LOTS OF PROPERTY MANAGERS ARE COMPETING FOR YOUR BUSINESS…WHAT SHOULD YOU BE LOOKING FOR WHEN IT COMES TO PRICING?
Let’s start with something we should all be able to agree on: Hiring a professional property management company for your rental property should bring you greater profits and returns than you would see without one. That doesn’t necessarily mean your property is going to bring back a return, because not all properties are created equally and a history of deferred maintenance will inevitably eat up early profits. But a good property manager will help you get the most value for the property you own, whether that means earning more or losing less. So for that to hold true, you need to choose a property manager that is charging you the correct amount. If they’re making money FROM YOU, not WITH YOU, you’re never going to see the full potential of your investment.
A COMPANY THAT MAKES MONEY FROM YOU
As has been teased out by different people in different arenas, if you want to know someone’s priorities, look at their budget. In the same way, you can see if a prospective property manager is truly working with you by looking at their pricing structure. It’s how they make their money that should be your primary focus, followed by how much they’re charging.
Here are 8 COMMON TACTICS you’ll want to be aware of in evaluating a property management company:
1. UNLISTED PRICING
If you can’t easily find a company’s pricing online, there’s a reason for it. “Contact us for a quote” should be code for “don’t contact us at all because we dabble in smoke and mirrors”. Unprinted pricing really means one thing: you’re not necessarily getting the same deal as the next person. You want someone to help you with your real estate investment, you’re not buying a used car. There should be no need or expectation to negotiate around pricing. This subjective approach naturally creates an adversarial relationship with someone you should be partnering with. They are directly trying to make money from you out of the gate.
2. NON-SERVICE BASED FEES
It makes sense that you’ll run into service fees with a company that is providing you a service, but it doesn’t make sense that you should pay for items that don’t directly add value to your property. Paying for maintenance as it comes up…makes sense. Paying for your property manager to file an eviction and show up at the courthouse on your behalf…that’s added value, it makes sense to pay for it. Those services make your life easier and they’re why you hired someone to partner with in the first place. But be wary of companies trying the following:
3. ACCOUNT SETUP FEES:
Many property managers charge an initial account set-up fee and they may ask for as much as $300! For what? For entering your information into their computer software? Does that action make your life easier or their life easier? At that price are they hiring a lawyer to do it? Regardless of what the cost is, if someone is charging you an upfront fee for initial setup, they’re tipping their hand that they aim to make money from you rather than with you.
4. FLAT FEES FOR MANAGEMENT
Flat fee structures aren’t quite as dubious or telling as the previous examples, but this approach leaves a lot of variability to pricing, which again presents the opportunity for subjectivity, negotiation, and not knowing whether or not you’re getting the same deal as someone else. It’s again smoke and mirrors because they’re using property type, square footage, and the property’s condition to estimate its value…BUT YOU KNOW THE VALUE ALREADY!!! IT’S WHATEVER THE RENT IS. Why pull out their calculator and protractor to try to guess a number that already exists??? Unless they’re using the latest Graphic Calculator from Texas Instruments that brings back nostalgia for High School Pre-Calc, the only viable reason is that they’re trying to make some money from you, rather than with you. More often than not, flat fees are used like the people who post things on Marketplace for $1: they present lower costs than competitors to reel you in, but either the value is not there, or the costs are hidden elsewhere.
5. GRADUATED PRICING STRUCTURES: (STANDARD VS. PREMIUM)
If a company offers two different management price options they’re 100% making money from their clients. If you need to offer up 2% more per month to get certain services and guarantees that are part of the job, that just isn’t right. Some companies only offer “eviction protection” if you sign up for their premium service!!! What? The primary objective of hiring a professional is to avoid costly evictions and vacancies…how is this service a premium? In some of the other categories, there’s been the suggestion that you might not be getting the same quality service as other clients. In this case, maybe we should give them credit for being transparent??? And if you do go with the standard package and there is an eviction, are you at fault and beating yourself up after an eviction for not having splurged for the gold membership? Buyer beware.
6. LEASE RENEWAL FEES:
Now what effort does this require? Typically, just hitting a button…changing a date on a calendar drop down for the most part. Perhaps there’s a little more that goes into it, but there shouldn’t be with the technology available today. Clients have told us their previous managers wanted over $100 for this service! Charging $5 is too much! These companies are either highly inefficient or they’re taking money they don’t deserve.
7. LATE RENT FEES
Your property manager should split any late rent fees with you right down the middle. You’ve been inconvenienced and so have they. If a property manager takes the full late fee or more than half, they actually benefit when the rent is late. That’s not the professional touch you’re looking for. You want a pricing structure that benefits both parties equally to help reinforce full collaboration.
A COMPANY THAT MAKES MONEY WITH YOU
Best piece of advice: when contacting a potential property manager ask them directly how they make money with you. They should respond with key words such as partnership and collaboration and should be able to explicitly describe the value they provide and should ask you about your long term goals. The best property managers will have transparent, easy to find pricing where management fees are based on a percentage of rent that is collected. That percentage may change depending on how many rental units you have under management, but all clients are getting the same dedicated service across the board. If a company charges you for vacant units or when tenants do not pay, they’re no good. The right property manager aligns their incentives to your goals, not theirs, and the best ones create systems to ensure your goals and theirs overlap. A company that makes money with you and not from you does not negotiate or offer sales or special deals: to do so means some people are getting a better deal than others and to afford those deals the company must be making more at the margins than they need to…which makes it harder for you to invest successfully, which is the ultimate reason you’ve hired them! If you get the feeling your company might not be upfront with costs, keep looking.
HOW MUCH SHOULD YOU PAY?
This should be a difficult question to answer because naturally markets are so different across the U.S., but it’s not. Because management costs should be a percentage of rental income (not a flat rate), market fluctuations don’t matter. A company that makes money with you is going to benefit as much as you do when rental prices are favorable…and they’re going to feel the same crunch you might when the market cycles in the opposite direction. On average 8-10% is normal across the U.S. and will vary depending on rental income amounts and units under management. For Nexus Property Management®, 8% is the sweet spot and the rate that the vast majority of our clients in Arizona, Connecticut, Massachusetts, and Rhode Island pay. Some companies in and around big cities (Natick/Boston, New Haven/NYC) charge higher percentages because costs are higher there, but ultimately it makes no sense to pay a higher rate because rents themselves are higher.
No matter what, you shouldn’t pay more than you can afford. If you feel like you might not be able to afford 8% to have a professional in your corner, sit down with your top choices. Go over your rent roll and what maintenance needs they foresee. A property manager who can provide you with a reliable long term financial outlook and potentially tell you you’re not a good candidate for professional property management at this time, is likely the company for you when you’re ready.
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Mick Lefort is the General Manager of Nexus' New Haven County Franchise Office and the Vice President of Operations for Nexus Property Management®, a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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