As you evaluate the rates and services of a potential property manager, it is important to understand all of the fees that may or may not be charged. There is a lot of variance in how deals are structured; you should be armed with the knowledge to ask about all possible fees and understand the logic behind each one. The fees that will make up the most of your overall evaluation are the Property Management percentage, any setup fees, and a Leasing Fee. The rest are important to understand and mainly arise in specific situations.
Property Management Fee
Monthly management fees typically range from 7-10% of collected rent on a property. Although commercial properties and residential properties have many differences, the baseline fee to expect is typically in that range. Fees will vary based on how many properties you have, the number of units in each property, the quality of the property, the location, and a list of included services.
Fees also vary from market to market. For example, a pricing agreement for a rental property in Indiana will differ from a property in California. Once an agreement is made on the pricing model, find out if fees will be deducted directly from your account or billed to you. It is important to know what to expect so everyone is happy with their pay structure.
Property management companies may also charge a fee for the time invested in a setting up a new account. Set-up fees can range anywhere from nothing (some companies do not have set-up fees) to $300. Find out if you should expect to be charged a set-up fee and ask if that fee will be per unit or per property.
Leasing fees compensate property management companies for the costs associated with finding tenants to fill properties – including marketing and advertising services, property showings, and the company’s general time and effort. Leasing fees usually cost 75-100% of the first month’s rent and are sometimes referred to as ‘placement fees’.
Most property teams charge leasing fees, but some rental property owners are opposed to paying the fees separate from the general management contract. Their philosophy is that the leasing fee should be built in to the main management contract as an incentive for the management team to find long-term tenants.
However, a good property management company does not rely on leasing fees to provide the bulk of their profit. They rely on the primary management services as their main source of income and simply offer more expensive leasing fees as a stand-alone service (meaning without other property management services). A transparent property management contract will have a fee structure that does not reward high tenant turnover, so everyone benefits from long-term tenants.
While some property managers only charge a fee for brand new tenants, other companies also charge a lease renewal fee when they have to draw up paperwork to renew a tenant’s lease. The process does not require a lot of work, so consider it a red flag if the lease renewal fee is anything above $200. Agreeing to provide lease renewal fees can be a great incentive to reward property teams for finding long-term, reliable tenants.
Over 80% of property management companies provide advertising services to fill unit vacancies. To find long-term tenants, there are many ways to market and advertise a property. From free resources like signage and CraigsList to paid Multiple Listing Services like Zillow and Trulia, make sure your property management team has a defined process on how they plan to successfully market your property. Vacancies do nothing but cost you extra money and prolonging a vacancy to save marketing dollars is not a smart decision. If the team has solid marketing tools and a good strategy, you will actually end up spending less money in marketing and advertising fees.
According to a 2018 research report by Buildium, 31% of property managers listed maintenance and repair services as their biggest concern. The number one concern was losing efficiency by struggling to get moving parts and people to work together. These statistics alone tell the story of why understanding and agreeing to all maintenance fees and processes is crucial to the property team and property owner partnership.
A. Cost Approvals
First and foremost, you and your property management team need to come to an agreement on who can approve what when it comes to performing maintenance and repairs. Is each repair a pre-defined amount? Or will the team contact you with an estimate for approval? Their policy may state that they will contact you if an expense surpasses a pre-determined figure. Although that pre-determined figure may be something like $500 to $1,000 – you may want to consider lowering the amount until you create a solid, trusting partnership.
Also, make sure you both understand what should be done in emergency maintenance situations. Create an understanding of what qualifies as an emergency and what the team should do in the event they cannot reach you.
B. Crews and Contractors
While some property management companies have their own maintenance teams, other companies prefer to contract maintenance services to a list of trusted professionals. An in-house maintenance team that is managed properly can definitely lead to cost savings and a more streamlined approach. However, as long as you confirm a reasonable price and quality services, either option should work for your property. Ask questions around these topics to make sure you understand and agree to the property management team’s maintenance policy and process:
- Included services
- Bill rates (per hour or per job)
- Minimum billing time
- Emergency maintenance plan
- Emergency maintenance billing
Property management companies typically require a reserve fund to be kept on-hand for payment of day-to-day operations and expenses. This allows the team to make sure bills are paid on time and services are performed promptly when needed. Since most funding should be worked out as part of the general property management agreement, a reserve fund of only $300-$500 is normal for single family units.
Bill payment fees
Outside of collecting rent and managing tenant-landlord relationships, there are also bills to be paid for your property itself. Owner payments such as your property’s mortgage, Homeowner’s Association dues, and homeowner’s insurance are a few on the list. Some property managers charge a fee for making payments that fall under the owner’s responsibility, while other property managers do not even offer this service.
Unpaid invoice fees
Unpaid invoice fees are small service charges added to all unpaid and past due invoices per month. The service charge is typically less than 2%, but keep in mind that this small percentage will continue to accumulate if invoices remain unpaid from month to month.
Evictions are not fun for anyone involved. For that reason, expect an eviction fee for serving notices, hiring and working with attorneys, court appearances, and physical eviction processes. Some property management teams charge flat fees per eviction of around $500 (not including legal costs), while others charge between $30-$50 an hour. Dealing with difficult tenants is one of the main benefits of hiring a property team, so make sure you agree with their eviction billing rate and legal process.
If someone wants to buy your property, property management teams typically require an exclusive arrangement that allows them to broker your property. If this is the case, ask about the brokerage rate and make sure you are able to list with another broker if they cannot sell your property in a reasonable amount of time. If an actual tenant ends up wanting to buy your property, a property management company could also expect a percentage of sales commission (typically between 1-3%).
Extra duties fees
It is also best practice to make sure that any services not included in the contract are still listed within the contract as extra duties. Having a list of what services are not included in the main contract and the billing rate of those services creates a clear understanding for both parties. Check to see if this clause exists – if it does not, suggest it to your property management team and work with them to outline additional services and fees.
In addition to the general property management fees, find out if your property management team plans on keeping other sources of income, such as:
- Returned check fees
- Pet deposits
- Lease violation fees
- Late payment fees
- Security deposits
- Laundry and amenity income
By covering your bases on every property management fee, you are beginning to set the expectations around Property Manager and Owner Responsibilities. You may agree on the fees, but who is expected to cover different aspects of the agreement? Read our next article to find out more!