In 2012 we hired a management company to manage one of our out of area properties in Illinois. What initially looked like a great match turned out to be a disaster, and we had to terminate the company after just one month. However, upon terminating the company we were forced to pay them 2 months of management fee just to have the leave. If we had used a proper termination clause we could have avoided this.

Or like the time we had the garbage removal company come on site and have one of the maintenance guys sign for a 6-year contract! Knowing who is responsible for what, will avoid you making those same costly mistakes.

Over time we have learned how to use agreements that increase the probability of success. I have made a short outline of some of the areas that you should think about including in the property management agreement, and posted it below. (note that I am not a lawyer, and you should always consult one before making any decisions)

1. Renting of Premises

You as the owner set the standards, or should approve the standards that the management company uses to screen prospective residents. Not knowing what the standards are can get you into trouble with fair housing. This is a problem you do not want to have.

As soon as possible after taking over the management of the property, the property management company shall be responsible for producing an operating budget for the next 12 months, and do this every year at least 60 days prior to the beginning of each calendar year. In the budget there should be a plan for capital expenditures and major repairs, which will be required during the next year. Such list shall describe work to be done, location, necessity, estimated cost, and the quarter of the year in which it is to be done. You as an owner is equally responsible for reviewing and accepting the budget too. The budget will be the plan from which the property is operated and performance measured.

2. Employment of Personnel

In most instances anyone employed at the property shall be the employees of the management company. Remember to confirm with the management company. That goes for salaries and benefit levels too. You need to check if there are any additional charges that the property company will charge you for personnel. Also make sure who is responsible for what.

3. Service Contracts

In some instances, we have discovered, too late, that service contracts have not been property set up. One time the garbage removal company had secretly had one of the property maintenance guys sign for a 6-year contract.

When your management company goes out to get bids for new severice contracts they should do so in accordance with your vendor bid policy to ensure you get the best service for the least amount of money. This does not mean that cheaper is better, but you want to know who can offer you the best quality of work, for a competitive price.

4. Maintenance and Repair

The management company shall maintain the buildings, appurtenances and grounds of the Development in accordance with standards acceptable to you the owner, including within such maintenance, without limitation thereof, interior and exterior cleaning, painting and decorating, plumbing, carpentry, and such other normal maintenance and repair work as may be desirable.

For any one item of repair or replacement, in excess of $1,000 you can include a provision to have the management company bid out the work, or the parts. Unless they are emergency repairs (flood, blood and fire). Further you can have another provision stating that for any expense over $2,500 they will need to have your approval to make the repair.

5. Insurance

Many times you can better insurance rates by using the insurance company of the management company. It is important that the insurance certificate lists you, the property management company and the lender. At a minimum you should have adequate General Liability Insurance, or any other insurance required by law, to protect you! You may also have insurance for Property Damage, Boiler & Machinery, Fire, and or Rent Loss. It is important that you follow your lender guidelines and that insurance is placed with a reputable company with adequate ratings.

You should also make sure that the property management company has a policy for notifying you of any accidents, claims and damage, the cost of the repairs, and or any other reports required by the insurance company or the authorities.

You can approve the management company to settle any claims that are less than a certain amount, say $1,000. If there are claims larger than this you should be notified, together with the insurance company or your legal representative to make sure that you respond appropriately. Failure to this can cost you BIG $$$$$$$$.

6. Monthly Reports

On or before the 15th of each month the management company should prepare.

(i) Balance Sheet;

(ii) Modified cash basis Profit and Loss Variance Report; (

iii) General Ledger Detail Report;

(iv) Property Status Report, Unit Status Report, and Delinquency/Prepaid Report;

(v) A listing of accounts payable, if applicable;

(vi) A report in letter form, commenting on important operational features which are not apparent from the financial reports, forecasts of changes in operations or physical conditions and significant variances from the approved Budget;

(c) Annual Report including a Profit and Loss Statement showing the results of operations for that year and a Balance Sheet of the Development as of the end of that year.

(d) Tenant Complaints. All complaints coming from tenants shall be received, logged and considered in systematic fashion in order to show the action taken with respect to each. Complaints of a serious nature shall, after thorough investigation, be reported to Owner with appropriate recommendation.

7. Compensation

The compensation of the management company shall be outlined with all details, with how the management fee is calculated, when they are to be and a full list of all services and their corresponding charges should also be attached. This could include big CAPEX projects that require a project manager.

8. Major Repairs

If there is a need for repairs over a certain limit (say $2,500) the management company should get your explicit approval for these repairs, and should also include a vendor bid package to show you that the job was bid out to several vendors and that they obtained the best bid.

9. Management Company’s Affiliates and Subsidiaries

Sometimes you may be faced with the management company using an affiliated company or a subsidiary to perform certain services at the property. I strongly advise against using any company related to the management company, or any of their employees! If you ever need to use an affiliated company, the policy for how this is done should be clearly spelled out in the management agreement

10. Separation of Money

This may be a no brainer, but make sure that the property management company does not mix your money with their money! Keep separate bank accounts. It is also well worth to separate the operating money and the security deposit (this is the law in several states).

11. Termination

Just like with any other professional relationship you should include a provision about terminating the management company, and how this should be done, and when it should be done. In some instances I have seen contracts that do not allow for termination in less than 60 days. This is in my opinion way too long, and will only complicate matters for successfully managing the property. 30 days is more common, and it goes both ways with the management company being able to terminate the contract with you too, if you do not adhere to their requests.

12. Arbitration and Attorney’s Fees

Like so many agreements these days its important to think about whether or not to have an arbitration clause in your agreement. It could potentially save you from a costly lawsuit. So does a provision about who pays who’s layers fees.

Who will be paying for legal expenses, most agreements have a provision outlining that each respective party cover their own legal expenses. And including a provison about this could

These are just some of the items you need to make sure to know about when hiring a management company. But in my opinion some of the most important.

Do you have any other that you think should be included on the list? If you do please do not hesitate to include them in the comment section.

Best,

Christian