Property Management Agreements

[Jeremy Hart]

Hi all - for those of you currently using (or doing) property management, I have a question.

I'm closing next week on a duplex about 40 miles from me. I will be putting PM on this, and since it's an area that's new to me, I'm interviewing PM firms. In reviewing their management agreements, I'm finding a clause that gives me some heartache. It's not one I've had with my local PM firm, and while I've heard of this clause, I've never actually seen it in person. However, I'm wondering if you've come across it, and what adjustments you might suggest. It reads:

In addition to any leasing, management or other fee payable hereunder, a sales fee equal to 6 percent if the Property is sold during the lease term or up to 180 days following the expiration of the lease term, to a purchaser procured by Agent, or to any entity affiliated with, controlled by or under joint ownership or control with such Owner or any of its owners or principals.

How many of you have come across this clause before? Seems to me that they're suggesting, should I sell anytime during the lease term - or six months after - I'm entitled to pay them a 6% fee. I assume that's 6% of the sales price, but would need to get clarification on that. Any suggestions on how to handle this? Seems to me that, should my circumstances change so drastically that I need my equity during the term+6 mos of this Agreement, I'm eating into margin. Comments?

[Robert Gilstrap]

@Jeremy Hart you need to actually read the clause and yes it's incredibly standard for any professional manager. It says that if you sell to a buyer that the property manager brought to the table  then you owe a commission. In other words if you sell to a tenant that the PM procured either during the term of the lease or up to 6 months after then you owe the PM a sales commission. Totally fair and completely normal.  It doesn't say you owe anything if you decide to sell to someone else, nor does it say you have to use them as your listing broker when/if you ever decide to sell. 

Remember, PM's are licensed real estate brokers in most cases and their stock and trade is bringing buyers to buy property and they expect to get a paid a commission if that person buys.

As a side note; people mention just having the PM "strike this clause"; so a little secret here to tell if you're dealing with a "real" professional firm or someone who is "playing manager" on the side: if a PM ever agrees to "just strike something" from their PM agreement then you know you're dealing with a rank amateur or at the very least an extremely inexperienced PM. Professional management agreements are crafted with painstaking detail and no professional that I know would ever change a word in his agreement because a potential client asked. You can't run a successful PM company with 15 different versions of your mgmt agreement in play across different owners, just doesn't work.