Fee Structure

As I hurtled through space, one thought kept crossing my mind –
every part of this rocket was supplied by the lowest bidder.

- John Glenn (Astronaut)

One of the biggest investments people can make is real estate, be it in their own home or in investment properties. Investors spend a great deal of time and money to acquire their assets and expend resources to maintain and manage them.

Property management seems to be a simple and straight-forward proposition for owners to conduct during their off-hours. Rapidly, it becomes an all consuming, full- time job, even with a small number of units. Few investors manage their own units long term. They usually burn out and leave real estate investing altogether. Alternatively, they can turn their properties over to a professional management company. This choice allows for greater portfolio expansion and equity growth.

Many investors pour their blood, sweat and tears into their properties. Handing over a rental property to an untested property management company can be a nerve-racking experience.

You get what you pay for

New real estate investors, who spend an enormous amount of time sourcing, negotiating and closing a deal, often believe that the best way to pick a property management company is by selecting the lowest fees. After all, how difficult is it to collect rent, pay bills and place a tenant? Right? Wrong!

These companies lure property owners with attractive, low fees. However, due to inexperience or incompetence, their mismanagement results in unanticipated costs. A trustworthy, knowledgeable property management company may charge a bit more up front, but this fee is more than offset by greater value delivered.

Property managers vs. salespeople

Many so-called "property managers" are real estate sales people who see the business as a way to supplement their income when the market slows. To them, property management is purely a side-line business until the next sale comes along. With this attitude, no wonder there is no value added to their services.

The skill sets required to sell real estate are radically different from those required to manage property. If given a choice, it is far easier for a property management company to source real estate deals than for a sales organization to manage property.

The true cost of poor management

Cheap property management fees reveal themselves in unresponsive or slow service to both tenants and owners, inaccurate financial accounting, slow rent collections, poor tenant placement, unkempt properties and high resident turnover. Consequentially, the hard-earned profits of a well-sourced and negotiated deal are lost through poor management.

We know. We see it every day.

Something for nothing

No one works for free. This adage also applies in the property management industry. Property management companies are in business to make a profit. How do property management companies make money?

Property management company fee structures fall into two basic categories:

A global fee structure encompasses standard industry services and any exceptions or added services are easily noted. For example, the property management company charges a monthly fee based on a percentage of the collected rents with a basic lease-up fee.

This straightforward fee structure allows property owners to quickly determine the basic rate that covers the entire spectrum of services without any "surprises."

Opaque pricing unbundles standard services and prices them a la carte. The actual cost of services skyrockets as more services are unbundled. For example, the property management company low-balls the monthly management fee and then adds a stiff leasing fee, lease renewal fee, fees collected on vacant units, set-up fees, inspection fees, annual fees, freshen-up fees, document preparation fees, and maintenance charge-up fees.

But it doesn't stop there…

In addition to using unbundled service fees, these property management companies must generate a tremendous amount of account volume. The service is so poor (and liability to the owner so high) that they can lose upwards of 40% of their accounts every year. This pattern forces the property management company to offer ever lower base fees to lure in more unsuspecting clientele.

Prudent property owners investigate their property management company's operations and processes.

Things to look for in a property management company

Property Management Subspecialty – The property management industry has many areas of specialization that require different management approaches. The majority of property management companies tend to focus on one area exclusively because the subspecialties differ greatly from one another. For example, a company specializing in managing commercial buildings is generally ill-equipped to service the multi-family residential segment and vice versa.

Investor Alignment – Owners should focus on finding a property management company that is philosophically and financially aligned with the investor's goals. The chosen company should possess a great depth of successful experience, state of the art management systems and efficient processes. A competent, personable staff will have a substantial impact on the property's two most significant cost drivers: unit turnover and maintenance. The property management company needs to be responsive, reliable and value-added at every step in the process.

How they market vacant units – A minimum marketing effort will not yield the appropriate tenant traffic. Over-aggressive marketing means they will take the first warm body that walks in, whether or not the tenant is financially qualified.

How they show vacant units – Units can be left open for anyone to view unattended. On the other end of the spectrum, property managers may also open units only during inconvenient timeframes (e.g. business hours). Remember, the goal is to find a quality tenant.

How tenants are screened – One bad tenant will wipe out a significant amount of cash flow. Check for credit, rental history and criminal background.

How rental delinquencies are handled – Do they deal with the legal process themselves or do they outsource it? There can be significant liability issues involved in this regard.

Their approach to maintenance – Maintenance is one of the two biggest cost drivers in rental housing. A well-thought-out approach is key to increasing cash flow and equity growth.

How they deal with after-hour emergencies – Property management companies need a definitive process in place to handle emergencies 24/7/365. This is why you pay them – peace of mind!

The type of technology used – Are they using advanced, state of the art systems to deliver responsive and efficient service? Is the accounting accurate? Do the reports show what you need to know?

Are they insured? – You need to be protected. This is an issue of professionalism.

Responsiveness and service – Property management is a people and service business! If the property management firm is not responsive, professional and approachable, unit turnover increases. This significantly impacts cash flow.

Fee structure – Property management is all about service and balancing competing issues. Good property management companies deliver service and financial value. Do not be deceived by a low base fee and the unbundled services approach.

What you are getting for your fees is peace of mind, convenience and value-added services. If you have to be concerned about how your property is being managed, why bother hiring a third party firm? Great property management companies add value at every step in a long and complicated process.

Read the fine print in the contract and know what you are paying for. Unbundled property management service agreements reduce cash flow, stunt equity growth and expose owners to greater liability.

Quality property management falls into the expense category on the income statement, but it also offers a return on investment.

Poor property management adds more trouble than it's worth.

A bad property management company can cost you far more than a bad tenant.

They can place bad tenants who create significant property damage. These tenants can take many months to evict.
They can place bad tenants in more than one property.
They can steal from you by creating false repairs.
They can obtain kick-backs on legitimate repairs.
They can rent units for cash and tell you those same units are vacant.
They can keep cash rents.
They can steal checks.
They can purchase more equipment and materials than necessary with your money and pocket the cash after returning or selling them.
They can increase maintenance costs by deferring simple maintenance until it becomes a major problem.
They can create hostile tenants as a result of poor service.
They can increase unit vacancy turnover time – a major cost factor!

Don't believe the sales pitch!

When a property management company trumpets its greatest value as having the cheapest rates, common sense advises caution. Property management requires a set of people skills and attention to detail comparable to law and medicine. Most people don't select their doctor or lawyer by whoever offers the cheapest fees. So it should also be when choosing a professional firm to manage your real estate assets. Saving a few pennies isn't worth the huge dollar risk.

Don't believe in cheap!

The highest quality product or service is rarely offered at the cheapest price. The concept of value lies in juggling a number of factors. In property management, time, convenience, specialized skills, regulatory knowledge, know-how and peace of mind are balanced against the cost of property management. All efforts should drive toward the ultimate goal of creating quality cash flow and maximized equity growth.

Choose a first rate property management service to create true value. Higher fees are a bargain when set against mitigated liability, balanced cash flow and maximized property equity.

Don't believe in easy answers!

Property managers perform complicated tasks by balancing competing, and often mutually exclusive, issues and stakeholders. The key is in listening to the client, understanding his or her property goals, creating a customized plan and then successfully executing on that property plan. This is difficult, requires hard work, and only a few companies do it well. When managed correctly, properties can deliver tremendous value.

John Glenn had his life riding on that rocket as he hurtled through space. This statement was meant to provide a bit of levity through a tongue in cheek comment. As an investor, you have a lot riding on your real estate investment. Choosing wisely means choosing the greatest value, not just the cheapest price.

Fees at Au Terre Properties are fair, honest, straightforward and transparent.

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