Using Property Mgt, who should be responsible for a bad tenant?

Question

I'm still in the research phase of my real estate investing but, one thing I know is that I want to be an investor, not a land lord, so I would be using a property management company.  I'm curious about something though, if the PMC has been given a clear profile of what a qualified tenant looks like and they put someone in a unit that they haven't fully screened or for some other reason slips through the cracks, shouldn't they have some financial responsibility for the lost rents, cost of evictions and any required rehab work that is a result of that?  What is normally done, is it typical that they get paid regardless of their performance, or lack of performance?

I understand that I would need to manger my manger, just like I would with an employee or anyone else that I delegate responsibility to however, every other area that I hire sub-contractors for they are responsible for performing the work to the standard we've agreed to.  If they don't, they don't get paid until they've resolved any deficiencies and if we have to pay someone else to complete the work, they don't get paid at all.  To me, a relationship where both parties have something to lose is more likely to be successful for both sides.

Nathan Gesner · Answer

UGH. Here we go with the "every Property Manager is a lying thief" rants again.

Here's how life works. You own a rental property and start looking for a Tenant. Do you take the first person that expresses interest in it? No! You want to know who they are, how they take care of a property, if they are financially responsible, etc. So you screen them to find out as much as you can and make an informed choice. Does screening guarantee you'll get a perfect tenant every time? No! Sometimes they lie or your screening misses something or you make a mistake or the tenant loses his job through no fault of his own or his wife of 14 years leaves him for his best friend.

You decide to hire a Property Manager. Do you take the first person that pops up on a Google search? No! You want to know who they are, how they take care of your property, how they screen applications, how they deal with lease violations and unpaid rent and evictions and maintenance. So you screen them to find out as much as you can. Does screening guarantee you'll get a perfect Property Manager? No! Sometimes they lie or you ask the wrong questions or the Property Manager they lose their best employee or they hire a new employee that screws up.

People whine about the evil Property Managers just like novice investors whine about bad tenants. If you keep getting bad tenants, it's YOUR fault. If you keep getting a bad Property Manager, it's YOUR fault. Learn what a good one looks like, learn how to screen for a good one, learn how to supervise them. There are a ton of professionals out there that will take care of your property in a professional, honest manner and they can put more money in your pocket over the long run.

A good Property Manager can screen better than the average Landlord because they are far more experienced and have more resources. They have stronger leases, policies, and procedures. They have systems in place to handle problems quickly before they snowball and run up the costs. They have responsive, reliable, affordable maintenance crews or vendors. They know the laws and uphold them to protect you from lawsuits. However, no system is perfect and the PM can't be expected to have 100% success and protect you from any/all losses. If they are negligent, they should be own up to that and eat the cost.

Remember: cheaper management doesn't mean you'll make more money.

You can start by going to www.narpm.org to search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start. Regardless of how you find them, try to interview at least three managers.

1. Ask how many units they manage and how much experience they have. If it's a larger organization, feel free to inquire about their different staff qualifications.

2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, but especially if they violate the terms of your agreement.

3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 5% management fee but the extra fees can add up to be more than the other company that charges 10% with no add-on fees. Fees should be clearly stated, easy to understand, and justifiable. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate!

4. Review their lease agreement and addenda. Think of all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.

5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance, late rent, evictions, turnover, etc. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that it is enforced equally and fairly by their entire staff.

6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. The fact they are complaining online might be an indication the property manager dealt with them properly so be sure to ask the manager for their side of the story.

7. Look at their marketing strategy. Are they doing everything they can to expose properties to the widest possible market? Are their listings detailed with good quality photos? Can they prove how long it takes to rent a vacant property?

This isn't inclusive but should give you a good start. If you have specific questions about property management, I'll be happy to help!

Wayne Brooks · Answer

@Bernie Granier

You’ll never get a PM to agree to that...it’s one of the risks.

Steve Vaughan · Answer

The main reason I've continued to self-manage as one of 'those' landlords is because of this.  To answer your question, no, they aren't responsible for placing a turd.  They get their placement fee in full regardless of whether the placement performs or destroys, requires eviction and/or stops paying.

I've always advocated for a PM to spread out their placement fee over the tenancy.  The tenant performs,  they get paid.  Tenant vacates or stops paying, so does their fee.  Seems fair to me to stand behind your tenant choice.

Enjoy being an 'investor' and paying 16ish% of your rents for what is ultimately your responsibility anyway.

Matthew Paul · Answer

A PM is going to charge you to place a tenant , charge you to collect the rent and charge you to evict the tenant , then charge you to have the repairs done .  If you think they are going to take responsibility for a tenants actions or inactions , you will be managing the property yourself

Jason Hendrickson · Answer

It would be nice if things worked that way, but they don't.

Bernie Granier · Answer

@Jason D.  That seems reasonable, they're not helping with damages but, at least they have some skin in the game.  I think it's better for everyone when all involved have some risk.

Nathan Gesner · Answer

Yes, I know some investors live in small towns where there aren't any "good" property managers. If that's the case, consider investing somewhere else. I'm in a town of 9,500 and I am the only full-time, professional property manager so I know not everyone has the freedom to pick and choose.

Colleen F. · Answer

I do think the PM should be accountable for the tenants they place but that isn't the same as responsible.  Accountable would be that their criteria and the particular tenant pass muster.

@Steve Maginnis

I  supposed if it is framed to the tenant as a non-refundable move in guarantee it might make sense. That said I imagine that the premium is high for the ones that you would really want this insurance for.

Courtney Huntoon · Answer

Find a company who doesn’t make exceptions. You should hire a company who does everything in their power to place a qualified tenant, however you won’t always have perfect tenants. Tenants on paper can be amazing, pass every requirement and still be poor housekeepers/tenants. Part of the fun being an investor ;) Maybe not fun, but definitely an aspect of it. You want a PM company that will do everything to protect you and your investment and in the situation that may arise from a bad tenant, you want a property management company that will collect lost rents, get the unit turned and rent ready quickly, and get new tenants in. Our goal is to place great tenants, we don’t get paid on vacant units ;) We guarantee placement for the initial lease term or we place the next tenant no cost.

Jason D. · Answer

@Bernie Granier my PM give each tenant a "score", and if the tenant is above a certain threshold, they will pay all lawyer and eviction fees to remove the tenant, and replace the tenant for tree.

So yes, it is possible to find a PM that will be, at least, partially responsible for a bad tenant.

Using Property Mgt, who should be responsible for a bad tenant?

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