Selecting a Property Management Company
Selecting a Property Management Company
There are numerous possible reasons why real estate investors need to hire a property management company. Some investors need to utilize a management company because they want to reap the benefits of real estate investment without personally managing their properties or cannot do so because of other business or employment commitments. Other investors have no choice except to utilize a management company because the property is at a distant location.
However, using a management company can in itself potentially create new risks for an investor and result in unexpected financial and/or legal problems. Use of a property manager does not eliminate an investor’s liabilities related to ownership and operation of the property nor does it guarantee that the property will be managed efficiently and profitably. Accordingly, selecting a management firm requires considerable care and adequate due diligence.
A property management business that is both competent and profitable requires a team effort. Thus, you will probably want to utilize a qualified full-service property management company. Most qualified property management firms will be a multi-person business in some legal format, usually either a corporation or limited liability company. However, for brevity, the term “manager” will be used hereafter.
The most important thing to remember is that you will have employed someone who has the authority to act on your behalf and that you will be liable for all acts performed by that agent in exercise of the authority you have given. Accordingly, it is extremely important that you choose a company that is honest, competent, and experienced and that the contract between the two of you adequately defines and restricts the authority given to the manager and defines the duties of both parties.
Good management requires a significant amount of knowledge, a lot of work, and good organization. Profitable management requires that the management company have adequate qualified personnel to handle the work load and the tools necessary for doing so efficiently. For example, may states require use of a “resident manager” for a complex having more than a specified number of units – e.g., greater than 15 in CA – and the resident manager must be an employee (as
defined by federal and state laws) who is adequately supervised and for whom payroll must be done.
Many real estate brokerage firms offer property management services even though the primary business is brokerage, perhaps only home sales. However, real estate companies that do not include a serious property management division may have limited knowledge and experience, have limited or no access to screening reports, and may not have documentation available and procedures in place that are both functionally adequate and in compliance with all current laws.
Selecting a good manager can be one of the more important decisions you will make regarding your rental property. Accordingly, owners should do as much due diligence as they consider necessary to ensure that the selected manager will manage their properties in a manner that is (1) at all times in compliance with all federal, state, and local laws and regulations, (2) efficient and long-term cost effective, and (3) results in long-term increasing cash flow and market value.
All states regulate many aspects of real estate transactions. In most states, a Real Estate Broker license is required for any individual or company that, on behalf of another and for valuable consideration, engages in property management including advertising real estate for lease, procuring prospective tenants, negotiating lease terms, or executing lease agreements. While most states license property management under a real estate broker license, a few states provide for a special property management class of license.
Before proceeding to interview each candidate management company, you need to first verify that the company is properly licensed and determine whether or not any complaints have been filed against it or any disciplinary actions have been taken against it. Check out each candidate via a phone call to the state’s real estate license regulatory agency or on the agency’s Web site. In particular, be sure that there have been no material trust account regulation violations.
For each management company meeting these criteria, you next proceed to look at the following specific qualifying issues.
- Property Type Qualified – Is the company qualified to manage the type of property you have? It is usually necessary that a firm have a significant number of units under management in order to be able to afford the personnel and tools
necessary for efficient and adequate management of properties. However, although the number of units is one preliminary indication of the firm’s qualifications, the number of units managed is usually not more important than
the firm managing properties of a type similar to yours. - Staff requirements – Consider each kind of service you want the company to perform for you. This will usually include: finding, screening, and selecting tenants; executing leases; holding and accounting for deposits; collecting rents; handling tenant complaints; dealing with emergencies; supervising routine maintenance and repair; and providing financial accounting and reporting. Does the company have adequate qualified staff to add your property to their current management load?
- Personnel- Are personnel who perform tasks that require licensing, properly licensed? Are at least key personnel highly experienced? Is adequate effort put into keeping up with laws and regulations related to property management?
- Management Contract – It is important that the management contract you will sign be fair to both parties. There are things that must be included by law in most states, things that should be included to protect you as owner, and things that should not be included.
- Screening & Selection Procedures – The most important functions a manager is likely to perform for the property owner is tenant screening and selection. A bad tenant can cost you thousands of dollars and ruin your day. Worst case, improper screening and selection procedures could cost you everything you own and ruin your life.
- Documentation – Legal and adequate documentation is extremely important for minimizing management problems and dealing with problems that do occur. You will want to obtain copies of all documentation used by a candidate manager and satisfy yourself as to adequacy.
- Management issues – Does the company have adequate operational and management procedures in place? Does the company employ technology that results in efficient and cost-effective management and that provides adequate reporting?
- Maintenance Issues – How is maintenance handled by the management company? Does it utilize employees or independent contractors or a combination of both and does it do so in accordance with IRS rules and other legal requirements?
You must always remember that the manager Is your agent. What you see when interviewing a candidate gives you some indication of what you are likely to get, but we have all learned that looks can be deceiving. Select a property manager based on qualifications that have been verified, not because of a nice smile or a fancy office. The fact that the manager is your agent means that:
- The property manager will essentially control your investment;
- The manager represents you with your customers, the tenants;
- The manager represents you with governmental agencies;
- The manager handles the tenants’ money and yours
As your legal agent, the manager can, through incompetence or negligence, get you embroiled in lawsuits regarding a variety of issues including (1) physical injury, (2) property damage, and/or (3) personal injury; and
The manager can get you into trouble regarding other issues that can involve both lawsuits and governmental agencies, including those related to violation of landlord-tenant, fair housing, fair credit reporting, lead-based paint, and other laws at federal, state, and/or local levels.
Finally, owners should regularly monitor the operation of their properties and discuss problems and questionable issues with the manager. In addition to reading furnished financial reports and contacts via phone and email, owners should regularly visit their property. Depending on location and other factors, “regularly” might mean monthly, quarterly, or annually. More often is better than less often.