Legal repercussions for property managers

[Ed Lopez]

Having a bit of an issue with some of my out of state properties. I have a smaller property management service in this area that handles everything since I purchased the properties a little over a year ago. Most units were occupied when I purchased it and we moved into full occupancy shortly after. These are passive properties for me but I noticed my operating account was depleting significantly. The ROI's were pretty great during my analysis but it wasn't panning out that way. Communication from the company was spotty at times. Whenever I inquired I was told something different and assured it would turn around. Once or twice during the year I came thousands additional out of pocket to fix some alleged issues with the properties. The company was using tenant cloud and later switched to a different rent manager program. Upon looking at income and expenses, I found the rents collected were right at what I estimated. The expenses however were astronomical….and almost all of them were payments to the management company as opposed to directly to the repairmen that were supposed to be doing the work. These properties include some of the nicer rentals in the area that are relatively new construction. I noticed a lot charges directly to the management company with notes like "cleaned up branches" "scraped paint"…..things of that nature. I just got my 10-99 and it seems crazy to me. In 2022 the rents collected over $73k. I only received $13k into my account over the year. $13k is about what I injected for the repairs so I effectively received zero dollars and paid the entire years mortgage out of my operating account. I've looked into other management companies but it is a relatively small town and slim pickings as far as management companies go. What is my best course of action here?

[Nathan Gesner]

Quote from @Ed Lopez:

We can't answer this for you without seeing exactly what was done, but it certainly sounds suspicious. I would start looking for a new property manager. In general, your ordinary maintenance costs should be around 10% of the rental income.

As Matthew mentioned, your PM Agreement should have a limit to how much the PM can spend without your permission. If it doesn't address this, tell the PM you want to be notified for any repair estimated to cost more than $200 and then hold them to it. I would also consider reviewing all the invoices for 2022 to see who did the work and what they did. You might even contact the tenants to confirm the work was necessary, that it was completed, etc. You may discover evidence of fraud and a good reason to sue.

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!