Dear Property Management Companies....

[Mike McKinzie]

and Property Managers in general,

Just about no one on Bigger Pockets is as big a defender of Property Managers as I am.  While some folks are great DYI people and can manage their own properties well, I am a firm believer that a Great Property Manager will actually INCREASE an investors return on a piece of property.  Not only did I run my own property management company back in the 1980s, I have just recently gone back to work, for a Property Manager here in Orange County, CA.  We manage about 4,500 units and I manage the Accounting Department and have five people under me.

But I have started to notice a trend in Property Management that is weakening my defense of you. I am seeing more and more ways that you guys are GOUGING the investor. Back when I ran my PM company, I got my 10% fee and THAT WAS IT. I did NOT charge for renewing a lease. I did NOT charge for finding a new tenant. I did NOT charge extra for a repair. I did not have my own in house repair company. And the company I am now working for also does NOT charge to get a new tenant, does NOT charge to renew a lease, does NOT charge a 'commission' on a repair bill. As a matter of fact, I have 11 SFR rentals in CA and NONE of my California PMs charge for a new tenant or charge to renew a lease or charge extra on top of a repair bill. And one of them, who manage several rentals, charges me 6% of the months rent and NOTHING else, EVER.

Therefore, having run my own company, having current PMs manage for me and currently working for a PM in CA, I know what it cost to run a PM company and gouging us is very unprofessional.  And please don't use the cliche "you get what you pay for" as I have found that to NOT be true very much in life.  I will absolutely PAY more for good quality, but it better be as good as the comparison between a Rolls Royce and a Yugo.

I will continue to DEFEND Property Managers as I like to invest in a variety of places.  But if this trend continues where PM's try to find "new and exciting ways" to gouge the investor, I may be forced to semi-self manage my properties.  I have the knowledge and skill, I just thought my time was more valuable, but when a $1,000 a month rental COSTS me $3,000 every turnover, that might convince me my time is worth semi-self managing.

This may sound a bit like a RANT, as well it should.  I don't like overpaying for anything, from an ice cream cone to a new rental.  As is always said on Bigger Pockets, you make your money when you BUY, so BUY right.  I am 'buying' Property Management so I want to buy right.

As a final question to BP, have any other investors noticed this same trend in Property Management, that they keep finding ways to charge us?  Or is this just me?

[Stewart Guthrie]

@Mike McKinzie

"Interesting that I have not received any defense comments from the Property Managers out there. No one?"

In my opinion, your original post sounds more like you're trying to pick a fight.

If someone stands up in a bar and announces that he can kick anyone’s *** in the place, and he goes unchallenged, does that mean he’s correct, or does it mean that the other patrons of the bar have decided that there is nothing to be gained by responding? To carry the analogy further, are the other patrons more or less likely to come back to this bar?

Accusing a fee manager of "GOUGING", (all caps), probably goes a long way to ensure a suppressed response by lots of people who may or may not agree with you. To me, the term "gouging" implies that the fees being charged are unnecessary and excessive; simply “additional profit” that adds little or no value to a client or customer. I don't know if that is your definition, but I think it's a fair place to start. The problem is that many investors/clients compare what they would charge to perform work on their own property, (nearly nothing in many cases), to what a PM is charging to perform the same work and assume that the delta between the two figures is excess or unnecessary profit.

So, a few points:

1)  The free market conservative/libertarian in me says, “So what?”

As long as my fees are disclosed, (difficult not to do in our state, but a moral and ethical imperative in any case), our clients can make an informed decision as to whether or not they want to do business with us or another PM down the street.

If I have more or different fees than another PM, each client must make a decision based on what they value: the product they buy from me has to be worth more, (to them), than what they pay me. If it isn’t, they can, (and should), take their business elsewhere when we have fulfilled our contractual obligations. For the most part, it’s still a free country, (Thank God).

If I conduct my business in a legal moral and ethical manner and my market still won’t support the fees I am charging, then I will either change my prices or go out of business, full stop.

2)  Is it not the obligation of any business owner to maximize profits?

If a prospect investment property is worth $200K but it was listed for $175K, “For a Quick Sale” because there is some sort of distress or trigger event, does a BP member offer $200K? Why not? My guess is that most folks on these forums would start at $145K, (many would start at $99K).

Why should it be different for a Property Manager? What if I can cover my costs by providing service of an acceptable quality at $75/month but my market research indicates that this level of service will consistently sell for $100/month, should I give up the $25/month because I’m better at providing service than my competitors? My good, smart, ethical hard working employees hope not, they’d like a raise, a bonus or a better telephone system. The Regents of the University of California hope not, because they want me to pay tuition for my 3 children, (though one of them is likely to join the Navy, everyone reading this will be on the hook for his GI Bill).

3)  Markets and customs are vastly different.

For example, a strong case can be made to charge a leasing fee along with the monthly management fee, (typically lower):

This structure more accurately reflects the work load on a rental property: taking new marketing photos, writing and syndicating marketing ads, scheduling/performing showings, tenant screening, acceptance of deposits walk-throughs etc. Taking half the first month’s rent, when the property is rented, reflects the heightened activity during this phase of management. The intensity level drops considerably, or should, when the tenant is in place and paying rent on time, reflected in a lower monthly management fee.

So, I made a case. I don’t know if you are convinced or not, but that is what is customary in this market, (to @Dawn Brenengen's point above).

I should also note that this doesn’t make this fee structure more “right” than another, it simply means that the vast majority of property owners and PM’s in our market have found it a comfortable/acceptable business arrangement. Just because it’s different does not make it dishonest or excessive, (or “GOUGING”).

4)  Most folks on BP recoil at the thought of paying any sort of markup on maintenance. Let me give an example.

You purchase in investment property, built in 2007; it’s part of a large development, middle class, good schools, mostly owner occupied.

Over the same long weekend, your brother, (who believes that the answer to all of life’s questions will drop out of the bottom of a spreadsheet), buys a property roughly the same size, built in 1971. Cash flow looks AWESOME because acquisition costs were so much lower.

Logic, and considerable experience, tells us that the home built in 1971 is going to need a lot more attention and will have a lot more maintenance issues than the one built in 2007. The solution advocated by many BP posters would have us simply increase our management fee percentage to cover the cost of managing maintenance. But is that fair to you, the owner of the home built in 2007? You bought a newer, likely more expensive, property. You were likely betting on having a smaller allowance for maintenance. Why should you pay, (through an increased management fee), for maintenance management services that you don’t need?

I think that your brother, the one that bought the 40+ year old property, (probably with lead paint and asbestos tile), should pay more if he uses more service. The maintenance markup is a fair way to do that. Is it the only way to ensure that costs are covered? No. Is it a valid way? Yes.

In some markets, with very high rents, management fee revenue really is sufficient to cover the additional management burden of all but the largest projects. That isn’t the case in all markets though.

5)  Finally, it would be foolish to ignore the fact that there are loads of opportunities for a dishonest actor to cause harm, especially on the maintenance side: Defer maintenance, Bill for Maintenance never engaged, Request unnecessary maintenance or Mark maintenance up excessively, etc. (this is by no means an exhaustive list of the ways a dishonest person can screw you).

In my opinion, the more pertinent question is if it is more rational to build a business plan around what is likely to happen, (assuming you take care in choosing your PM):

An honest, competent and imperfect, (Read: Human) Property Manager does their best to maximize your ROI while staying true to an ethical and moral standard that is in alignment with yours.

Or should you build your business plan around the worst case scenario:

A dishonest, incompetent, and imperfect, (Read: Human), Property Manager, not in alignment with your ethical and moral standard, somehow manages to fool you in the interview process and gets away with overcharging you.

Both scenarios are possible. But if you think the second is more likely than the first, you should probably manage your own properties, locally, where you can perform your own maintenance as well doing your own rent collection and accounting. BP is great at teaching people how to do just that, and I am a huge believer in being self-sufficient, so I wish you good luck and God speed if that is your choice, you’re in the right place to learn how.

So, while I doubt that I convinced everyone, (anyone?), I hope that I have provided some clarity as to why PM’s do what they do. Above all a PM is your agent and is supposed to act in your best interest as your fiduciary. We take that obligation very seriously as do the vast majority of professional property managers out there.