How to Hire a Property Management Company

Somewhere along the line of your real estate investment career, you may outgrow your ability to manage the number or properties you acquired. Or you may find that managing your own property is not a skill that you are gifted in or are good at. In those cases, you’ll have to locate, interview, qualify, hire, and manage a property management company.

Searching for a Property Management Company
• The absolute best method of finding the best property management companies is by referral. Get a referral for a property management company from someone who is happy with theirs or knows of someone who is happy with theirs.
• The second best method is by asking your broker or agent if they know of a reputable property management company.

Interviewing a Property Manager
Here are 13 questions to ask professional property management during your initial phone calls.

1. What is the general vacancy rate in your area? “Your area” could be a city, town, neighborhood, district, street, etc.
• This information is crucial in studying feasibility of owning property in this area.

2. How many units do you currently have under management? What type?
• If you are looking for them to manage your 4-plex, see it to that they at least manage 4-plexes. If you have a 20-40 unit or larger apartment building, see to it that they have under management the same. A property management company that manages 400 single family homes is not the same company that manages 400 units of apartment buildings.

3. How long have you been in business?
• If they have less than a year of experience, don’t use them. They need at least one cycle (spring, summer, fall, winter) completed to know what’s going on.

4. Do you have a start-up or account setup fee for new landlords?
• Know this upfront.

5. What are your percentage management fees? What other ways are you compensated?
• Plug these fees into your property cashflow analysis.

6. What is your policy on who keeps the late fees collected – the landlord or the management company? Or is it split?
• Know this upfront.

7. Do you have your own maintenance staff or do you use independent contractors?
• Gives you an idea of their sophistication.

8. What is the cost for an eviction process from start to finish?
• In San Francisco, it costs about $5000 per eviction. In NY, it costs about $300.

9. Is there a per new lease charge to the landlord?
• Know this upfront.

10. How do you advertise your vacancies? Who pays for advertising?
• Typically, good property managers will have a referral system in place.

11. What are your business hours?
• Know this upfront

12. How are tenant emergencies handled? Weekend calls?
• Gives you an idea of their sophistication.

13. What monthly reports do you typically send owners?
• Know this upfront

NOTE: This interview is not for telling them what you want from every question asked. It is merely to gather information in order to make a decision on if you want to continue.

Character Traits You Want In Your Property Manager:
1. Tough-minded leader yet a people person, diplomatic
2. Creative and entrepreneurial instinct
3. Excellent communicator
4. Good negotiating skills
5. Capable organizational and administrative skills
6. Basic mechanical skills to verify contractor work
7. Local market and in-depth industry knowledge
8. Decisive
9. Integrity and honesty

Qualities and Capabilities You Want the Management Company to Have
1. High quality staff and support personnel
2. Confirmed reputable name in the marketplace and govt. offices
3. Reliable and modern reporting system for financials, operations, and maintenance
4. Excellent tenant relations that are visible and apparent
5. Licensed to manage and posses industry certifications

Components of a Sound Property Management Agreement/Contract:

1. Leasing
• Use best efforts to keep property rented by procuring tenants for the property and negotiating and executing on behalf of the owner.
• All leases for the property shall not be in excess of 12 months without written permission from the owner.

2. Rents
• To collect the rents and revenues from the property and serve or cause to be served all notices for the collection of rent and other charges.
• To initiate actions for evictions and when necessary, to settle, compromise, or release such actions or suits and reinstate tenancy.

3. Service Contracts
• To execute in the owner’s name for utilities and services for the operation and maintenance of the property.

4. Accounting
• Property manager shall keep proper books of account for the property and books shall be open for inspection by owner.
• Property manager shall furnish to owner a monthly statement on or before the 10th of each month.
• Find out if owner is required to keep a reserve monies account with property manager.

5. Compensation to Property Manager
• In consideration for the services rendered to the owner by the property manager under the agreement, the owner agrees to pay the property manager on a monthly basis.
• Compensation can be a percentage (%) of collected rents, a fixed fee, or a per door fee. The percentage ranges from 4% to 10% typically.
• Find out if there is a per new lease fee.
• Find out who keeps the late fees, or is it split?
• Find out if there is an extra charge at any time during the eviction process.

6. Terms of Agreement
• Initial terms are usually for 12 months. Try to avoid a 12 month initial term. If you are not able to do so, negotiate a 6 month term agreement. Never sign on for more than 12 months at any time.
• Either party may terminate the agreement by giving a 30-day written notice to the other party. Avoid 60-90 day requirements.

7. Terminations
• Immediately upon termination, the property manager shall provide owner with all originals or copies of leases and all agreements and related documents.
• All property financial records in possession of the property manager shall be delivered to the owner.

8. Provisions and/or Additional Provisions
• Delete any clause(s) stating that the property manager will act as real estate agent or receive commission if and when the owner sells the property.

9. Fiduciary Responsibility/Statutory of Compliance
• This is the code of ethics clause.
• States the property manager will perform all duties in the agreement.
• The property manager’s first obligation is to obey and abide by the law.
• The property manager will notify owner of professional opinion matters.
• The property manager shall keep the owners’ information strictly confidential and not shared with the public.

10. Be leery of “hold harmless” clauses.
• Responsibility is a two-way street. This clause relinquishes the property management company from all liability of damages to the property.

Essential Tips for the New Apartment Investor

1 – Proformas - Don’t buy on broker proformas!
To verify what the broker or owner is reporting for rental amounts, do your own quick n’ easy market rent survey. Call the actual apartment complex first to ask what the rents are (pretend you are a potential tenant). Then, call two to three competitors and do the same. The information you gather will confirm whether or not the income that is proposed is viable and achievable.

2 - Operating expenses are ALWAYS underestimated – triple check them.
Investor check #1: have the operating expenses double-checked by an experienced investor or professional property management company.
Investor check #2: get original copies of all utility expenses shown for 12 months.
Investor check #3: be conservative, then check if the deal still works and meets your objectives (e.g. cash flow, return on investment, cap rate, etc.)

3 – New property tax bills that can wipe out your cash flow - Be wary of reassessing property tax bills…know when it happens and at what rate. In California, property tax is re-assessed upon the transfer of new ownership to the higher level. In Ohio for example, taxes are reassessed every 3 years, setting you up for a shocker of a new tax bill if you’re not prepared.

4 – Income and expense statements versus property tax returns – make sure the income amounts on both forms match each other! For example, if the income statement shows an annual income of $100,000, but the same property’s tax returns show an income of $80,000, which one are you likely to believe? The tax returns of course! The question is: where is the missing $20,000 in income?

5 – Watch out for these properties – today especially, watch out for “all-bills paid” or “master-metered” properties. These apartment buildings have one master utility meter for electric and gas and water, although water is typical. The ideal arrangement is for each apartment unit to have individual utility meters. Can you imagine paying the entire electric bill for all 50 units?

6 – Don’t over-pay! Do yourself a favor and convince yourself you’re not over-paying by getting up-to-date sales data of comparable apartments. Make sure sales data is no more than 6 months old.

7 – Yes, location remains important. You can “fix” a property, but you can’t fix a location. Start off by getting simple demographic information for your area. Do this by going online to the city’s Chamber of Commerce and begin researching there. Next, call the Chamber’s office and ask to be connected to the Economic Development Department. Or ask to speak to the Director of Business Development. Confirm that your property’s location is sound by asking for data on the following: job growth, population growth, areas of revitalization, paths of progress, business growth and company relocation incentives.