Does Property Management get Paid when tenants aren't paying

Question

My partner and I manage our own properties.  We work together on acquisitions, etc.  I manage the rehab, contractors, and collect property management for dealing with all things with tenants. We have 8 doors with our partnership LLC.  Some questions we still need clarity about are processes with property management fees.  Just hoping someone who has a PM company can give me some tips.

1.  Do we pay PM when the rent has not been paid yet. ie (vacancy) There is obviously a lot of work to be done especially when our properties are vacant, marketing, screening applications, showing the property etc.

2.  Our rents are due always on the 1st of each month with a 5 day grace period then $25 late fee post 5th day.  What date do we pay the management fee, presuming timely payment?  I assume once rents clear and paid in full.  (the 15th?)

3.  What date do we pay PM fee presuming there are late tenant payments?

4.  Does the management fee also apply to the late fees?

I'm sure there may be some obvious answers here but just wanted a few opinions on how you deal with this from a PM standpoint.  Thank you for any direction.

Nicole Heasley Beitenman · Answer

My dad is my PM, and we have a very small number of properties so late payments are rarely an issues (in 5 years, it's only happened once or twice). If our portfolio was larger, we'd have to do things differently. As it stands, here's how we operate now:

1. No. He gets paid similar to how a realtor would if one was filling the vacancy, which is the equivalent of one month's rent once the space is filled.

2. I pay him on the 1st regardless, but if I was using a 3rd party, I would do it the 15th after rent has been collected.

3. See above. If I was using a 3rd party, I'd expect to pay after rent is collected.

4. No. I wouldn't think a PM would be rewarded with extra money if a tenant pays late.

Drew Sygit · Answer

@Brian Long

1) Typically there isn't a management fee when a property is vacant and being repaired or shown. - Repairs: because time is money, most PMC's make money on repairs- Showings: time invested here is covered by Placement Fee- Occassionally we have a client that doesn't have funds to fix up a vacant property, but expects us to keep an eye on it while it sits there. We then charge them either a monthly flat fee or per inspection.

2) Most PMC's have a standard day of the month they batch issue payments to owner. We actually do it twice/month on the 15th and last day of each month.

3) Management Fees are auto-charged by our software when a tenant pays. We pay them to ourselves the same day we pay owners.

4) Late Fees are often 100% retained by the PMC. Some take 0%. We take 50% of late fees as we manage a lot of Class C properties and it takes a lot of effort to chase tenants to get them to pay, so we feel the 50% is warrented.

Davartay Miller · Answer

@Brian Long We tell our clients we (the PM) do not get paid until you do (the owner). Which means exactly that. . . . If the property is not rented, the resident is not paying, etc. We retain management fees on rent collected. Hope this helps!

Best of Luck!

Joe Martella · Answer

Generally, PMs get paid based on rents collected.  As you can see above, some PMs charge crazy fees.  I had a PM manage one of my SFHs.  They were absolutely useless.  I fired them after a year and took over managing the property that is an hour away from me.  I do not get many calls from those tenants and have had to find a handyman to fix somethings.

One PM horror story is that the hot water pipe froze one winter.  The tenants had no hot water for two days and they had little kids.  On the third day the PM called me and asked me what I wanted to do.  I was not happy that my tenants had what was going to be 3 days of no hot water with children.  The PMs response was "well we waited  at the other properties we manage and the pipes unfroze in 2 days."  WTH.  What was he thinking?  I put the tenants in a hotel and before I could get a plumber in there, the pipes unfroze.

I went on this tangent to explain that you live and die by the PM.  I don't know the distance between you and the property or the area it is in, but managing properties isn't that scary.  I have a very demanding full time job that doesn't stop when I leave the office, and own and manage 3 SFHs.  I have had my fair share of "oh crap, what do I do," but you manage through them and figure it out.  I know some people talk about the benefit of the PM having a handyman that charges less, etc... but remember you pay for the handyman services just as much.  If I have a property renting at $2,000 a month and I am pay the PM 10%, that is $2,400 a year I am giving them and that doesn't include the re-lease/finders fee or any other of the fees associated.  Oh and collecting the rent is easy.  You can do it electronically yourself.

I believe that PMs are a necessary evil if you live really far away.  Talk to real estate investors/realtors in the area and see if they will manage the property.  In reality, you don't need someone to collect rent, or re-lease a place (you can do that electronically) you just need someone with the connections to get things fixed when they break or an emergency.  If you can find that out and work out a compensation arrangement, then that is a relationship that is mutually beneficial.

There is a book out there by David Greene about managing out of state rental properties.  I haven't read it, just yet.

Theresa Harris · Answer

My PM doesn't charge me if the unit if vacant.  I get my money deposited on the 15th of the month and they take their fee directly out of the rent.  No idea about late fees for rent, most seem to keep those.

Each PM does things slightly differently, so best to ask the ones you are interviewing.

Mary M. · Answer

I have dealt with 2 PMs....  they were a bit different but here is what they charged:

a percentage of rent (once collected) late fees went to PM (so they have zero incentive to get rent paid on time) either a 50% or 100% lease up fee when units leased (ha! if they actually ever get anything leased) owners got paid on the 10th what was in their account less reserves

one of the PMs actually charged for "payroll" which I think was 500/moone of them charged for advertising

one had a 500 cancellation fee  - the other no cancellation fee (for owners to cancel the contract)

I beg you can find a lot of this info by looking at PM websites as lots of them list pricing

Brian Long · Answer

Drew this is super helpful and insightful.  Thank you for your time explaining this.

Brian Long · Answer

@Davartay Miller it sure does Davartay. Thanks so much!

Brian Long · Answer

Nicole Heasley, Mary M., Theresa Harris, Joe Martella, thank you very much for your thoughts and education.  Very helpful information.

To clarify I am the property manager.  My partner and I have agreed that I operate the day to day management of things.  I currently manage 22 properties and keep another full time job and its working great.  My main questions were to understand the best way to handle fees when tenants are late/on time, vacancy etc.  All of your info is excellent and I will definitley reach out to some other PM companies to see how they handle these things.  B

Does Property Management get Paid when tenants aren't paying

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