Are we paying our property management agent too much?

Question

Hi Guys really appreciate your time and help, I am new to the real estate business, we recently bought into the property market in Ohio with 3 multi units with approximately 50 units in total.  Are the following charges normal?

The agent wants to charge 7% management fee of all Receipts monthly, All Receipts are defined as follows: all rental income; all parking income, all vending and laundry coin income, all late fees and lease settlements, etc

He also wants to charge 85% of one months rent for finding  new tenants?

The Agent shall receive a project management and supervision fee equal to eight percent (8%) of the labor and material costs of any major capital improvement or major repair project, This fee does not apply to routine suite preparation and other routine maintenance/repairs.

Again, thanks for all your help guys.

Harvey

Joel Florek · Answer

@David Barnett From what know of talking to investors in different markets this is normal. However, I would urge you to not accept normal. Get creative on aligning the incentives in both your favor and managers favor. One of the major problems with the flat 7% to10% fee plus 1 months rent for filling vacancies is the issue of incentivizing to fill vacancies quickly. Lets look at a unit that rents for $600 a month. If it goes vacant the managers looses $42 to $60 that month. They loose that much monthly income each month until they fill it where then they get a bonus of $600 for filling the unit. When screening tenants and they have a choice between an elderly couple looking to find a permanent place to live with no maintenance hassles or a young engineer looking for a pad to live in over the next 12 months until they can afford a house who do you think they are going to pick? The long-term tenant is not in the best interest of your manager although it is in your best interest. Also, the incentive to fill vacancies quickly is small for your manager with you taking on 90% to 93% of the financial loss. Sounds bad right?!

In my opinion you should try to negotiate a commission that pays out over an annual period and tied to your financial performance. You will have to play with this to make sure they can get paid monthly.  The commission is directly correlated to occupancy. Rather then a flat correlation of commission percentage to occupancy rate shift the curve to the right. What I mean by this is make the last 3% of occupancy go completely to your manager. So an example could be they get a minimum of a 2% fee. If they achieve 80% occupancy they get a 5% fee. If they achieve 90% they get a 7% fee. If they get a 95% occupancy they earn 9%. And every point over 97% occupancy they get it all. If they can achieve 100% occupancy(total revenue potential) they have the potential to earn 12% of your revenue. Given you plan for vacancies and they beat your plan you and the manager actually make more money then you would have otherwise. Works great for you, and can work great for your manager if they work hard and perform well.

Would be happy to talk through these ideas more if you would like. It is a bit unconventional but everything in business is negotiable and you will find someone who will get excited by this opportunity. Feel free to message me and we can set up a call.

Joel Owens · Answer

Focus less on the price and MORE and the competency of the property manager. If you have a manager for 6% but they run your property into the ground and chase away tenants that 1 or 2% you thought you were saving is turned into much bigger losses for the property.

There is cheap,expensive and then there is VALUE.

Value is getting competency for what you are willing to pay. Now if the market dictates what you want to pay is not realistic then you typically have to adjust expectations. Property management is a very low income activity so if you find someone good you need to treat them like gold.

Jeff Greenberg · Answer

@David Barnett do you have any on site management on any of these MF properties? If it is just the pm with no onsite the fee is reasonable.  I totally dislike a new tenant lease up fee & would do anything I could to find a way to give bonuses for resigning leases, meeting income benchmarks, and reduction of turnover. This is more in line with my goals on increasing the NOI.

Peter Lohmann · Answer

Can't believe nobody has asked yet - what are the average rents? That makes a huge difference.

7% of $400/mo (class C or D) is pittance. I wouldn't even get out of bed for that.

7% of $1200/mo class-A plus 85% leasing fee, on the other hand, is highway robbery.

We charge a flat rate per unit with no leasing fee to most of our clients. They seem to love it.

Russell Brazil · Answer

8-10% management fee, along with 8-10% of all repairs and 1 months rent for tenant placement is normal in my market.

Jeff Greenberg · Answer

@Peter Lohmann what area do you manage in?  Do you have any referrals for management in Cincinnati, C property over 100 units.

Mike Dymski · Answer

With that fee structure and 50 units, you may want to consider hiring an employee.  You could also consider having them manage property for other owners with a fee structure that aligns the owner's interest with the PM's interest rather rather than lease up fees.

Sean Dawson · Answer

@Anthony Chara Looking forward to your presentation at the COREE meeting and already signed up for the workshop.  Better be worth it! :)

@David Barnett our PM charges something very similar to what you've stated.  Although instead of 80% lease up it's 100% (until a certain rental amount).  If you're in Columbus we can share notes if you'd like.  I think our management company is worth it though.  We've discussed many things related to actually purchasing our multi-families and we havent seen any shenanigans as of yet.  Win win for both.

Anthony Chara · Answer

What part of Ohio are the properties located in, @David Barnett? I might be able to recommend a couple good companies for you to research for a comparison.

Chris Soignier · Answer

In my deals, 3-3.5% is typical, but they're usually more doors and concentrated in one location.

I think you should get at least 2 more bids, but don't just pick the cheapest.  Get several references from each PM prospect.   PM is a huge responsibility, and an incompetent manager can destroy a lot of value in a short time.