Advice on Property Management Agreement

[Trey Jordan]

My wife and I are new to the rental game, but have been following BiggerPockets for the past 2 years religiously. We live in Houston, TX where I'm a Mortgage Lender, and she owns a Travel Agency.  A large reason why we want to invest is due to the tax benefits that this will bring us for years to come.  

We knew from day 1 that we weren't going to manage these ourselves, so it was always part of the plan to hire a management company to do the work for us. The duplex has Section 8 tenants in both units (unit A tenant has been there for 9 years, and unit B tenant has been there for 3 years). Our preference would likely be to stick with the current management company, due to their relationship with the tenants (based off of our interviews with the tenants) and their ability to keep to have low occupancy rates. The units cash flow decent enough for us with a 7% COC and 6% Cap.

I'll preface this by saying that my knowledge of reading contracts only goes as far as what I do when doing a mortgage loan. The current company sent us an agreement over the weekend to look at, and a few questions came up immediately. Any help would be greatly appreciated.

1) "Contract states that management company is to receive "100% of one full month's rent" each time the property is leased to a new tenant."

2) "Fee if Buyer is Procured through Broker: If during this agreement, Owner agrees to sell the Property to a person other than a tenant who occupied the Property and Broker procures the buyer, directly or through another broker, owner will pay broker a fee equal to 6%." I'm reading this to say that when I want to sell, I'm going to be forced to use them, because I'm going to have to pay them 6% regardless.

My questions are, A) Are these normal? Since I've never done one, I'm not sure if it's par for the course, or if these are high, and B) if it's normal, how do I factor these costs into my Financial Analysis?

Thank you

[Mark Brown]

Hi. As an owner of a property management company, I would say the one full month's rent is pretty typical in the Houston market, particularly when so many renters have their own agents representing them. The one month's rent gets split, typically, 50%-50% with the renter's realtor. But keep in mind, everything is negotiable in a management agreement. But if you offer less than one full month's rent, it may make it harder to market your unit on the mls, since your property's offered compensation will be less than other competitors on the MLS.

On 2), the fee doesn't bind you to use them if you sell the property, only that you'll pay a commission if they bring you a buyer for your property. For example, you can hire another realtor to sell your property, and they will probably ask for about a 6% commission as well. In that case, you would sign a separate listing agreement with that realtor that sets out their compensation. But here's what often happens - you tell your management company you want to sell your property - and a good management company will know lots of other investors, so they might let their other investors know something is coming on the market, and before you know it, one of their other investors is interested in buying your property. And now you have a buyer for your property before you even got it on the MLS. In that scenario, this paragraph protects the management company that you'll pay them some kind of compensation if they bring you a buyer when you don't have a separate listing agreement with the management company. But these things are all negotiable - I've often just left those paragraphs blank, figuring if an investor wants to sell the property, they would want a separate listing agreement and everything put on the MLS. Hope this helps.