Property Managers - Help Me Understand How To Justify Your Costs

Service fees, like any commodity, are likely based on the market forces of supply and demand. 

Managers charge the fees they charge, because that is what the market will bear.

Aside from that, pproperty management is a huge hassle! (Been there done that and will NEVER do it again)

Good luck with your endeavor.

Ok, as a property manager who manages homes in your price range, I will do my best to answer your question. But let me first say: I agree that the industry is in need of a facelift. It definitely has a stigma, which is why I felt there was an opportunity to shine. Also, I am going to put some links in this, so forgive me, but I think you will find them useful.

First, I would always goto the National Association of Residential Property Managers to find a manager. This is the BEST organization in our field. Its not perfect, but its the best. After finding one in your area (if there is), I would visit their website and do some background work prior to contacting them. After you contact them, if you like them, ask for some references.

Now, as to a justification of the costs. Let me first give you my pricing:

Leasing only, 1/2 of one month's rent, minimum is $1000.00

Full Service, $495 up-front, and 6-8% of collected rent based on rent amount. $2000 and below is 8%, 2-3000 is 7% and 3000 and up is 6%.

The reason I charge an up-front fee is because the commission are so small. I can't afford to run ads, pay employees to show property, pay for the office, etc...if anyone who wants to cancel can just cancel and walk away. Also, a lot of my listings are also listed for sale with another broker. If the house sells, I still want to get paid for my efforts.

The leasing fee is a commission. Similar to what a realtor charges. I am getting paid a commission to rent the home. The commission is based on the amount of the lease. Some companies, especially in commercial, charge a percentage of the entire lease amount. Get a longer lease, get a bigger commission.

The monthly fee is also part commission/part service fee. It is essentially a commission that is charged over time and a service fee to manage the property. Collect rent, pay bills, serve notices, arrange for repairs, etc...

This is how I justify my fees to the owner.

1) We have a 0 eviction rate (since I was made CEO 3 years ago) for tenants we have placed. You are paying me to find a GOOD tenant, not just a tenant. Anyone can find a tenant. So, if you want someone experienced in weeding out the con artists and other riff-raff, than I am your man.

2) If I make a percentage of the rent and don't do anything for it but collect rent, the owner should be happy. That means your tenant is paying on time and taking care of the property. No notices and no repairs is almost always a good thing. Also, tenants are more likely, in my humble opinion, to pay a "company" on-time when things are tough. For some reason, they feel more likely to have a "real person", i.e. the owner, forgive them for being late.

Hope that helps. Unfortunately, I am in sunny southern california. Your property is a bit beyond my reach!

Well it is the same thing as if you were selling a home. If you were selling a home that is on the market for $400,000 and a home that is on the market for $135,000- would you expect the same commission?

I was a PM for over 7 years and it is typical to charge the first month's rent plus the 10% monthly. For a rental that is on an upper scale- you are obviously going to have only market renters- meaning that if the rental amount falls over the section-8 limit you are going to have full market rental. So you would have to advertise/market properly. Rental books for higher end rentals- things like that.

With all the things a PM has to endure everyday from the renters- it is more than you realize- when you break it down to how much money a PM makes for their troubles- it's not enough!

Remember- interview and do a good check up on their experience and work history. Make sure it is a PM that has worked on higher end rentals. They will know what to do to rent them.

I have done both higher end rentals and tax credit properties. Night and day and who you hire needs to know where that line is drawn to properly market for you and get solid people in that will pay rent and have a good history!

Good luck!

btw, we also have 3 options for the tiered system. For instance, your property would be

1) $495 up-front, 8%

2) $200 up-front, 9%

3) $0 up-front, 10%

Our clients asked for options, and they got them.

Leasing is local, as well as sales. We are in small-town-AZ. We charge $150 set up fee and 10% of rents collected. That is about what the other PMs in town charge (only one other company, now). We do an excellent job of screening tenants. That alone is worth what we charge. How many owners want to do the checking themselves and call the prospective tenants and explain why they won't rent to them? Many owners say to us "I'm just too soft-hearted".

We also collect rents, do inspections, deal with any maintenance needed, deal with tenants' questions/problems/crises. Is it fair that the commission is 10% for all properties? The lower end properties cause BY FAR the most work (we have everything from $475 to $1350) but the owners of the lower end properties aren't going to pay 25% so we can reduce the commission on the higher end.

Are we worth it? Absolutely.

Sara, that was a great post. These are some very real concerns some owners have. In my case I don't mine so much paying reasonable up-front fees etc. But what bothers me is when I pay and the service I get is not good. In particular in SC the PM do not accompany the prosepctive tenant on a showing. Instead the PM gets a photo copy of the tenants license and $20 deposit and then hands over the house keys. The tenant goes by themselves. In all my years of investing this is the only states I have run into that does this. The flat fee commission is an interested concept and I have run across it in FL. To me, yes I don't like all the fees, But if the PM is really good and gets a "qualified" tenant and know his stuff their are worth their weigh in Gold! I've gone through too many bad experiences to know in the long run it's not so much about the quality of the tenant but about the quality of your PM.

John, I like your attitude and your success rate "0 evictions". Where have you been all my Life! Unfortunately I sold my house in CA.....I was crazy.

Please check this out (below) and give me your honest opinion if you think this site will Fly. You can be brutally honest. I need to know.

Karen McDaniel

www.propertymanagementprofile.com

First of all the big Red Flag was you want to do your own marketing... Bad Bad Idea. My contract strictly forbids that. Why? I actually had an owner print up fliers that stated (NO CHILDREN). I had another who put my personal cell phone number in the ads. I was getting calls at 2:00 in the morning about a rental house.

Hire someone who knows what they are doing and get out of the way! Ronald Reagan said: Surround yourself with the best people you can find, delegate authority, and don't interfere as long as the policy you've decided upon is being carried out.

NARPM and IREM are great resources but also find out what kind of education your property manager has. Are they a real estate agent who sidelines as a property manager or do they actually have some real property management credentials, accreditation's, certifications, education?

You get what you pay for; that old adage applies here too. You can get the kid next door to show the house but when he tells someone something illegal or has a huge party in your vacant house your toast.

What are your getting for your money? If you can't Google the address and find a posting on craigslist or backpage or rent-clicks then someone does not understand the importance of Internet marketing. That takes time, effort and that translates into money.

Background checking, we have developed systems that most people couldn't even dream of for finding out things about potential renters. My staff spends hours compiling a book of references, background checks, credit reports and criminal histories. The $30 we charge the applicant doesn't come close to covering the time spent.

You are right about one thing managing a $400 a month property is a lot more work than managing a $1750 a month property. The less they pay the more they bitc#! We do offer to reduce the price for people with multiple properties that rent for a higher rate, we have also established a $50 minimum that replaces the 10% for low end properties. But my bookkeeper still has to do the same amount of reports, the same amount of accounting etc. for all the properties.

Overhead is crazy, liability insurance, work comp, unemployment, E&O, etc. costs huge money! The risk is greater in a high end property the tenants typically know their rights, and can afford legal council. Everyone wants a reason to sue the evil landlord and that means the PM gets sued too.

What is Property Management?

As an owner/investor, I use Craigslist becauses it free, it's a popular site and you do get some good leads. Yes, I get some weird ones too, but you have to be savvy and weed them out. Whatever leads I do get I always ask them certain questions regarding why are they looking for a place to live (relocating, job transfer etc) and I mention good credit is a must and that they will be required to show rental history and the financial means to afford the rent payment plus all utilities expenses. If they start asking me questions like "we've got to move in today" or "Do I have to pay the utilities" I get a little concern. All questions I ask are geared towards credit worthyness and job stability..... no discrimination whatsoever. I never put  a phone in my ad or give it out until I've done my "weeding out".

My PM still does their own advertising and I believe this just helps them out. Once I get a good lead that appears legitimate I turn them over to my PM. My PM will do the rest.....

I usually do my own advertising ONLY when the market dictates it (slow rental market, lots of rental vancancies), Another factor where I do my own advertising is when my PM ads are generic in nature (Meaning their ads are not specifically promoting my property).

Otherwise I let my PM do their thing. 

I agree not all owners should get involved with doing their own advertising, especially if they don't know what there doing. By sending bad leads to your PM could give them more headaches then helping them. Out of 10 leads I got for a property I only sent one to my PM, and they are my current tenant. So it can work.

It has been my experience that property management is a highly labor intensive business. A GOOD management company will definitely earn their wage what ever it is they charge. (I don't publicly talk about my commission) and neither should any of the other licensees.

It reminds me of the time I was remodeling an old house. I got some bids on re-doing the wood floors. I thought to myself, these guys are thieves. I rented the equipment and got about half way through and thought to my self, they don't charge enough.

Let's look at some numbers for the sake of discussion.

Let's say there is no up front fee.

Let's say there is just a percentage of the revenue, which I think is the best because the collector now has an incentive to collect.

A property rents for $1,000 per month and for the sake of simple math a company charges ten percent. that is a $100. If that company managed 50 properties with full vacancies and no collection loss, that would be $5,000 per month. Which between you and I that is not enough money to manage that much real estate.

If you account a staff person, advertising, phones, office space, internet services.

Then it was mentioned that there is a market force. Most property owners are not good landlords (not saying all prop management co's are) but typically property owners buy property and treat it like a stock certificate. They stick in it  a drawer and hope it is worth more later. Property is very, very good if worked correctly. As for passive income that is for tax purposes not meaning you don't have to work at it.

Why Real Estate Works

Hey Sara saw this post and thought I would comment. I have a property manager working for me. He charges a flat fee of $50 per month and only when it is rented, he charges $200. finders fee and no repair fees. He has had 4 evictions in five years, none went to court and the sellers go all that was owed them as far as monthly rents. I rest my case.