Is contigency reserve normal for property management?

[Gopichand N.]

I am currently in the process of reviewing a contract from a property management company, and I came across a clause that raised some questions.

The contract stipulates that a sum of $500 per property, up to a maximum of $2,500, must be deposited as a contingency reserve. It further mentions that the agent can withhold rental income on a monthly basis, as necessary, to restore the full contingency reserve.

While I understand the concept of a contingency reserve for unexpected expenses, the idea of withholding rental income to replenish the reserve is new to me. I wanted to reach out to you, given your expertise in the field, to seek your opinion on whether this is a standard practice within the property management industry.

Should I be concerned about this clause? Do you consider it to be a fair and standard practice, or is it something out of the ordinary that warrants further scrutiny?

I appreciate your time and look forward to hearing your thoughts on this matter.

[Richard F.]

Aloha,

I agree with most of what @Bill B. stated above. We handle reserves exactly the same...the amount varies depending on a) general condition of the property; b) estimated monthly net; c) the spend limit which the Owner does have a say about, although we typically recommend $1000 - $1500 based on rents at a minimum of $950 - $1150. Locally we cannot get a water heater replaced for much under $1500 by a properly licensed and insured contractor; and number of properties/units each Owner has with us. Keep in mind, busy PM's are processing 100's, 1000's of payments at beginning of month; then writing checks for paying all the bills; then sending reports and net to Owners. They work in large batches, but by the second half of the month most of the funds have been disbursed. That second half of the month is when the reserves may be needed.

We do not, however, let vendors know what limits we might have...all they need to know is we will not spend money that is not sitting in our Client Trust Account. If there is a major project, whether a complete reno, roof job, major plumbing or electrical, no matter what, there will be a contract signed by our Client and their funds will be deposited and cleared, to our Trust Account prior to work starting. Final payments will not be made without Client approval.

For smaller jobs, appliance repairs, plumbing or electrical service calls etc., I require the vendors to call me from site for recommendations and approval of their verbal estimate based on findings.

No PM will pay vendors out of pocket, and it hurts ALL of their Clients if they slow pay a vendor. We usually pay 10 days net.