Published on May 27, 2020 at 9:00 a.m. EDT
Q: Over the years we have acquired a small residential rental portfolio that we self-manage. Despite the current market uncertainty, we believe the market for rentals will be strong for the foreseeable future. We want to expand our portfolio and believe hiring a property manager will allow us to focus on that goal. How do we go about locating and selecting the best property manager? What legal terms should be in the property management agreement?
A: To find the best property manager for your situation, narrow your candidates by taking the following steps:
Make sure your candidate is properly licensed
The District of Columbia Real Estate Commission’s website provides a tool to look up licensed property managers. To obtain a property manager license in the District of Columbia, the candidate must be able to read, write and understand English; pass the commission’s exam; be a high school graduate or equivalent; not have been denied a license in the past year, and not have had a previous license suspended or revoked in the past three years. Having a real estate broker’s license is not essential, but any licensed real estate broker in the District also meets the requirements for licensure as a property manager.
Investigate your candidate’s experience, reputation and professional credentials
“You will want to select a property manager that has been in business for many years [and] enjoys a reputation for honesty, competence and technical savvy,” said Steven Landsman, president of Abaris Realty in Potomac, Md., a property management firm representing 150 condominium and homeowner associations. Call references from your candidate’s current and previous clients. Ask how long they used the candidate, if they experienced any problems and how the candidate resolved those problems. Ask the candidate how many properties they have under management and how many employees they have serving those clients.
Steven Moretti, who owns Moretti Management Group in Potomac, Md., said investors should watch out for companies that try to solicit more new business than they can reliably manage. “The problem with building a large account base without having a solid infrastructure in place is they don’t deal with all the issues that arise in a timely manner. Failure to immediately follow up on repairs adversely impacts the property and damages the tenant-owner relationship.”
Professional managers will often possess professional certifications, such as the Certified Property Manager designation awarded by the Institute of Real Estate Management, and will have joined relevant trade associations, such as the National Association of Real Property Managers.
Carefully negotiate the property management agreement
Management rates are based on the monthly rent collected and range from 5 to 10 percent. At a minimum, the agreement must clearly list the services the manager will perform without additional fees. The base fee should include collecting rent; maintaining all insurance policies; enforcing your leases in court if necessary (but not the legal fees paid to attorneys), and ensuring compliance with all homeowner association or condominium covenants, conditions, restrictions and house rules. You should also expect to pay additional fees to property managers for handling insurance claims, major repairs and capital improvement projects.
Property managers typically charge owners additional commissions for leasing vacant rental properties. These commissions typically range from a half to a full month’s rent. According to Heather Norwich, a property manager with Pier Associates in the District, “that fee covers the marketing and Internet-based advertising tasks; evaluating rental applications, running credit, criminal background and eviction checks.” A property manager’s role is to cover logistics so the owner does not need to interact with the tenant, she said. “I also handle the leasing package, make sure that the owner has the necessary District general business license and coordinate all inspections and showings.”
At some point you may decide to sell your rental unit. Pay attention to how your property management agreement treats a sales transaction. Some agreements contain clauses that obligate you to pay a commission to your property manager if you or anyone else sells your property while the property management agreement is in force and even for a period after it ends. That post-agreement period is called the “tail period.” You should avoid these embedded “exclusive rights to sell” clauses, or at a minimum, reduce the commission rate and shorten the tail to perhaps 30 days.
Many property management agreements provide the property manager with an “exclusive agency agreement,” granting them the right to sell your property for a limited time, such as 90 days, and the right to earn an agreed-upon sales commission if they sell it during that time. In either an exclusive right to sell or an exclusive agency agreement situation, you should negotiate a commission waiver or discount if you sell to your tenant, specified neighbors, friends or family members without any help from the property manager.
Still other property management agreements are silent regarding the possible sale. The implicit assumption in those cases is that since the property manager has performed well, knows your unit, and knows the sales market for your unit, you would probably call on them to list your unit for sale.
Make sure your agreement requires the property manager to provide you with all leases, modifications and renewals; tenant contact information; all keys, fobs and access control codes; and monthly and annual financial reports.
Your agreement should permit you to immediately cancel it for “cause.” Cause is often defined as a property manager’s criminal conduct, gross negligence or failure to account for and promptly disburse funds. You should also be able to cancel the agreement without cause on 60 days’ written notice.
Repairs often become contentious between owners and property managers. Make sure your agreement explicitly states how repairs and maintenance are handled and how they are paid. Most property managers’ base fee will cover handling run-of-the-mill maintenance and repairs. They outsource these tasks to contractors and should bill you for the actual cost without any markup or additional cost.
Watch out for managers that use repairs to increase their profit, Moretti said. “Many property managers maintain in-house contractors and receive extra compensation for making repairs,” he said. “Some property managers will outsource to third-party contractors and add a 5- to 15-percent administration fee to the repair cost. Still other less-ethical property managers will not charge the administration fee but will have the contractor inflate the repair cost and receive a kickback from that contractor.”
Despite taking these steps, there is no guarantee that you and your property manager will be a good fit. After all, property management is not just about managing the property condition. It is about maintaining happy tenants who pay market rent and remain in your investment properties for many years.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Washington. He is an active real estate attorney, investor, landlord, lender and settlement attorney. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact him at firstname.lastname@example.org, jacobs-associates.com or email@example.com, or call 301-417-4144.