Property Management - Repair Mark-ups?

[Steve Cook]

Hi BP!

Happy new year!  I own three investment properties in Indianapolis that are professionally managed.  I was on the phone with my property manager the other day and he said something that caught my attention.  He stated "My properties perform better than yours do because I'm not paying any mark-ups on my repairs."  This immediately struck me as odd as I wasn't aware of any form of compensation to the PM for any maintenance related activities, just 8% of gross rent and 1-month of rent to lease the property, per our contract.

Naturally I wanted to understand the nature of this arrangement, specifically how much mark-up is being charged, so I referenced a specific sewer repair bill from 2015 that was $2,600 and asked him if he could provide the vendor invoice so I could understand how much the vendor charged and how much revenue the PM recognized.  He came back and said that discussing price discounts that he's established with vendors wasn't appropriate.  This was a huge red flag for me. 

So now my questions are,

1. Is this normal?  Do PM's typically take $ of the top of repairs after they have negotiated lower rates? There is nothing in our contractual agreement that acknowledges this type of arrangement. 

2. If this is normal, is there a typical industry standard mark-up?  5%, 10%?

Overall, this feels wrong to me.  Fundamentally I'm paying a property manager to protect my investment, not pocket money on the side from construction arrangements with vendors.  Even if he has negotiated lower rates with vendors, I would expect him to pass that savings onto the investor and not pocket the difference.  

Would love to solicit the community's thoughts. 

Happy investing!

Steve

[Michael Bowman]

Good afternoon Steve! 

Your situation is slightly concerning to me. Here are my thoughts: 

2. I charge a standard 15% mark up on 100% of repairs we do for our clients. At first, I struggled with this concept with internal questions like: "Why are they paying me 15% when they are already paying me to manage the property?" Not charging a mark-up was cute and good when I was a one man show, however when I grew this company and had to hire a full time billing department, full time maintenance department, and full time turnover manager, the slim 8%/month would not cover my overhead. 

3. I fully disclose the fee to all clients, include the original vendor invoice in their landlord portal, and make it abundantly clear to them what my mark up is both contractually and time of initial invoice. My management agreement states that the consumer will never be charged above market for a repair after my up charge. 

I have no problem with making money on these repairs. The amount of man power it takes to properly coordinate renno/maintenance requests coupled with the fact that our vendors give us discounts, makes me ok with it.  What I am NOT ok with is your PM company never disclosing this to you (that is illegal btw) and not working to get the best prices for their clients. I would be leery. 

@David Rutledge has rentals in Indy. He's a client of mine here in Charlotte. Perhaps he can connect you with the management company he uses.