Wednesday, September 1, 2004
Things You Should Know Before Selecting a Property Management Company
By Will Allen for Official Apartment Joural

The function of a property management company is to assist the owner with the operation of their investment property. In some cases this simply means screening tenants and taking care of day-to-day building maintenance. In other cases it's anything from being concerned with the property, to paying bills, screening tenants, evicting tenants and maintaining the physical integrity of the property. Property management is one of the key elements to investment success. It assures short-term profitability and long-term value by maintaining high occupancy levels, while keeping costs to a minimum. Ultimately a good property management firm will make owning investment real estate a more pleasurable experience. Unfortunately there are some issues that come up between a management company and an owner that could be avoided.

Mistake #1 - Signing a long-term agreement
Unfortunately this happens more frequently than one might think. A typical scenario might occur when an owner really needs help quickly. They find the first management company listed in the phone book and in desperation, sign on the dotted line. Some time later when the management firm seems to have disappeared, the owner informs them that their service are no longer needed. It is then when the owner realizes that the original agreement lasts another couple years and like it or not they are stuck with the non-performing management company.

The only time a property owner should ever consider signing a long term agreement is if they have a relationship with the management company, and are offered a substantial discount to sign a long term agreement. Otherwise, there is no reason for owners to sign a long term agreement.

Mistake #2 - Signing an agreement that allows a management company to receive
" overages" on vendors work
Often times, management companies have language in their contracts that allow them charge a fee based on a percentage of the invoices a vendor charges. For example, when an owner needs a new roof on the building, the roofer's invoice is $25,000 and then the management company charges an additional 10% or $2,500 for the duty of " supervising the roofer." So instead of the roof costing $25,000 it really costs $27,500. Shouldn't the cost of supervising the roof work be built into their management fee? Haven't you already paid for that?

Mistake #3 - Not having a preset spending limit
Many management contracts do not limit the amount the management company can spend without getting the ownerships prior approval. This causes the owner to really lose control of their property, especially if the agreement they signed was a long-term agreement. It is well within the owner's rights to insist upon a preset limit something in the $200 to $500 range, and it's in their best interest to do so.

Mistake #4 - Not reviewing expenses on a per unit basis
At least every six months, owners should review expenses by unit. We have been asked to conduct property management audits and discovered in one case that $3,800 was spent on a unit in the prior six months. It was a one-bedroom unit in a well-located property, but nothing special. All we could think was, " How could someone spend that much money on one unit?" Unless you're installing granite countertops and crown molding it's pretty tough.

When we asked the management company, they provided us with an accounting of expenses for new carpet, new drapes, new sink, etc. So we went to the unit, knocked on the door and explained to the tenant that we understood a lot of work had been done on their unit in the last year and requested a tour. They let us in and explained that they had requested some work to be done, but nothing had ever really been done. Once in the unit it was obvious, the six-month-old carpet looked to be about 5 years old. The blinds were shot and there were fist-size holes in the wall that the tenant said were there when they moved in.

Once the management company understands the owner is paying close attention to what is spent per unit they will rarely experience any problems with misappropriations or overcharges again.

Mistake #5 - Percentage fees can be deceiving
Usually, the first (or second) question an owner will ask a management firm is, " What's your fee?" According to the 2004 Apartment Building Operating Expense Guideline the average fee for managing 5 - 15 units is 5.5%, 16 - 50 units is 5% and 51+ units is 4%. When an owner is considering a management company they can't always look only to the percentage fee charged. A management company may tell a perspective client over the phone that they charge a 3% fee. What they don't tell them is that their contract has no preset spending limits and " Oh by the way" they also charge a 10% " overage" on all vendor invoices. This could easily turn their 3% fee into a 7% fee.

Remember, most management companies are honest and capable of doing a good job and help owners with their buildings. Should anyone be interested in obtaining a free property management audit, go to the Healstone website and click on Property Management and then on Audit. With the right tools and information your experience as an investment property owner can be a pleasant one.

Will Allen is the Chief Executive Officer of Healstone Real Estate Investment, a brokerage and property management firm specializing in multifamily investments throughout Southern California. Will can be reached at (949) 553-0204 or wallen@healstone.com.