I’ve been pretty vocal and transparent regarding the two investment properties I purchased this year. Both are condo’s, one located about 30 minutes from my house, and the other is over 1,000 miles away on the Gulf Coast in sunny Florida! First, let me say that I am not overly impressed with either property management company I am currently using, but the one locally is essentially internet-based, and thus with lower overhead they only charge me $79 a month and without any additional tenant screening or placements fees. It’s very rare to that find sort of pricing because the property management industry is basically made up of realtors. Realtors love to have commission-based payment structures, as I am sure most of you that have ever bought or sold a house know all too well. This is precisely why I sold, and purchased, my last house on my own. It’s actually not all that difficult to do, but that is for another post altogether. The point being, a fee-based payment system is much more efficient, levels the playing field, and really prevents ethical situations from arising. After all, what additional effort is done on a $1 million dollar house that a real estate agent earns 3% commission on ($30,000) versus the $200,000 home ($6,000 in commissions)? The only difference is that one of you can afford more home so the real estate agent thinks they can get more money out of you…simple as that. The same can be said for charging a commission as a % of monthly rental income. If they manage a $1,000 a month rental versus a $2,000 rental, what additional work is there for them to do? The answer is usually none. However, they will charge you 20% of that gross rental income, and one will make $200 a month in commission, and the other will make $400 a month for them in commission. When situations arise and they get bogged down with emergencies at the properties, which one do you think they will tend to first? Conflicts of interest across the board here.
My Florida property is a different situation altogether. There is no such thing as fee based rentals in vacation spots. I wouldn’t necessarily be against it, however, this might be the one time that a commission-based percentage isn’t as detrimental to the bottom line as it might first seem. My property manager in Florida stands to make 20% of ALL gross rental commissions throughout the year. He makes nothing unless I make something. This means that he has a very vested interest in renting the property out to it’s maximum potential. That includes that highest number of days possible throughout the year, at the highest possible amount throughout the year. You can easily see how this differs in comparison to the my local rental property. My local property is rented, at a minimum, for a year at a time. The monthly rent is negotiated ahead of time for the whole year and never changes. Whereas, my seasonal property commands higher rents in the winter than summer, and is more occupied at certain times over others, and the minimum rental stay is a mere 2 weeks. There are a lot more variables to manage with this type of property and I actually prefer a commission-based pay structure in this particular situation. Though one needs to always compare and contrast local companies and their varying percentages they charge, and whether or not there are additional fees and for what.
When my partner and I flew down to look at properties we made sure to interview a property manager that was in the vicinity of where we were looking. For better or for worse, we settled on the very first company we spoke with. To me, at the time, our willingness to go with them was quite sound. First, they helped us avoid putting in an offer on a property that would have been a financial nightmare. Second, they were the managers of the unit next door to the property we inevitably purchased and their gross rental amounts on that unit were exactly what we were hoping for. Third, their office is located about 3 blocks from our condo. Lastly, they have a simple 20% fee structure and that’s that. The only exception is if they manage any work on the property for us, they have a standard 10% mark-up to any bill to cover their costs of managing it. Well, we needed to have some light construction done on the property, which we already knew, but figured a cost of $5k or less to cover it all. Our property manager, and his partner, assured us that once they got the keys they would walk through and create a checklist of all items we needed so that we can decide what and what not to replace or buy…i.e. furniture, bedding, dishes, etc. In short, a checklist (for which he had a template printed out for us) never came to be. Instead, he simply called me and walked me through the list of items we needed to replace. I still have that handwritten list I took down as we talked for over an hour during my lunch break at work. It had 16 items on it, some of which were debatable still, and it was what happened after that the property management nightmare began.
It’s been nearly 3 months since we’ve closed on the Florida property, and almost immediately turned it over to our property managers to get the ball rolling. Everything seemed to start out just fine, they were getting quotes for the work we wanted done and sending the details over to us to approve, just as we thought the whole process would work out. Fast forward to October 4th and we received our first owners statement, after requesting it I might add, as the automatic push of the owners statement never came our way as it should have at month end. We owed roughly $6,000. More than we initially expected but since it covered pretty much everything we ended up needing done by that point in time. Other than the “renovations” taking longer than we expected we figured everything was fine. Then on October 15th, 11 days later, we received all of the additional charges they had racked up, this time without our consent or approval. It was about $10,000 more! They began charging us for movers fees, large tips to movers and delivery people, and then 10% mark-ups on everything including the tipped amount. They were purchasing items from IKEA online and we were paying $100 delivery fees for simple online items like towels and bedding from IKEA, and again another 10% mark-up on all that including delivery. Then 10 days later we received another updated owners statement, this time stating we owed $15,000 in total. The charges just kept racking up with no end in sight. These included additional furniture charges from placed like Ethan Allen (quite expensive I might add) that we had never approved or had even known about. I finally started receiving the receipts from them and they were adding in their own delivery charges, claiming that the companies charged more, and me mistakenly thinking that their 10% mark-up included these sorts of additional activities. I guess I was wrong! Here I am several weeks later, and we owe roughly $20,000 more than we expected or approved of, and they want their payment now. Yet they still haven’t sent all the receipts yet, and we keep getting them in bits at a time… which is utterly ridiculous.
So you may be asking…why haven’t I switched to another property management company yet? Well, the answer is quite simple. I live over 1,000 miles away as I previously stated and I am handcuffed to the reality that I need to deal with SOMEONE in that area that I need to trust to rent out the property for it’s maximum potential value. They have proven they can do that with the very similar unit next door to mine. Also, we are far behind the point in time I expected to have our unit listed online. Every day further that goes by is the potential of losing rental income for the “busy season” starting in January. I feel myself having to swallow a lot of pride, and a little common sense, in hoping that they can achieve rental income for this coming winter. We are out enough money at this point that I can’t risk messing up the first quarter of the coming rental season. I believe this is what they call being stuck between a rock and a hard place! I have put in a very stern request that they clear every single penny before it’s spent going forward…but alas, the damage, and our budget, is done.
What would you do? Fire them now? Use them for a short time?
Let me cavaet with I’ve never dealt with a property management company so I don’t know the ins and out of what is legit in the industry and what isn’t. With that said I would be terrified of them. $20k in such a short time especially when you didn’t authorize it would scare me. I would get in writing what the agreement should be moving forward and then have them stick to it.
While specific amount aren’t in writing, there is verbiage in a contract that says they need to get approval from us first. I have my bank ready to deny payment authorizations that they send through to our account just in case. The real issue is that I desperately need them to rent this place out for the busy season… its too late in the game this year to switch companies, and they collect revenue, so either way they have very little risk of not collecting whatever it is they want.