ok to have prop mgr hold security deposit and leases?

Question

i'm interviewing property management companies and have run across some instances where:

• the leases will be between the property manager and the tenant (rather than between the owner and the tenant), and
• the property manager will hold the tenant's security deposit in an escrow account (rather than the landlord holding the security deposit)

are these common? are there pros/cons to doing either one way or the other? thanks for any input.

Chris Clothier · Answer

I am not sure about Indiana, but I am sure it is not too far off from other states.  First, you only want to work with a state licensed property management company.  Part of that process will ensure that they operate in an owners' best interest.  They will have to be properly insured and have standard accounting practices.

For those two reasons - if you hire a licensed property management company, their name will always be the name on the lease.  The tenant is not renting from you, they are renting from the management company and entering into a contract for service.  You, the owner, enter into a contract with the management company to provide that service.

So you are not going to find a scenario where a licensed management company is not on the contract.  They are properly insured and licensed to provide that service to you.

As for security deposits, that is the property of the tenants.  It is not revenue and is not earned income for the management company nor the owner.  It is held in escrow for the tenant and is returned to a tenant if they return the property in proper condition with a fulfilled lease.

State law prohibits the management company from disbursing that money to an owner and also dictates that the money must be kept in a separate escrow account.  Once the lease has been either fulfilled or voided and a determination of condition has been made for the property, then a management company can move that money into an operating account and either dispurse back to the tenant or over to the owner.  Not before ~

Unless you are interested in hiring just any person to manage your property and then they might be willing to do whatever you want them to do as long as you pay them! :)  I wouldn't recommend going that route.

What you list in your question are both standard operating procedure and are done to protect all parties involved from tenant to management company to owner.  I would say it is a good thing and it sounds at least that you are speaking with licensed companies who handle their service the way it is supposed to be handled.

James Wise · Answer

@Jesse Danzig

Having the security deposit held by the property management company and having all the leases be between the property management company and the tenant is completely normal. In fact it is a huge red flag if you found a property management company who does not require you to do it that way. Any company who allows you to hold the security deposit is likely not properly licensed to handle property management.

Samantha Klein · Answer

I'd go with Thomas S. advice. What if the property manager and you get into a dispute and the PM won't return the tenant's deposit or some other unfortunate circumstance or the PM company won't hold the tenant's to the lease?

Jesse Danzig · Answer

thanks Thomas S. specifically asking for the indianapolis area if anyone has insight as to what's standard in the indy market.

Fred Heller · Answer

It's perfectly acceptable and common for the property manager to hold the lease and the security deposit. You should get a copy of the lease, of course.

There is no lease between the property manager and the tenant because the property manager does not have the authority to create a lease between himself and the tenant. The lease is between you and the tenant with the property manager acting as your agent.

I use the standard TAR lease and it states very clearly that I am signing the lease on behalf of the landlord under a written property management agreement.

If I am just leasing a property and not managing it, then I do not sign the lease.

Jesse Danzig · Answer

thanks @Jackie McBride!

Jackie McBride · Answer

Hi! I'm a licensed real estate broker that provides property management services in Fort Wayne, IN. I hold security deposits in escrow as someone else stated above.  The lease I use states that the contract is between the property owner and names my company as the management service.  Since the property doesn't belong to me or my company it seems to me that the contract should really be between the property owner and the tenant.  In Allen County evictions must be filed by an attorney if you don't own the property or if the property manager isn't a w-2 employee of the owner, no attorney or judge has ever questioned the way it's written.

Jesse Danzig · Answer

thank you @Brandon Battle and @Chris Clothier. i am not going turnkey but will be placing property management. the companies i am interviewing are insured and seem to be reputable (most come as recommendations from BP'ers), but it made me raise an eyebrow. appreciate the feedback!

Thomas S. · Answer

It is not OK to allow the PM to sign and hold lease or hold deposit. They belong in the owners hands and the lease should only be signed by the owner.

ok to have prop mgr hold security deposit and leases?

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