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Property Management Fees

July 17, 2017

                 While property management fees are important they must be viewed in light of what other firms are charging, and the scope of services provided and the quality of those services. The company you hire will be stewarding one of your biggest assets and the last thing you want to do is make your decision based solely (or even primarily) on who charges the lowest fees.

A lower price may reflect either an acknowledgment they don’t provide top tier service, or an attempt to gain business by undercutting the competition. The problem with the latter is that it leads to slim margins for the firm which lowers the ceiling on the quantity and quality of service they can provide and still remain profitable.

Common mistakes are failure to identify all the potential fees for property management, as well as not making a true ‘apples-to-apples’ comparison of costs between property management companies. A lower management fee could easily be wiped out by a lot of expensive back-end charges and vice versa.

Ask prospective management firms about the following fees so that you fully answer the question "How much will property management cost?"

Management fee

There is a significant difference between commercial vs residential property management fees but the average management fee ranges between 4-12% of monthly rent. For a single family home you might expect to pay 10% in rental property management fees. This fee will vary based on the number of properties you need managed, the number of units in each property, the location and condition of the property, and most importantly, what services are included for that fee. Other pricing models include flat fees, or a hybrid that sets both a percentage and a flat fee and asks you to pay whichever is lesser/greater. Find out if fees are billed or deducted directly from owner accounts.

Vacancy fee

Many management companies don't require this—if they do, pay close attention. Some management companies charge a monthly vacancy fee ($50) that is prorated when a tenant is landed. Other companies expect to collect the full monthly property management fee even though there is no rent coming in. Make sure that the language in the contract indicates management fees are to be paid out of "Collected rent" or "Rent collected" as opposed to "Scheduled rent" or "Rent due". Ensuring this language is in place will also protect you from having to pay management fees in the event that a tenant stops paying rent.

Set-up fee

This fee is for the time invested in setting-up a new account. It ranges from 0$-300$. Find out if the fee is per unit or per property, and if it makes a difference if the unit is occupied or not.

Leasing fee

 

Leasing fees compensate the manager for the time, effort and cost associated with getting you a new tenant. While this fee is common, some owners are opposed to paying it, preferring that it be padded into the management fee so there is more incentive for the management company to find long term tenants.

In truth, a good management company views the management fee, NOT the leasing fee as the primary profit center. This is why leasing fees as a stand alone service (meaning without other property management services) are typically much higher (75-100% of first months rent). A transparent fee structure is laid out in such a way that high tenant turnover hurts, rather than rewards the management company. The only time this is not the case is when the fee is excessive, or there are significant vacancy fees. In the event that you are fortunate enough to have a long term tenant, you will benefit by not having to pay a leasing commission that is padded into the monthly management fee.

Advertising fee

There are plenty of ways to generate leads using free resources like signs, craigslist, etc. but with vacancies time is money and prolonging the search process to save a few advertising dollars is a bad idea. This fee could be charged in addition to the leasing fee so it’s important to ask who pays and what the typical fees are. The better they are at marketing the less you will pay, if they have a good strategy and use tools like rentmarketer.com this should be around $100 and certainly not more than $200.

Lease renewals

Some property managers charge this fee whenever they have to draw up the paperwork to renew a tenant’s lease. The fee typically ranges from 0-200$. The process doesn’t require a lot of work, so a big fee should be a red flag. You should ask if they require lease renewals or if they allow tenants to go month to month after the initial term is up.

 

Reserve fund fee

These funds are used to pay day-to-day operating expenses, making sure that services are performed promptly and bills are paid in a timely manner. A reserve of $200-$500 is normal for single family properties.

Maintenance fees

Will they contact you with an estimate before performing repairs over a pre-defined amount? Is this negotiable?

  • Their policy may be to notify you if an expense exceeds a higher figure like $500-$1,000, but you may want to ask if this can be set lower ($100-$200) starting out and increased over time as you become more comfortable with the property management companies judgment. Additionally, if this notification is waived during "emergencies", ask that they define what qualifies as an emergency.

Do they have their own maintenance/repair crew?

  • Companies that don’t offer this may portray it as an ethical hazard since the company could overcharge, but so long as you confirm that the billing rate and process is reasonable, it should not be a problem. If managed properly, an in house crew is a benefit that can lead to cost savings and a more streamlined process. Here are some questions to ask:

    • What services do they perform?

    • What is the billing rate? ($30-$40/hr is average.) Does it vary based on the work being done?

    • Is there a trip charge, or a minimum billing time?

    • Are they available 24/7/365? Is there an extra fee/higher billing rate if they are called on off hours, weekends, or holidays?

Eviction fee

Fee for serving notices, dealing with attorneys, court appearances, evictions, etc. Hourly rates are typically $25-$50 while a flat fee for the whole eviction process usually comes in between $500-$600 (plus court costs). Find out if they typically use an attorney for evictions and what their billing rate is.

Bill payment fee

Fee for making owner payments such as mortgage, insurance, home owners association dues, etc. Some management firms don't charge a separate fee, while others don't even provide this service.

 

As you can see there are many fees property management companies can charge so it is important to know them all before signing an agreement with a property management company.

 
 
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