Property Manager vs Investor--- An inherent conflict of interest?

Question

I have a property management fee structure question for the forum.

I have several properties in Louisiana and I live in Georgia. I am under a typical property management agreement with an individual who has been fantastic. Pretty standard 10% rents collected though I do not have to pay if he finds a tenant for a vacant unit. Furthermore it’s written in the contract that I have to approve any expenses over $X therefore he does not make a dime over what I’m being charged and I can see and make the final decisions on the major repair work.

Reasons for this are simple- I want his interest as manager as closely aligned as possible to my interest as owner.

I’ve talked with a couple other owners who use the larger incorporated property management companies. Some common pricing themes I’ve been hearing 1) aprox 10% of rents, 2) a % of first month rent for finding a tenant, 3) charging a premium on contracted out major repairs and 4)nickel and diming on small repairs.

This seems like a massive conflict of interest. As a property management company you would better profit if there is a high turnover of tenants and there is constantly work being performed on the property. The exact opposite of what an investor would want.

So the question becomes has anyone out there come across a pricing/fee structure that better reconciles the interest of the management company and investor?

Marcel Bryar · Answer

Yes.  I'm invested in a building in Baltimore and we wrestled with this question before hiring a management company.  We finally came up with the following (I'm paraphrasing, obviously):

1.  Fee is a % of rents; no fees for finding tenants.

2.  Manager has to meet certain metrics:  (a) low vacancy rate; (b) market rents -- we require them to check rents for comparable units in the neighborhood; (c) maintenance and repair costs stay at or below CPI, year over year; (d) tenant satisfaction -- we require them to publish a quarterly survey.

3.  If manager exceeds metrics, we pay them a bonus; if manager meets metrics, we pay the base management fee; if they fail the metrics, we withhold a % of their fee, the amount of the % based on the level of their poor performance.

Now, we put out an RFP asking competitors to bid on these terms and a lot of them refused.  One told us we were crazy.  But a number did bid and we chose one.  They hired a good on-site manager and she helped them hits "meets" a number of times; once or twice, they go an "exceeds."  Our vacancy rate has been 0% for more than 10 years and we have very little tenant turnover.

Hope that helps.

Marcel Bryar · Answer

Christina,

To answer your first question, that is right.  We pay a % of monthly rent and no fee for finding new tenants.

The bonus (or credit) is quarterly.

We used this approach for a multi-family building (46 units).  We haven't used it for a portfolio of single-family properties; we self manage the ones we have.  I think the approach could work for SF but I'd have to give it some thought to see if there are some tweaks I'd want to make given some of the differences between managing SF and MF (e.g., there's no on-site manager for SF).

Hope this helps!  Good luck.  Marcel

Steve Rozenberg · Answer

As an investor and owner of PM company I can see where you are coming from. I think one thing to remember is that when you own a PM company that is a business. It has costs, for things such as staffing, taxes, accounting etc.. things we don't normally think about when we are buying a rental property. I think it is vital to have the right PM company on your side that is like minded. I have learned that it can't be one sided where the PM only makes money , or the property owner makes money. It has to work synergistic with growth and success, I try to make sure I sit with new clients and make sure our goal as a company aligns with their goals of investing. Also one thing I learned is that cheaper is not cheaper.

If we try to save an owner money by going with "Chuck in the truck" and he does a bad job and tenant complains or worse it is a lisc type job and we cut corners to save some money but get the owner sued, have we really done the owner right...

I tell people we manage 1,000 properties... that means we have about 500 owners, 1,000 residents and about 200 vendors.. and everyone has a different definition of happiness and service. The only thing we can do is run it down the line to the letter of the law to protect both the owner, the tenant and investment property. Its like being married to 2,000 people and everyone wants something different..

My point is the key is to set the proper expectations in the beginning, what is expected of us and what we expect of them (both owners and residents). and to remember that it is a business that has laws, regulations and protection of rights

Just my opinion

Jason Bilbrey · Answer

In another thread @Kevin Smith suggested another potential option:

"I was thinking the manager could take a percentage cut, say 20%, of the following:

Rent Collected - (Repairs/make ready costs due to tenant + HOA penalties +eviction/collection fees)

This  would incentivize the property manager to place a quality tenant who  doesn't break a lease early, and who takes good care of the home. This  would minimize the time the manager would have to spend on the property,  and minimize unnecessary costs to the investor."

Thoughts on this? Has anyone ever seen or negotiated a Property Management company with this kind of approach?

Jason Bilbrey · Answer

@Marcel Bryar - Could you share more details on this part of your post:

"Manager has to meet certain metrics:  (a) low vacancy rate; (b) market  rents -- we require them to check rents for comparable units in the  neighborhood; (c) maintenance and repair costs stay at or below CPI,  year over year; (d) tenant satisfaction -- we require them to publish a  quarterly survey."

What are your specific targets? For example:

• Low vacancy rates: Meets = "At market vacancy" / Exceeds = "Below market vacancy"...or do you set a specific target like under 5% meets, under 3% exceeds?
• Same question for market rent targets?

For the repair and maintenance, what is CPI? And can you detail your specific targets with some examples? Is it something like under 5% of rent for maintenance costs or is it set at $xxx per door or less, etc?

Marcel Bryar · Answer

Alex -- We sent the RFP to 15 companies and 11 of those opted out.  The company we ended up selecting has been with us for over 10 years.  Honestly, we weren't surprised by the low response rate.  We were asking people to adopt a new way of thinking.  But we were comfortable we'd get someone.  Our "ask" was reasonable and fair and the market for property management is very competitive (turnover between PMCs is high, particularly in the condo association market, due mostly to customer dissatisfaction with the service).  Best, Marcel

Christina Crawford · Answer

Hi Marcel,

Thanks for bringing up this topic.  I am starting up a Property Management company currently and I've been trying to figure out how to benefit investors with it.  My husband and I used a PMC previously and hated the way they nickled and dimed us.  We decided to start up our own in hopes of changing "Property Management".  I know that the more you give and serve, the more doors and opportunities become available to you.

To understand your current plan:  the only thing you pay your PMC is a % of the monthly management fee for the most part.  Is that right?  You give a bonus also if metrics are achieved but is that just once per year?  I can see how this is possible financially for the PMC if they have a large amount of properties from each investor.  Is there a minimum number of houses that come with those terms?  Any extra info you can give will help me build a better business plan.

Thanks!

Alex Dutton · Answer

Marcel, really good stuff and similar to what I did with my property manager. It amazes me when property managers don't recognize how cost prohibitive some of their services can be, however, I don't know what margins their businesses are running on.

May I ask you a follow up- You said you included these performance metrics in your RFPs, what % of management companies responded And were actually willing to take your ideas seriously (of course allowing for a little negotiation).

Property Manager vs Investor--- An inherent conflict of interest?

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