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Property Management Contracts: What to Expect before Signing the Dotted Line

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By hiring a property management company to handle the day-to-day operations of your property, you are trusting a property team to make decisions daily on your behalf. You are also making a significant financial investment to gain the value a property management team can bring to the management and success of your property.

Although hiring a property team means receiving a substantial amount of help with running the property, there is at least one aspect you must play a big part in: The Property Management Agreement. A Property Management Agreement lays out the basic information property owners and property management companies agree to when moving forward with managing the property.

To ensure you understand the full picture of what the property management company provides (and how), look for these topics in the agreement.

Scope of Work

A Property Management Contract is mostly defined by a detailed scope of work section. This section should outline what the property management company is responsible for, what the property owner is responsible for, and the fees associated with each.

Elements to expect in the scope of work include:

  • Monthly services performed by the property management company
  • Tenant screening and approval processes
  • Rent collection
  • Maintenance and repair process, and how repairs are approved and fulfilled
  • Property reports

The more a property management team provides in their scope of work, the more it will cost you. If the scope of work is slim, the cost will likely be cheaper, as well. This may seem obvious, but it is important to remember that less cost usually just means less service.

Fees

As a standard base rate, most property management companies charge between 7-10% of monthly rental income for managing the property. Outside of this monthly rate, some property teams may charge add-on fees for additional services outside their initial scope of work. Make sure you understand and agree to the fee structure, as many times it is negotiable. For example, some property management companies will waive add-on fees depending on the set monthly rate a property owner is willing to pay.

Property Owner Responsibilities

Long story short, anything you want to manage and control yourself should be listed here. Anything you do not want to handle for your property needs to be spelled out clearly in the property management company’s scope of work. Otherwise, those responsibilities will inevitably fall on your shoulders if not written into the contract. For example, if you do not want to handle the tenant screening and selection process at all, include that in the contract. If you want the property team to handle the screening process but give you final say in choosing tenants, include that in the contract. Do you see a theme here?

Property Management Liability

It is not uncommon for property management companies to be held liable for certain issues, as long as it is outlined in the contract. These issues may include vandalism, bed bugs or mites, and injuries due to lack of maintenance follow-up. The property management contract should clearly state what situations the property management team is responsible for and what situations they are not. It is also possible that a property management team will require the property owner to have sufficient liability insurance, especially if they are willing to be held liable for a handful of issues.

Contract Termination

The final piece that is crucial to a successful property management contract is the contract termination clause. The clause should state the specific date your agreement starts and ends (and how the renewal process works). Although both property managers and property owners work hard to build a successful partnership, there may be unfortunate circumstances that cause either party to wish to end the contract early. Make sure the contract termination clause gives expectations around providing notice and paying early termination fees, if any.

Most contract termination agreements give between 30 to 90 days’ notice for early termination of the contract. Fees can vary from a couple hundred dollars, a monthly payment through the end of the original contract, and even an upfront lump-sum payment of the monthly fees in full (yikes!). Upon termination, make sure the contract also spells out the obligations each party has before officially cutting ties. This could include money owed and the passing over of tenant and property files.

Having these topics in a property management agreement does not promise a smooth relationship with the property management team and the property owner. However, a clear and detailed property management contract gives both parties a better chance at mutual expectations and clear communication. You would never rent your property to a tenant without clearly spelling out their rights and responsibilities, and the same should be expected from a property management contract.

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