Property Managers - Why do they always Overpromise and Underdeliver?

[Mat Lewczenko]

I hear this ALOT...
"I had a great PM company, paid them $X but they are gone, had to fire them. They were great in the beginning and then..."

What makes them great at the beginning?
What are the biggest let downs?

I ask because my partner and I are putting together a business plan to start managing other investor's properties as well.

What do you all think is the best Value Proposition that we could offer that the current management pool is lacking in.

Very interested to hear everyone's perspective.

[Steve M.]

The biggest problem I have with PM's - Tenant Finders Fee's (Assignment Fee). This can range from 50% of the first month's rent to $300-$500.

So, essentially, the PM will make more money the more turnover you have (the complete opposite of what you want to happen)

I would have ZERO issues paying a PM to find a quality tenant that stayed for atleast a year. If you charge an assignment fee at the END of the lease instead of the BEGINNING of the lease, I think that would be great. It makes the PM find better tenants, and keeps the owner happy with the year long lease ... Everybody wins!

[Bryan Hancock]

I think the trouble is that the property manager has to shell out placement fees to occupants' agents up front so that is why the model is the way it is. It would be nice to have it on the back end though.

I also would love to see a model where the property manager gets more income if you get more income. Their fee is tied to NOI so that your goals are aligned. Try finding that out there though!

[Mat Lewczenko]

I think there might be some merrit in possibly deferring the placement fee until later, at least half of it.

Bryan the NOI model is very interesting indeed, does anyone do that?

Great stuff everyone, thanks!

[Paul B.]

There's a risk in making the fee related to NOI, though. It could swing the other way and entice the property manager to defer needed maintenance or use sub-standard contractors.

[Allen B.]

Originally posted by Mat Lewczenko:
I think there might be some merrit in possibly deferring the placement fee until later, at least half of it.

Bryan the NOI model is very interesting indeed, does anyone do that?

Great stuff everyone, thanks!

I would happily manage a property for Noi. The catch is you give me $100,000 and I pick the property and manage it and you cash checks. Problem is most people bought properties too high or deferred maintenance.

[Bryan Hancock]

Good contracts heal all...If you do business with investors that know how to account for transactions, capex schedules, etc. you will have a VERY small market of owners to manage though!

I would suggest you have one set of contracts for the general "investor" community to increase volume and one for real investors that know how to manage cash flow and account for it properly.

For the NOI approach you just need to agree on what portion of gross rents each month are retained for capex and develop budgets to make sure everyone is on the same page. It can be done!

[George P.]

Originally posted by Mat Lewczenko:

Paul, I am totally with you! I like that, Dazzle them. We believe that superior service will create enough business. We also talked about a multi unit discount, something like first door = 9% with a .25% discount per door with a discount floor of say 6.5%.

I don't really understand why you need to gradually decrease your fee if you are doing a good job as a PM? Horrible PM's would decrease the fee in order to retain the investors. But if everyone is happy and you're doing a terrific job ... Why get paid less????

[Jeffrey K.]

How are you billing labor at $20/HR? If you are paying taxes, have insurance, pay for their truck, gas, tools, and time, you cant make a penny.

If you are paying a guy $15-20, which is what you need to pay to get someone even decent, you would have to bill at $40-50 to make money.

[Account Closed]

jeff, in my opinion (and some property managers or others may disagree), i dont think there should be a mark up on maintenance issues and repairs...the managers should, as part of the contract, have a guy in-house, and they should pass this savings on to the property owners...there shouldn't be mark up when there's a maintenance issue or repair--that's the problem with property management!! they should make money on rents collected and nothing else. making money on anything that takes profit away from their investors is bad business in my opinion.

it's the same with taking 1/2 month's rent on a new tenant...they can just churn that apartment to keep getting extra cash...anything a management company can do to financially align their goals with the property owner's profit would let me trust them more and possibly consider doing business with them--marking up a maintenance man's billable hours doesn't seem right in that light.

[Steve Babiak]

Originally posted by George P.:

Originally posted by Mat Lewczenko:

Paul, I am totally with you! I like that, Dazzle them. We believe that superior service will create enough business. We also talked about a multi unit discount, something like first door = 9% with a .25% discount per door with a discount floor of say 6.5%.

I don't really understand why you need to gradually decrease your fee if you are doing a good job as a PM? Horrible PM's would decrease the fee in order to retain the investors. But if everyone is happy and you're doing a terrific job ... Why get paid less????

When I read that originally, it sounded to me as if he were going to give a bulk discount to those who had more units. So I guess it's more about rewarding those with a bigger portfolio for giving that much business.

Not too much different from the contractor discounts at Home Depot.

[Brandon Kamm]

@Jeffrey K,

Labor required at properties varies in all degrees, from trashing out a unit, to painting walls, cleaning common areas of multi units, plumbing repairs, etc. Some tasks "grunt labor" can easily be performed by someone for $8.00 to $9.00 per hour. Skilled plumbers and good painters will run $15.00 or so per hour. Varied billing rates for what is being done make this possible. If a tenant skips and we have to trash out the unit and clean it, i don't need a $15.00 hour guy and bill an owner $40.00. i can use a $9.00 and bill $21.50. When i need to replace a toilet i use the $15.00 guy and bill $40.00. Its about making a profit, but keeping owner expense reasonable

[Jeffrey K.]

My point is unless they have insurance and worker's comp you cant bill that little. It costs a ton to own the trucks and run a company the right way. If you want to pay some guy you find on the street $8/hr cash, but that is not the right way to do things.

[Account Closed]

and my point is you shouldn't be marking up a profit on this work...it's bad enough the property owners have to pay to get it trashd out...then the manager who put the tenant in the apartment gets a kickback too...does anybody else see something wrong with this?? this is why i can't trust managers...you say you have to make a profit somehow...but you shouldn't make a profit when things go south for the owners

[Mat Lewczenko]

Originally posted by Steve Babiak:

Originally posted by George P.:

Originally posted by Mat Lewczenko:

Paul, I am totally with you! I like that, Dazzle them. We believe that superior service will create enough business. We also talked about a multi unit discount, something like first door = 9% with a .25% discount per door with a discount floor of say 6.5%.

I don't really understand why you need to gradually decrease your fee if you are doing a good job as a PM? Horrible PM's would decrease the fee in order to retain the investors. But if everyone is happy and you're doing a terrific job ... Why get paid less????

When I read that originally, it sounded to me as if he were going to give a bulk discount to those who had more units. So I guess it's more about rewarding those with a bigger portfolio for giving that much business.

Not too much different from the contractor discounts at Home Depot.

That's exactly what we are hoping to do. We figure some investors will let us handle their trouble properties, and with everyone's advice on this thread, we can provide them with what they have been missing and will gradually bring their portfolios over to us. The 6.5 rate wouldn't happen until the 9th property.

We are also planning on having an on-the books handyman and then only contract out when it is imperitive to do so, yet still utilizing our network of reasonable contractors passing on our connections to our investor clients.

We feel that this will help us stand out and build our business.

[Brandon Kamm]

@ Jeff,

You can make a profit, albeit not a large one. We pay out the you know what in insurance, workmans comp, and vehicle maintenance. If you keep tabs on productivity and overhead you can make a small profit on that work. Thats not bread and butter, but if it cost me $9.00 in labor and $8.00 in overhead and i bill $21.50 that's a good margin...when you have the volume. This is NOTHING along the lines of "picking a guy up on the street" labor. Its unskilled probably high school dropout, but need a job labor

@Bryan - This is a cost of doing business. When the manager lets a tenant in a unit that had no business being rented to you may have an issue, thats a conversation an owner should have with the manager. A reputable company would probably agree to eat some of the expense if they put someone in the unit that never should have been. But if the person was qualified to rent the unit, that's a cost that would have to be incurred

[Patrick K]

Sounds like the main problems with property management is the same as the old adage "You get what you pay for"

I dont even understand how you make a substantial income, much less a decent living charging only 8% or even less as you all mentioned??

I guess we need a context to put the business in, but you could be handling over $40,000 ($3,200 a month revenue) a month in rentals and still not make much....let alone have any money to pay for an office, your taxes, any employees, advertising, insurance etc etc.

Seems like a bum gig to me.....

[Account Closed]

sorry brandon but i disagree with you.....you're basically saying a property manager doesn't make the real money until something goes wrong....think about it...if you find the perfect tenant and they stay for 6 years and you earn your 8%, you earn maybe 1,000 bucks a year on that rental, if even...on the other hand, in a few months you can earn 1/2 first month's rent, rent for a month or 2, evict, mark up the trash out, clean up, and necessary repairs, then get another 1/2 month's rent, etc. it's a problem when you make more money if thigns go badly..there is no possible way in my opinion, that this can be a mutually beneficial relationship..the original poster asked for ideas to stand out from the pack...here's my idea...align your goals so you make money when your investor makes money, and you dont' profit when he's losing....don't mark up these repairs...don't take 1/2 first month's rent, don't keep 100% of the application fee, etc.

[Todd Brittingham]

All I can say is that I love my property managers. They deal with all the stuff I don't want to deal with on a daily basis. With that said, I'm realistic about the service they provide. You may not be managing your properties, but you certainly need to manage your property manager. I look at the relationship as more of a partnership, and as such I communicate with my property manager at least once per week. I always know exactly what is going on with my properties, and if there are issues obviously you need to stay closer to the situation.

You have to be realistic. If you own property, maintenance issues are going to come up. I am happy to pay my property manager to handle these items because I do not have the time to do so...that's what I pay him for. If he tacks on a 15% fee to the top of the bill that is more than fair. I do cap it at $150, but let's be honest...in those times he is saving me a great deal of time and energy from finding and dealing with contractors, setting up appointments, dealing with tenants and inspecting work.

Another thing I do is I try to send as much business to my property managers as possible. I understand that that they're in it to make money like I am, and if they're successful, there's a good chance that I'm going to be successful. So I refer all kinds of people to them. When I setup turnkey properties they get the business because they're good managers and they represent my business well.

[Brandon Kamm]

Bryan,

You make money off of volume. In the scenario of rent evict in a couple of months etc, we don't charge commissions again, we will not charge more than half a months rent in a twelve month period. 75 bucks a month for a house doesn't sound like much, but with 100 it adds up fast. With that you can reduce fees for those with multiple units, with some only paying $25 a door. We have a 1,000 units we manage and with volume we have been able to reduce a number of costs that someone with 100 or 200 wouldnt. With that volume of mgmt fees I don't need to rely on maintenance for the sole source of profit, I can do as you say and cut costs to where I make a small profit,
but the owner sees cost savings vs. What some others may charge. Volume is the key. You try to make a nickel 100 times vs. Making a dollar once.

I do completely see where you are coming from though, many managers don't have a problem when things go wrong as theybsee that as an additional source of revenue. Over time though when owners have increased expenses they will look to go somewhere else

[Brandon Kamm]

One point to add, in the scenario of I make money when the investor makes money. As I believe Allen pointed out, let me pick out the property, assess repairs, complete repairs, find the tenant, run the property and that's no problem. When we take over a property that someone paid too much for, hasn't had repairs assessed and taken care of correctly, already has a tenant we didn't screen, etc. It is difficut to align those goals. If am in involved from the very beginning and you pay me to renovate, I can warranty the work, I pick the tenants and it doesn't work out I can be more accountable, etc

I do enjoy the discussion of this thread btw.

[Dale Osborn]

Mat:

Some tidbits from college management notes as to the "M's" of Management:
1. Manpower:
2. Machinery, Equipment & Tools:
3. Materials & Supplies:
4. Methods:
5. Money:
6. Management:
7. Maintenance:
8. Marketing & Sales:
9. Miscellaneous:
0. Manager Traits:
1. Morale:
2. Management Company: Policy Manuals.
3. Market Analysis:
4. Management Mistakes:

Other Notes concerning Property Manageers:
1. Market the Property.
2. Screen Tenants:
3. Admin Forms:
4. Establish Rents:
5. Tenant Retention:
6. Collect Rents:
7. Maintenance & Repairs:
8. Lease Addendums:
9. Safety & Security:
0. Habitability:
1. Evictions:
2. Insurance:
3. Ideal Tenants:
4. Inspection of the Property
5. Reports to Owner:

If you work all of the above into your business planning you should not go wrong. There are probably more, but these are my contributions.

Some of the previos comments based on my experiences:
1. Number one priority Listen to what the Owner has planned for that particular property and work together to achieve the same results.
2. Repairs: Met a company who had their own inside maintenance person. Uncle Billy did not know anything about plumbing or repairs, but he was doing the work at the professional level salary.
3. Property Management Companies like to plug things into property management software programs that generate tons of papers. To find one item you get 20 pages to dig through. The Owner does not want to get buried under the paperwork. A one page summary sheet is what they need to quickly scan and see how things are running.
4. Decreasing Fees: This is a great reward for those who stay with your company. A great retention plan.

Following are some Management mistakes:
1. Unfamiliar with State Tenant Laws
2. Don't run rentals like a business
3. Poor Record Keeping
4. Set rents too low
5. No Tenant communication
6. Hire wrong/not enough people
7. Do not improve the property
8. Rent to Family or Friends
9. Do not network w/other landlords
0. Fail to Screen Applicants

Eliminate these and you are on your way to the top in the property management business.

[Mat Lewczenko]

Realtyman that is a great bullet list. Also reasurring that we caoverd 80% of that list and are happy to adress the rest.

Looking forward to updating everyone on how it goes.

[Account Closed]

i see your points brandon...being that you're on this forum, you're probably one of the few property managers that cares abour your investors....repairs are going to happen...i'm not that naiive....i just believe a property management company shouldnt' add to the expenses...yes, they're overseeing the repairs--that's what they said they'd do in the contract they signed for 8% a month....making money when i lose is a conflict of interest...like i said, you seem like a goodguy, but the other thousands of managers out there may not be as ethical as you....to stand out from the rest, i gave the option about aligning your goals with the investor...not adding markup, etc. this would definitely create loyalty and volume that you speak of which would make moremoney thanthe measly 15% mark up you mention anyways..i'm curious in your contract that you sign with your investors what it says about compensation...does it say you'll oversee repairs, etc for 8%...or does it say you're giong to mark up repairs? someone just posted abotu understanding their manager marks up repairs...if it's disclosed that's one thing as well...but if it's under the table and behind the property owners' backs, then it's another thing entirely in my opinino...so do your investors knwo you're making money when things go south for them? if so, and they are happy, then i'd say it works...but if it's not disclosed, i'd say that's pretty shady, and they wouldn't be happy to find out

.at the end of the day, you're a manager, and i'll never use one, so chances are we're not going to agree...but at least 2 different views hvae been brought to light

[Brandon Kamm]

Bryan,

You make good points as well. One thing to always keep in mind. I am managing property to make a living, I have to earn a profit, ultimatey in some way shape or form this will be at the owners expense. The tough part is trying to balance making a fair profit and keeping a property profitable.

I have always thought that the number one thing investors overlooked especially in the book years of 2004 to 2007 when purchasing was factoring in the cost of having a manager. Most of these properties were purchased for too much anyway.

You HAVE to account for a property manager when purchasing a property if you are not self managing.

[Bryan Hancock]

You have to account for a property manager even if you are self managing. Your time is worth something! For investors your time should be worth a lot.