Where Property Managers Really Make Their Money

Property Management companies don’t start out cheating their clients. What so often occurs is that there is a gradual bending of ethics without property managers realizing they and their companies are becoming entangled in many unethical and even fraudulent practices against their clients. Here is the way this usually occurs.

The first question most prospect clients ask is, “How much is your management fee?” Such prospects are shopping for the management company quoting the lowest price. To quote lower management fees, many management companies lower their management fees below profitable levels and look elsewhere to make a profit. One way is to bill clients at a higher rate for in-house maintenance services. 

When this occurs, clients suffer in three ways. First, clients can no longer know the true cost of their property management services since the cost is hidden. Second, not only are clients paying more for maintenance, they might also be paying for maintenance not required, but done to bring in more revenue. Third, in order not to draw attention to the higher maintenance costs, these management companies’ reports become less informative in describing maintenance performed.  

One management company took this activity to the extreme by offering absolutely zero management fees. The owner of the company held a general contractors license, had a roofing company, and a carpet installing company.  This was such a blatant case of marking up expenses that only a few property owners could not see this management company’s intent and the company soon folded.

Mark-up in maintenance expense is only one of many ways some management companies make profits while using their management fees as lost leaders. Other examples include: collection services; unlawful detainer services; forms; supplies; storage; charges to tenants such as late payment and showing fees, parking, storage, and extra person fees; concessions on the property such as vending machine and laundry equipment; goods and services sold to tenants at move-in such as insurance, cable, phone, and internet access; and gratuities accepted from client’s vendors in return for access.

Thanks to a growing niche of rental property owners who know what to look for when hiring property management, property management companies that rely on their management fees without hidden fees for their profitability can survive. At present, this niche of owners is composed mostly of those who have learned through trial and error about the dangers of hidden fees.  With the sharing of knowledge such as is being attempted with this report, more rental property owners are learning where property management companies acquire their revenue.

The first step is to simply demand in writing an accounting of all income to the management company through the relationship with the client. This can be accomplished with the following policy:

• ·         The management agreement needs to show an all inclusive listing of income received by the property manager and an all inclusive listing of services and responsibilities covered.

• ·         The management agreement is to state the rules management is to follow regarding all revenues and gratuities received by management from vendors operating with the assistance of management where such vendor receives income from the client, from the assets of the client,  or from relationships with tenants of the client.

• ·         Any service that management is prepared to perform for the client, but is not directly covered under the management agreement, is to be listed in an additional agreement with a fee schedule. Such an agreement is to be submitted to the client before agreement is reached on management.

• ·         The management agreement is to make it clear that if a service is performed that is neither listed on the management agreement or the additional fee schedule of additional services, there will be no charge, unless the owner has agreed in writing to pay for such a service. In such cases, exceptions for emergency situations are to be spelled out.

• ·         The agreement is to make it clear that copies of all invoices for all expenses should accompany the monthly statement and that there should be no expense on the statement without proper supporting documentation. 

Owners should carefully review their reports the first few months to make sure they see exactly where all of their money goes. If they are too busy to do it themselves, they should hire a bookkeeper to do so. These reports should also be audited once or twice a year to ensure additional fees don’t start creeping in. If any questions arise from these audits, immediately make an appointment to go over them with the property management company’s representative.  It is usually a good idea to fax or email the representative copies of all questions before any such meeting so all research can be done beforehand.