Property Manager Compensation Idea

[Greg Horn]

Aloha all! 

I must first admit that I am a total newbie and haven't yet done my first deal, but I've been studying a ton for the last year and just had a thought about compensating Property Managers that I wanted to put out to the community.

I'm also currently reading The 7 Habits of Highly Effective People and one of the things they talk about is setting up systems and compensation for Win/Win scenarios. I realized that traditional property management compensation where they get paid a percentage of rent and then get a bonus for every new tenant is not in line with an owner's best interests. 

If the property manager gets half of a month's rent every time a new tenant signs on, wouldn't they be incentivized to regularly get new tenants in there? However, from an owner's perspective, we want to have tenants that are going to stay a while and pay rent on time.

What if you set up compensation for a property manager that said that upon first signing a tenant, they'll get 8% of monthly rent. Then, after a tenant stay for 6 months, that bumps up to 9%. After a tenant stays for a year, it bumps up to 10% and we give the property manager a bonus of half a month's rent. You could then continue to bump up the percentage one percent every additional year and continue to give bonuses. To me, this model will highly incentivize the property manager to find great tenants that are going to stay a while.

You could also tie a bonus to the property manager's compensation if the tenants consistently pay on time (or a penalty if they don't). You could also tie bonuses/penalties to the number of service calls a tenant makes or to the dollar amount of repairs that happen while each tenant is in.

I think you catch my drift.

I understand that this is going to create a more burdensome accounting situation for me as the owner, but it seems like it's well worth the extra tracking to ensure that everyone on my team is incentivized to do what are in my best interests as an owner. 

I know @Brandon Turner (great meeting you on Kauai!) and @Joshua Dorkin have talked a little bit about this on the podcast, but I wanted to open up the conversation further because I'm sure there's something that I'm overlooking as to why this isn't done more. 

Mahalo (Thanks) in advance for your input!

Greg

[Steve Rozenberg]

I think you are thinking correctly in theory as a fellow investor, however as a business owner of a property management company I don't think what you are hoping is out there is scalable by a company. So what will happen is you may get a smaller company that bends to do these types of things but you may not get what you are looking for in total.

As a PM company there would be a large amount of tracking on the accounting side if you were managing 500 homes like we do so the extra staff time to figure it out would create a higher cost per property for staffing.

I think doing your due diligence on the front end is more important then anything. As for the tenant staying I would call and ask current clients how long their tenant have stayed and also ask what their average tenancy is. 

If your tenant loses their job, gets transferred, divorced etc during the term of the contract I do not feel the PM company can foresee that any better then saying you will not be in a car accident this next year... Now looking at the company's track record and seeing how they screen their tenants would give you a better understanding. We do a 20 point tenant selection screening and have a 1% eviction rate with our properties.. that is the best in our area. However someone is going to be that 1% and not happy. That is just the industry you are in, things will happen that are not right or how you would do it. But I feel you having the correct expectations as a property owner of trust but verify who is on your team is the most important. If you are thinking as a owner it should all be to keep you 100% happy that may not be the best way to look at investing. There are things that will happen that you may not agree with (Fair Housing Laws, Discrimination, Eviction..etc) But again that is the sandbox you are playing in and those are the rules...

Again you may not agree but that is just my opinion

I would look up NARPM and start with them..Below are some questions I would think would be a good starting point for you to see who really treats their company like a business or a hobby.

Questions to Ask prospective management companies

• What are your average days on market for vacant homes?
• What is your average rent amount for all properties managed?
• What is your average work order cost for the owner?
• What is your average make ready cost for the owner?
• Are all my invoices uploaded to my owner portal?
• How do you advertise your vacant units?
• Do I receive video of my pre and post make ready?
• Do you have a setup fee?
• Do you upcharge on maintenance?
• When do you make owner payments? How often?
• Are you a Certified Property Manager?
• Are you a member of NARPM?
• What is your Guarantee?
• Do you provide move in and move out reports
• How many pictures do you take of the property prior to tenant moves in and after the tenant moves out
• Do you get weekly reports when the property is vacant what prospective tenants are saying about your home
• Do you provide monthly newsletters to your tenants
• Do you hold investor education classes to help me become a better investor
• Do you have single point portfolio based management services?
• How many properties do the owners actually own themselves?
• What do you do to ensure that the tenant is responsible for security deposit disputes since that is the largest reason for owner lawsuits
• How familiar are you with the newly changed laws that can affect you the owner if they are not used correctly?