Dangers in finding the right PM

[Jonathan Cook]

Why do so many people find Property Managers so unappealing? Why do investors cringe at the thought of hiring a professional PM? Reputation? Bad experiences? Fees? In my experience its a combination of all 3 then adding more and more stories about exactly how bad their previous PM was... Why do so many investors have the same stories? I am a BDM for a large PM firm and work exclusively with investors. I hear the same story over and over from hundreds of investors, all finally tired of doing it themselves and asking for help.

Let me know if this story sounds familiar... "I just bought a house from a Real Estate agent friend... they said rental comps in the area were very high, and they had a pm friend in their office..." At this point I typically can guess the next 2-3 years of pain they experienced. Real Estate agents do not necessarily understand how to comp rental value and can over promise in order to receive a nice commission. After all, they are done once the sale is closed. The story usually follows, "The PM they recommended wanted to lower the rent immediately and still took longer than I anticipated to find a tenant..." Then "They were great tenants for a while, then they stopped paying. After some time we let them out and I started looking for a new PM..." 

This story keeps chasing rents that were priced too high for either the condition or even size. Then when bad tenants perform badly the investor is shocked and moves to another PM firm and starts the cycle over. Looking for a new and cheaper PM over and over until they HATE Property Managers in general.

So, whose fault is this? The investors? The Real Estate Agent? The bad PMs? Yes... All three were either too ill informed, unprepared, or have a potential conflict of interest. On the surface what I normally see in these cases are Real Estate agents that disappear after the sale because they comped the rent value too high, followed by an inexperienced PM that has a hard time explaining WHY the rent price is too high, and finally an investor that put his trust in all the wrong people to achieve their goals. 

Rental pricing is a precise skill. Too low and you leave money on the table, too high and you either end up with underqualified tenants or long days on market. Zillow and other sites that will give you an automated rental value lack the precise local knowledge that can sometimes occur with rental properties. I know of several areas in my markets where something as simple as crossing a street or train track can change values by hundreds of dollars. If your PM doesnt let you have final approval of tenants then its easy to put the first applicant in an over priced property. I have seen so many properties that had desperate tenants sign leases above market value, only to never make any rent payments to begin with. Where this becomes REALLY dangerous is when your pm kicks the can down the road over and over, making excuses all along the way. Its easy to find someone willing to pay 1 month and a security deposit, but when I hear investors say their previous pm told them "the second month is always late..." I know they are in trouble. This is an excuse used all over the country to explain that after a security deposit and moving expenses the second month is expected to be late. I can even follow the logic here, but its bad advice, and bad managment that allows this to happen. Too many times I see this devolve into 2nd month late, 3rd month fine, 4th month a little late, 5th month late, 6th month fine, 7th month late, 8th later, so on and do forth... Tenants get behind and they cant catch up, and the PM makes excuses for a year before the investor realizes that MAYBE just maybe it was a screening issue, or pricing issue or whatever... Now you have to let the tenant out, or pay them cash for keys, or worse yet evict... Time eats away at profit and this can ultimately leave a nasty taste in your mouth about the PM. 

Once the property is vacant again you are going to have to turn it, and get it rent ready again... more time, more money... and find a new tenant. This might start the whole scenario over again just as bad. Sometimes at this point I see a PM change, looking for a cheaper solution to save money where it was lost. Cheaper PM's often lead to the same issues. 

What is the solution? Find a good PM, someone that not only understands your investment goals, but also how to operate your business in the most effective way possible. Maximizing rents while keeping good tenants is an art that very few PM's have mastered. All PMs are NOT created equally, so find one that is willing to speak with you about your goals, strategies, and markets. After all they will be the ones operating your business for you, so make sure their goals align with yours. Build a team of experts that aren't in it for one transaction, but a long relationship. This can save you tons of money and heartache. Property Managment is incredibly difficult to do well, so it can be worth it to pay a little more to find an expert in your market.

Good Luck and Happy Hunting!