What to Look For in Property Management Agreements
August 1, 2012
Every so often I get calls and email from landlords who have had trouble with a property management company, a company that manages property for several rental property owners, not the onsite variety of manager (though I get calls about them, too). Usually the complaints have to do with the property management company not having done the job the landlord was led to believe it would do.
I have responded to complaints such as, “he never checked references, he just rented to anybody,” “he let the tenants get away with murder,” “he says I have to evict the tenant.” Only after the landlord has started having these problems, he or she reads the management agreement and finds out that, contrary to what he or she was led to believe, the management company is not responsible for anything. Too many agreements are written so all the management company is supposed to do is send the right amount of money, and that’s only because it will get into trouble with the real estate agency of the state if it doesn’t.
After reviewing several property management agreements I have on hand, I came up with a list of clauses and terms that should be in any property management agreement you sign with an outside management company.
This is probably the most important clause you can have in a management agreement. In it the management company promises to do its best when managing your property. It is a legal term, which, among other things is defined as “that amount of diligence which a reasonable and prudent man would exercise under the circumstances.”
The professional property manager has an extra duty of diligence, since it has implied, by taking on a management contract, that it is expert in rental property management.
Communication and Notification
Here they are obligated to tell you what’s going on in the management of your property, as necessary. Preferably, the agreement will specify what they company needs to tell you about and when.
Every state has some kind of law regarding the accounting procedures of licensed property managers. Every agreement will have a provision that provides for the property management company’s following the law. Since accounting is a statutory requirement, all you can expect is the management company’s agreement to obey the law and send the right amount of money periodically.
One thing to watch out for, though, is when they will send the money. By what day of the month will your check be mailed to you? Will the check be for that month, or will the management company hold back a month? What happens to the security deposit they collect from the tenant?
Termination of the Agreement
Every agreement will have a provision for its termination. The question is how long does it take to terminate and is there a cost or penalty to you if you do so before a certain date?
Just about every management agreement will provide for the management company to handle repairs. Usually they hire contractors or other companies to handle them. What you will find in the agreement is a “hold-harmless” clause, saying that the management company is not responsible for the “acts, defaults and negligence” of the people they hire. What you also want to see in the agreement is a statement that they will use “reasonable care” when they hire anyone to work on the property.
Certainly they are not responsible for people over whom they have no control. But they are responsible if they hire someone who has a history of shoddy or dangerous work, and they know or should have known that he has.
Evictions and Terminations of Tenancy
Believe it or not, some agreements don’t provide for the management company to handle evictions or tenancy terminations. What are you hiring them for if not for their ability to deal with problems in the property? And what bigger problem is there than a tenant who must be booted?
What you want is their expertise and their willingness to use it. Always make sure that the property management company will use due diligence in terminating the tenancy of any tenant who must be removed.
Will having all these clauses in a management agreement guarantee a smooth relationship with the property management company you hire? Absolutely not. You need to interview and get references from several before you commit to anyone. In addition, find out what kind of professional training they have. Just as you would not rent a property without a signed rental agreement that spells out your and your tenants’ rights and responsibilities, never hire a management company without their and your rights and responsibilities completely spelled out. The reputable companies are eager to fully disclose.
About the Author: Bob Cain
Some 30 years ago Bob Cain went to a no-money-down seminar and got the notion that owning rental property would be just the best idea there is for making money. He bought some. Trouble was, what he learned at the seminar didn’t tell him how to make money on his rental property. He went looking for help in the form of a magazine or newsletter about the business. He couldn't find any.
Always ready to jump at a great idea, he decided he could put his speaking and writing skills to work and perform a valuable service for other investors who needed more information about property management. So Bob ferreted out the secrets, tricks and techniques of property management wherever he found them; then he passed them along to other landlords.
For over 25 years now, Bob has been publishing information, giving speeches, putting on seminars and workshops, and consulting for landlords on how to buy, rent and manage property more effectively.