Egregious property management clauses?

Question

How common is it to find clauses in property management agreements like the following:

1. The PM can terminate the agreement with a 30 day written notice, but there's no option for the owner to terminate the agreement

2. In the event of termination, the PM is entitled to the commissions for the remainder of the lease term.

3. In case the property is sold, the PM is entitled to 3% commission of the sale amount if the property is sold to the tenant or 6% if sold to someone else (!!)

I've seen variations of these from multiple PMs in different states. In all cases, these PMs come highly rated by owners, so they're clearly good at what they do. But I'm having a hard time agreeing to these terms.

How have owners/investors dealt with such clauses short of walking away from such PMs?

Mark F. · Answer

#3 is insane. Anyone who agrees to that is out of their mind. If that's normal, f that. I would never want to be held to sell the property under a specific agent without choice. You do realize you pay for reno on the property, not the PM? Like others said though, they are free to put it in just like you're free to not accept their services.

Mike Dymski · Answer

1 - should be mutual/same cancellation terms for both parties

2 - normal but if the property is transitioned with a resident/lease in place (i.e. not placed by the PM), I'd have them strike it or move on

3 - first part is normal...2nd part is not and would be a deal breaker if they did not remove it

Bill B. · Answer

#3 only applies to the tenant buying. You’re going to pay any other buyer’s agent their commission, why wouldn’t you pay your tenant’s buyer’s agent a commission?

I especially love the people who say “I’m never gonna sell” and “I would never use anyone that has condition #3…” a condition that only applies during a sale, to a tenant your PM found. Especially if this person then pays a commission (much larger percent of the rent than a sale.) to these same people.

Imagine what these same people would say if a tennant complained about a condition in their lease. Most of them would tell the tenant to get pound sand. I bet less than 1% would say, oh, I see what you mean, I’m going to change my lease and my business, thank you.

Theresa Harris · Answer

I've heard of #3, but never seen it.  Unless my PM was also my realtor, I would never sign a contract where the PM got any commission for the sale.  As for terminating the PM contract, I agree that there should be a certain amount of notice and a penalty if you terminate it early.

Chris Seveney · Answer

@Amol Kulkarni

Those are not bad - ones I see are indemnification clauses where you as the owner indemnify property manager for their faults, mistakes. I have seen some that we would indemnify them even if they knowingly broke the law…

Nathan Gesner · Answer

#1: you always have the right to cancel without penalty if they fail to perform. What they are essentially saying is, if you hire them, you need to honor the contract until the lease expires because they don't make all their money in the first month. In fact, most managers hit the break-even point in the latter half of the one-year lease.

#2: For the reason stated above.

#3: This is different for each company. I offer them the option of (a) sell through me and pay X%, (b) terminate management and sell through someone else after termination, or (c) sell through someone else while I manage it but pay me a hefty coordination fee for all the work I have to do that is unrelated to PM.

They are offering a service. You are free to buy it, not buy it, or you can try to negotiate some changes. If you don't those three clauses, call them and speak with them about it. If they are professionals, they can justify those charges and you may change your mind and decide to work with them. The companies with the lowest fees aren't always the best, or the ones that put the most money in your pocket.

Jeremy H. · Answer

I wouldn't deal with them after reading the first line

My agreement has the option of  (1) either party to cancel with a 30 day notice

(2) Really no linger applies if you terminate the agreement - so as it reds this is a no for me

(3) Mine is a flat 3% fee for the PM company

Bill B. · Answer

#1 you can always cancel by simply paying the remaining commissions on the remaining rent.  It’s basically the same as rule #2

#2 is common, fair and should be assumed

Part 1 of #3 is common, fair and should be assumed. Never seen and I assume you mis-read/didn’t understand the 2nd part. After all you could just sell it after their contract expires, or pay off the remaining rent commissions and they get 0%. I Doubt they could convince a judge they get 6% on a sale 50 years after the contract expires. And if they can’t 50 years after they can’t 50 days after. Just don’t sell to the tenant. Or if you do, use them and save 2-3% over other realtors.

My PM has rule #1 and #2 and the first part of #3. The 2nd part they are 2% for handling half or 4.5% if they find the buyer as well. (Maybe that 6% you’re reading is if you sell it with them and they find the buyer.)

Egregious property management clauses?

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