Tenant late fees go to owner or manager?

Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes

I was informed today by my property manager that he keeps all the late payments when tenants pay rent late. Is that the norm or should I contest this?

I know it could probably go either way and depends on what is in the management contract, but am I getting hosed or is this standard?

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Amber Gonion

Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes

I agree it goes by the contract, but I haven't heard of a contract with late fees going to the manager. Why would a contract be structured to reward a PM for having late payments and the owner not getting his money on time?

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y
Pretty typical, believe it or not.
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Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
Late fees should generally go to the property owner....but like you stated, check your contract.
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William Mccurdy
Fayetteville, NC · Member since 2016 · 50 posts · 29 votes
9y
Contracts with property managers is 100% based on your contract. Now I understand you are saying duhhh. What I mean by that is I have found there is not a norm for anything when it comes to property management. It's all what you can negotiate.
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Amber Gonion
Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes
9y
I agree it goes by the contract, but I haven't heard of a contract with late fees going to the manager. Why would a contract be structured to reward a PM for having late payments and the owner not getting his money on time?
9 Reply
Lynn McGeein
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
9y
So my manager states in the contract that late fees go to them, with the explanation being the extra labor costs to write up and deliver the pay or quit notice on day 5. Didn't like it, but sounds semi-logical. In reality, late fees have usually been added to my total rents received, with their 8% fee taken out of the total received. I haven't questioned it.
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Eric Hathway
OP
Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes
9y
thanks for the help, folks. I'll check the contract tomorrow.
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Levi T.Pro Member
Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
9y
Most PM agreements will seek to keep that and other fees, but do check your contract with them. That's said I personally think it's a crock. The average Joe is getting hosed with 10% management, 100% of one month on new leases, $200-500 for lease renewals, and more. Time you peal back the truth, your PM is pulling in 30% of your income. This is why most self manage, or build their own PM team. I have my own team and my total cost is 4% YTD of gross rents and shrinking fast.
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Fred Heller
Real Estate Agent/Property Management · Houston, TX · Member since 2014 · 1k+ posts · 827 votes
9y
I don't really have a big problem with late payments, but when it does happen I collect the late fee. And the reason is for that stated above. I have to prepare and deliver the notice and chase down the tenant for the rent. The rent is due on the 1st, but the late fee doesn't kick in until after the grace period ends on the 5th.
Personally, I would love it if I never collected a late fee. The extra few bucks are not worth the time and accounting hassle of dealing with late payments.
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Brad LarsenPro Member
Property Manager · San Antonio and Austin, TX · Member since 2016 · 377 posts · 380 votes
9y
It's common and customary for the late fees (NSF fees) to go to the Property Manager. They are the ones staying on top of the rent being collected and will immediately post notice when rent is late.
It's so common and customary the Texas Association of Realtor's (TAR) management agreement indicates that all late fees go to the management company. It's not an option is my point.
We adopt a zero tolerance policy and chase rents vigorously as needed. Our late fees are very high for a reason - it's a business decision.
I've seen companies intentionally keep late fees low - to collect late fees. If your late fee if $5.00 - what's the big deal - right? Pay late, pay the $5.00 - no biggie.
Take that on the aggregate and it turns into $5.00 times 500 homes. Serious money (in theory).
We go the other route on that and charge a 10% per occurrence and $40 per day late fee. We don't want late fees, we want rent payment compliance. It works for us and we have less than 1% arrears each month.
Take care out there!
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Eric Hathway
OP
Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes
9y
Thanks guys, I'll rest better knowing I'm not getting taken advantage of.
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Brian Garlington
Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
9y
@Eric Hathway
Ask to see a copy of the contract with YOUR signature on it Eric. If it's on there then yes it goes to them.
I would seriousely consider renegotiating this though and if they won't renegotiate you may need to seek another PM.
If a tenant is late paying rent you are the one on the hook with the bank to come up with the money.....not the PM.
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Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
9y
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Igor Messano
Philadelphia, PA · Member since 2015 · 177 posts · 64 votes
9y
depends on your contract and you should have known about this before signing. Check and if it's in there then they get it. I personally try to negotiate PM contracts that align my and PM's goals, and PM collecting late fees does not align with my goal of always receiving rent on time. It adds an incentive for the PM to have paid but late rents. In the other hand it gives them another incentive to chase late rent. You could always increase late fees and split the late fees.
Paying a month rent after every vacancy also incentivizes turnover but I haven't figured out how to better structure this.
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
It may be common but IMO it is a crock. The PM is already getting 8-12%, monthly, so to claim that fee is for chasing down late rent is a joke. Most months there is little for the PM to do on any particular unit, and the ones that end up being troublesome will be dropped by smart PMs. Raking the late fee is just an underhanded way of a low-value middleman to help themselves to extra profit. Good PMs do as mentioned above and add it into the owner remittance and base their percent take from that figure.
If I was presented this option in a PM contract, I would strike it or find another PM.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
PS: If the PM wants to pay me faithfully every month, on time, out of their account, regardless of whether the tenant pays, then that is the exception to what I posted above. If I collect 12 months of $X on time, even if the tenant is paying late or not at all, the PM can have the late fee for absorbing the risk of having paid me and not receiving like from the tenant. I am going to take a WAG and say that few to no PMs are willing to take that deal.
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Robert GilstrapPro Member
Residential Real Estate Broker · Cartersville, GA · Member since 2015 · 575 posts · 581 votes
9y
It's completely common for the PM to keep the late fee because the reality is that PM's couldn't possibly stay in business charging only 8% - 10% management fees.
When I hear comments like @JD Martin about how little work is involved in managing property or @Levi T. where owners are "getting hosed" it demonstrates a complete lack of understanding about what professional management is and does.
[email protected]770-480-7301
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Eric Hathway
OP
Investor · Southern, NH · Member since 2015 · 99 posts · 28 votes
9y
It sounds like late payments cause extra work for the PM making phone calls, typing letters, delivering them, making additional runs to the bank for late deposits, etc. It seems reasonable that they get an extra $20-$50 for example.
However, If you are paying the PM 10% or higher I could see a good argument that that should be included.
I guess it is similar if the PM coordinates outside repairmen (roofer, plumber, etc) and then charges 10% over their invoice. My PM doesn't do that because he said it's his job to coordinate those jobs.
My conclusion is it needs to be looked at in the big picture. My PM may keep late fees, but he charges me a low rent %, 1/2 month's rent to fill a vacancy, and doesn't add onto repair invoices.
If our other terms were more in his favor than I may gripe about the late fees, but I'm content with how we have it.
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Levi T.Pro Member
Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
9y
Originally posted by @Robert Gilstrap:

It's completely common for the PM to keep the late fee because the reality is that PM's couldn't possibly stay in business charging only 8% - 10% management fees.
When I hear comments like @JD Martin about how little work is involved in managing property or @Levi T. where owners are "getting hosed" it demonstrates a complete lack of understanding about what professional management is and does.
10-20 years ago, all them fees made since when you had to manually do it all, there was a lot of running around and it took a lot of man power, phone calls, paperwork, and other bs. Now of days it's so automated with software and 3rd party services that most are just racking fees for doing nothing. This is the #1 reason why the PM industry is shrinking fast!
For example, software systems perform all the following with no human input from management:
Receiving payments, assessing late fees, sending pay or quit notices, lease signings, agent commissions and fees, all maintenance request are taken via the system and routed to the vendors with zero involvement by the PM, just pay the bill when it arrives, which can be automated as well. So what are PM companies left handling that warrant such a large cut of the operation, that was invented over a lifetime ago?.. only thing on their plates is putting lockboxs on doors and showing units, payments of owners with a few clicks of a mouse, and the random eviction down at the court house (Some older PM's wont even do the court thing).

One agent now of days can run 200 SFH units no problem, if the operation is a well oiled machine, it's a part-time job - A good PM company knows this and have been adjusting their operation to reflect the times in their pricing.
Luckily for me, my operation has gotten to the point, that I just built my own PM company and hired my own agents to manage my stuff so I could reduce the cost even further, but that don't mean I don't know my operating cost down at my own PM firm. We are always looking at ways to streamline operations and make the process easer for our agents and the over all portfolio itself.
Best,
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Robert GilstrapPro Member
Residential Real Estate Broker · Cartersville, GA · Member since 2015 · 575 posts · 581 votes
9y
@Levi T. Not trying to be rude but your lack of knowledge about the property management industry is astounding. The industry is growing at the fastest rate ever and is not shrinking. Software has greatly improved the overall efficiencies of the industry but unfortunately real estate is a boots on the ground job. The big hedge funds all thought they could own thousands of doors all over the US and manage them from a high rise on Wall Street but soon found that it's a little more complicated than they thought.
[email protected]770-480-7301
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Levi T.Pro Member
Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
9y
Originally posted by @Robert Gilstrap:
@Levi T. Not trying to be rude but your lack of knowledge about the property management industry is astounding. The industry is growing at the fastest rate ever and is not shrinking. Software has greatly improved the overall efficiencies of the industry but unfortunately real estate is a boots on the ground job. The big hedge funds all thought they could own thousands of doors all over the US and manage them from a high rise on Wall Street but soon found that it's a little more complicated than they thought.
That's funny. Only thing astounding is your denial. Yes operations itself are expanding as we are buying and building larger portfolios than ever before, but that's the only thing expanding not the number of firms or people needed. The industry has moved to software to remove so many of them boots on the ground you referencing, which means PM's themselves are shrinking and closing their doors, as less boots are needed. A single agent can control entire regions or sets of buildings now of days, vs having a team just 10 years ago.

Blackstone Group going public for example is a big mile stone for them "guys in high rises on Wall Street". The first few attempts we may have failed at changing the industry, but we evolved to crack the problem, and overtime we are reinventing the industry. It would have never of happened if we continued to work off the old model. Now of days we focus on electronic payments, online portals, processing centers, call centers, and off loading onto vendors to schedule repairs with tenants. Just like the banking industry, we are consolidating to operate more like Bank of America and GEICO, and less like mom and pop PMs of old.
Here is the article for those who want to read up on Blackstone's success: http://www.wsj.com/articles/wall-street-as-landlor...
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
Originally posted by @Robert Gilstrap:

It's completely common for the PM to keep the late fee because the reality is that PM's couldn't possibly stay in business charging only 8% - 10% management fees.
When I hear comments like @JD Martin about how little work is involved in managing property or @Levi T. where owners are "getting hosed" it demonstrates a complete lack of understanding about what professional management is and does.
Your self-interest is showing. So what you are saying is, in an ideal situation where all tenants paid on time, you would go out of business on the common 8-12% take? What about stable tenants, where you didn't get your one month take on turnovers - would that make you go out of business too? If so, there's really only two possibilities here: either you depend on situations that are detrimental to the owner in order to stay in business via raking extra funds, or that PM is only profitable at a 15% or more take. No wonder you have to spend so much time telling people that they can't manage on their own.
Aside from that, I didn't say there was very little work in PM. I said there is very little to do per-unit on a month to month basis. If you manage 100 units, there is plenty to do in the aggregate, but very little to do on each individual unit (or else you have the wrong tenants/owners/units). In my opinion, the late notice letter and even the note on the door isn't worth 50, 75 dollars. 10% of that? Sure.
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Levi T.Pro Member
Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
9y
.. edit/ BP sent a notice that did not apply, I posted in error.
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William Walker
Investor · Wilmington, NC · Member since 2016 · 211 posts · 262 votes
9y
I split late fee 50/50 with the PM. I wasn't that happy with that setup but after reading the above comments seems like it's a great setup. They paid late once and only by a couple days. I still got the disbursement at the normal time and got an extra $30 which was good with me.
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Robert GilstrapPro Member
Residential Real Estate Broker · Cartersville, GA · Member since 2015 · 575 posts · 581 votes
9y
@JD Martin what I said was that comments you made such as "Raking the late fee is just an underhanded way of a low-value middleman to help themselves to extra profit."
reveal that you know little to nothing about professional property management and I stand by that statement.
This fantasy that PM's somehow rake in all this money while doing nothing just shows the ignorance of the person posting such stupidity. Property management is a service like any other; if you don't want it then don't buy it but don't try for a second to convince seasoned or new investors that managing property is easy, or cheap because it's not. Whether you manage it or someone else does, it costs real time effort and takes real skill. If your time isn't worth much then you should manage yourself. Once your time becomes more valuable to you than the cost of management then you will always seek to outsource day to day management.
[email protected]770-480-7301
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
Originally posted by @Robert Gilstrap:
@JD Martin what I said was that comments you made such as "Raking the late fee is just an underhanded way of a low-value middleman to help themselves to extra profit."
reveal that you know little to nothing about professional property management and I stand by that statement.
This fantasy that PM's somehow rake in all this money while doing nothing just shows the ignorance of the person posting such stupidity. Property management is a service like any other; if you don't want it then don't buy it but don't try for a second to convince seasoned or new investors that managing property is easy, or cheap because it's not. Whether you manage it or someone else does, it costs real time effort and takes real skill. If your time isn't worth much then you should manage yourself. Once your time becomes more valuable to you than the cost of management then you will always seek to outsource day to day management.
And I stand by my statement as well. Not all property managers rake the late fee in totality, and if your company is one that does, perhaps you should review your own profit motive. You also failed to answer the claim you posited, to wit: "the reality is that PM's couldn't possibly stay in business charging only 8% - 10% management fees."
Do you stand by your claim that you cannot stay in business without adverse scenarios for the property owner, said scenarios your "expertise" should minimize/eliminate?
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