PM charges too much fee to get it rent ready?

Question

Dear BPers:

we typically identify the specific areas we'd like to invest in and find the PMs to serve as our realtors and future PMs.

In this situation, we bought a house through the realtor/owner of the PM, and we are trying to put in the rental market. However, as we are reviewing the contract with the PM, we realize their fee is much higher than any other PMs we have used. e.g. if I ask my other PMs to get the place rent ready, my other PMs would never charge me a "project management fee" for 10-15% of what the contractors would charge me. Typically, the contractor fee would be a pass through. If my PMs charge me anything, it would be a $35 dollars flat fee (but again, never got charged for coordination). After all, I bought the house through the PM, and am paying 1 month of leasing fee, plus all the future PM fees.

I am really concerned that this PM is trying to push un-necessary work to prep this place because he has an incentive for that reno cost to be high (and even better he can give the job to his friends). And it's been the case, I have told him in multiple occasions, the floor is in good condition, even the kitchen cabinet is good, why is he trying to replace all these items and increase the work?

This PM belongs to a national franchise, and as I said, at other locations, the process of bidding on a project is pretty straightforward and transparent and we are pretty satisfied with the franchise in general. This practice just seems a little odd. Since we are out of state investors, should I be considering other PMs now the trust is lacking from our end or should we negotiate the contract?

Thanks!

Joanne

Hanna M. · Answer

You're asking them to basically act as a GC for your preparatory work, so it make sense that they would charge you accordingly. You should be able to approve the scope of work but if you want them to coordinate and oversee the work before they place a tenant then their fee makes sense to me. Expecting them to only charge $35 to oversee that work seems way too low.

Rick Novotny · Answer

Hi Joanne,

A project management fee is pretty typical if they are doing all the work and coordinating with contractors for work that can't be done in-house. With that said, if they are trying to push you into work that doesn't make sense it seems a little sketchy. If they can show you pictures or video of the issue to justify why it needs to be done that's one thing, but only then would I agree to do the work. Rental properties don't need all brand new stuff, they just need to be clean and safe for the tenants.

If you scale in one market, with one PM, you can negotiate a lot easier. Most PMs will charge top dollar for an investor who only brings one or two units to the table because there's almost no profit for a PM with one or two units, they need scale. My PM manages 21 units for me at 7%, half of first month's rent for marketing and finding a tenant, 12% project management fees when I do large renovation projects.

Carlos Ptriawan · Answer

holy cow definitely finds another PM. I thought it was 1-2K only. This is the usual cost for turnover.For cost above 15K it's more like the BRRR project.

David Song · Answer

@Joanne Tsai This sounds really fishy.  Be careful. Do not become another OOS victim.

Joanne Tsai · Answer

@Carlos Ptriawan initially he got me a quote for 19K on one unit, then after I pushed back saying that why did we buy a house with nice hardwood floor just so you can replace it with cheap LVP, and kitchen cabinet (while not the modern white cabinets), they are solid wood and in good condition and can be refinished and sanded, he got me quote last week coming down to 9K. I should also note it's not in class A neighborhood, it's more like c+ and b- the best. I just don't see how these additional work going to make its ROI in 8 or 10 years. I just expect my PMs to save me money when it's not related to safety issues.

and I have met with his contractor before we bought they house. They grew up together as buddies. Shouldn't I be able to see who else made a bid on the project other than his friend?

Carlos Ptriawan · Answer

How much is the actual cost to make it rent-ready?

Joanne Tsai · Answer

@Rick Novotny

thanks for letting me know your numbers, that helps. we are not full time investors, we typically only buy houses that are in good condition, meaning we don't want to do a lot of rehab. Doing some paint job or flooring is fine, but we try to avoid something big since we are out of state. I would expect an agent to coordinate with a painter or a GC or a cleaning lady to get something done quickly between turnovers. and I have never been charged a fee for that. It's a little odd that a PM where I bought a house through, paying leasing fee and future PM fees charge me 10-15% to order a paint job.

and I agree, the house doesn't need a facelift, it needs some touchup to be rent ready. I do expect my PMs to save me money, not to push work. Right now, we have three units with them, and are scoping out another 6 units, but I am a little hesitant since they seem to want to charge us for every little thing that we don't get typically charged for.

Joanne Tsai · Answer

@Hanna M. hmm.. that's interesting. what I meant to get it rent ready, is to patch up some holes on the wall or get the house painted between turnovers. Most of our houses are not bought in bad conditions.  We actually pay fair market price so we don't have to do a lot of reno. I have properties where my husband and I don't have PMs. Agents do this type of stuff for free when they are being paid 1 months of leasing fee. They call up the painters they use, and get us a quote, we approve, they get it done and send us the bill. I'd agree if it's a reno job, 35 dollars seem low, but according to one PM, their bidding process won't change and whoever get the job done, they go and ensure the work is done well before sending payment. I am not finding 5 GCs on my own and asking my PM to be monitoring and managing them.

PM charges too much fee to get it rent ready?

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