Is a cancellation fee for property management normal?

Question

Hi Bigger Pockets folks,

I'm in the process of getting ready to buy my first rental and I'm interviewing property management companies right now. One company that I was interviewing with is asking for a fee if I quit my contract with them before a tenant's lease is up. Essentially, they want whatever I would have paid them until the lease is up. So if they manage a unit with a tenant who's lease is up in 10 month and I quit my contract with that management company right now, I would have to pay them their monthly fee x 10. That amount might wipe out my whole cash flow for the year. That seems very strange to me and a lot of money for nothing in return. So my question is, is something like that normal or is that a red flag that they try that hard to disincentivize me to switch property managers? Any advice is appreciated.

Thanks a lot,

Sebastian

Nathan Gesner · Answer

It's pretty normal. Most managers won't really earn a profit unless they manage your home for a certain amount of time. If you hire them, they place a tenant, and then you fire the manager, they've essentially done the lion's share of work but only been paid a very small amount and it will result in a loss.

You should always be able to fire the PM if they fail to perform according to the agreement. If the agreement says they will notify you before performing maintenance and they fail, then there should be a process wherein you try to get them to correct their behavior or you can fire them without penalty. Make sure that type of protection is in the agreement.

Sebastian Dombrowski · Answer

Thank you so much @Jan H., @Nathan G., @Jon Kelly, @Theresa Harris, @Ben Scott, and @Drew Sygit. I didn't really think of the upfront effort they have for placing tenants. That actually makes a lot of sense now why they are asking for the cancellation fee.

Also, thank you @Nathan G. and @Ben Scott for pointing out the "cancellation due to mismanagement" clause. I'll keep that in mind when reviewing / negotiating the terms of the contract.

Bob Collett · Answer

@Sebastian Dombrowski

I am a property manager in Ohio. I do not charge any cancellation fee. If an owner wants to terminate, it’s most likely because I am not meeting their expectations. It’s also likely that their expectations are unrealistic. The reason might just be incompatibility of style. in my case I truly only want to work for people who appreciate what I am doing for them.

Thus if someone wants to terminate, it’s most likely mutual. I am not philosophically opposed to charging a reasonable termination fee,  I just choose not to charge for termination. Also, i offer to help them in any transition to the new PM.

Best of luck.

Bob Collett

Collett Property Management

Ben Scott · Answer

I second what @Nathan G. says. The majority of the work is finding the tenant, showing the property, vetting the tenant, etc. All which is done up front. So all that work would scale over the 12 months contract. If you cancel three months in after he found your tenant, he can't recoup his time for all that initial work. I'd include a fraud or mismanagement clause allowing you to cancel for suitable reasons.

Theresa Harris · Answer

You are entering a contract with them, so I would assume there is some sort of cancellation fee.

Dale K Poyser · Answer

A cancellation fee seems common from the property managers I have spoken to so far but the fee they are asking for seems uncommon, that is a lot.

A good property management company will have separate fees for the different services.

1- Fee for placing a tenant

2 - Fee for ongoing management

3 - Fee for prepping the property during vacancy (cleaning, painting, etc - not necessarily a part of 1)

When you cancel during the contract it should be a percentage of the gross rent or something like that. But I think you should keep interviewing until you find something that works for you. Companies have different packages. Try Yelp, Thumbtack, etc.

Jon Kelly · Answer

@Sebastian Dombrowski all future tenants or just the first tenant? A 12-month commitment is typical, but then you should have the ability to cancel the agreement with a 30 or 60 day notice.

Continue interviewing property managers in the area and see what others include. Property management agreements will vary by state and local areas, just like so many other things in real estate.

Sebastian Dombrowski · Answer

Thanks @Dale K Poyser, @Bob Collett,. @Soh Tanaka, and @Michael Noto. I do understand now better why they would charge such a fee. The amount is debatable I guess.

Soh Tanaka · Answer

More or less I agree with what @Bob Collett says. I do not charge any cancellation fee either because I personally don't want to work with someone who wants to leave. So far, no one left.

Drew Sygit · Answer

In the commerical world, owners often pay the full leasing fee of a 3 or 5 year cotnract upfront.

In the small residential world, many owners have little to no clue what they are doing when they select a Property Managment Company.

Can't tell you how many owners only ask about prices when they contact us and worse - they go with companies that have the shortest contracts because they're too lazy to learn the business they're investing in or too cheap to hire an attorney to review the contract.

A fair contract will allow for no termination fees if the PMC failed to materially perform their duties after a 30-day warning. Otherwise, if the owner wants to DIY or just change for the sake of change, a reasonable termination fee should be expected.

Is a cancellation fee for property management normal?

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