legal for me to take on his responsibilities as a private deal/transaction? Can I manage FOR him, not as a general property manager?

Any/all comments welcome and appreciated.  Thank you.

[Chris K.]

@Justin K. @Samir Shahani

So took a quick look at the statute and the regulations again. I posted a link below to the both the statute and the regulations if you are interested in taking a look. Just to give you an overview on how all this works, the main law on this issue is the "Real Estate Licensing and Registration Act." That Act creates the "State Real Estate Commission." The Commission has the power to publish regulations. I don't want to go into detail about the difference between a statute and a regulation --- for now, it's enough to think about regulations as a way for the Commission to supplement or clarify issues within the Act.  

Long story short, here is a very short summary of the law on this issue: 

1. Broker/Salesperson. The Act defines a broker is a person that provides certain services to another person for a fee, commission, or other consideration. One example of such services include management of "any real estate" and any promotion of "rental of real estate." The Act bans any other person from engaging in these activities unless they are "salesperson." The Act defines a salesperson as someone that a broker employs to conduct services that only a broker can do.  

2. Owner Exceptions. There are few exceptions to the above rule. Both the Act and the Regulations have the following exceptions: 

• An owner of real estate with respect to property owned or leased by such owner. In the case of a partnership or corporation, this exclusion shall not extend to more than five of its partners or officers, respectively, nor to other partnership or corporation personnel or employees.

While the PA legislature enacted the above law before LLCs became a recognized entity, we can reasonably assume that the above law applies to LLCs as well. So let's say there is an LLC that owns real estate and has ten members. The above language suggests that five out of the ten members can do activities that only brokers can otherwise do.

3. Employee Exception. The other big exception in the Act reads:  

• Any person employed by an owner of real estate for the purpose of managing or maintaining multifamily residential property: Provided, however, That such person is not authorized or empowered by such owner to enter into leases on behalf of the owner, to negotiate terms or conditions of occupancy with current or prospective tenants or to hold money belonging to tenants other than on behalf of the owner. So long as the owner retains the authority to make all such decisions, the employees may show apartments and provide information on rental amounts, building rules and regulations and leasing determinations.

The Regulations have a slightly modified version: 

• An individual who is employed by the owner of multifamily residential dwellings to manage or maintain the dwellings and who is not authorized by the owner to enter into leases on the owner’s behalf, to negotiate terms and conditions of occupancy with current or prospective tenants, or to hold money belonging to the tenants other than on the owner’s behalf. So long as the owner retains authority to make decisions, the individual may show apartments and provide information on rental amounts, building rules and regulations and leasing determinations.

The above exceptions suggest that an owner can hire an unlicensed person to take certain actions. Express examples include: (1) showing apartments (2) provide information on the rental amounts to the public; (3) provide information on rules and regulations relating to the rental. The property manager, however, cannot enter into a lease on behalf of the owner, negotiate terms of the occupancy with current or prospective tenants, or hold money belonging to the tenants other than on the owner's behalf.  

4. Links. 

http://www.dos.pa.gov/ProfessionalLicensing/Boards...

http://www.pacode.com/secure/data/049/chapter35/ch...

5. Thoughts. Can't really give you guys any specific advice about the above without us having an attorney-client relationship and knowing more about both of you. But from a board perspective I see some obvious risk with both options. 

Note that the Commission has the power to assess penalty for each violation. I can't recall what the max amount is right now. Last time I checked, I think it was around $10,000 per violation. So let's say you decide to help a "friend" manage 50 units. Everything goes okay for a year or two. One day, either the tenant or your "friend" --- who most likely won't get any holiday cards from you at this point --- gets pissed at you for something that goes wrong and files a complaint with the Commission. At that point, you face a potential fine of $500,000. Even if you can manage to avoid it, I assume you will incur decent amount of legal fees. 

Now I do know many "real-estate firms" that offer property-management services where a non-broker/salesperson has an ownership interest. I can't comment on the legality of it without much research. But in those arrangements, most of the work gets done by salespersons and other employees. Even then, my guess is that it's safer to ensure that any employees that perform any kind of property-management activities have a salesperson license. 

Long story short, such an arrangement would require you and the broker to have a decent number of properties under your belt to make it feasible (due to operating costs involved in running this kind of business). At that point, you are running a full-fledged business. While that's fine, historically property-management companies that serve smaller rentals eventually fail for one reason or another. Why that's the case is topic for another day.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.