Indemnity Clause in Property Management Contracts

[Grant Fjetland]

Hello BP Community,

I have been vetting some property management companies (Manager).  When looking at contracts, I am seeing a theme of indemnity clauses.  The Owner would be on the hook for the negligence of the Manager and agree to hold them harmless unless the negligence is deemed “gross” negligence or intentional misconduct on the Manager.   I understand why a management company would want to limit their risk exposure.  As an investor, I also want to limit my exposure.   I'd prefer a contract where I own the risk of my negligence and the Manager owns the risk of their negligence.

The Management companies I am looking at are extremely reputable companies, which is why I assume they can have a clause like this limiting their exposure.   Investors want a reputable, quality management company.   These companies are not seeking out my business, they have a line around the block wanting their services.  I am coming to them.

My questions for this community,

1)  Are indemnity clauses like I described common?

2) If yes, does anyone have a good suggestion on negociating a limited indeminty agreement (you pay for your negligence, I'll pay for mine)?

3) Any thoughts from experienced investors on accepting with this type of indemnity clause?  Simply part of my personal risk tolerance?

Thank you all in advance for your insights!

[Nathan Gesner]

1. Yes, they are common. You would want to consult an attorney for the specific language, but it generally doesn't matter. No matter what is written in the contract and agreed to, your Property Manager will be liable when they are at fault, whether intentional or not.

2. See #1. You can agree to anything under the sun, including the forfeiture of your first-born, but that doesn't mean it will stand up in court. A lot of legal jargon used in contracts isn't really enforceable.

3. Accept it. There are more important things to worry about.

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

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. You can also search Google and read reviews. 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 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 6% management fee but the extra fees can add up to be more than the other company that charges 10% with no additional fees. Fees should be clearly stated in writing, easy to understand, and justifiable. Common fees will include a set-up fee, leasing fee for each turnover or a lease renewal fee, marking up maintenance, retaining late fees, and more. 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, particularly if you have a lot of rentals.

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 policies are 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 that a tenant is 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!