Most experienced real estate investors decide to use a property management company to handle the leasing and maintenance of their real estate investment. For many of our passive real estate investors, having the right property manager is a key component to generating smooth and profitable passive income from your rentals. Although most property managers are genuinely knowledgeable and ethical, we have definitely heard instances where the wrong property manager creates nothing but havoc for the real estate investor.
Conducting the proper due diligence on your property manager is one step to ensuring you have the right person taking care of your rental. In virtually all instances, a property manager should be a licensed real estate agent and should be interviewed to get specific details as to their business practices, which should then be confirmed in a written management agreement. For example, we believe the right property manager will have established policies and procedures governing aspects of property management which may include, but certainly are not limited to:
WHAT YOUR PROPERTY MANAGER SHOULD BE DOING
- periodic monitoring and inspections of the property;
- accounting for rents, expenses and security deposits and regularly reporting the same to the owner;
- advertising and marketing plans for obtaining the right tenants;
- procedures for qualifying tenants and background checks;
- making repairs and correcting adverse conditions on the property;
- documenting and responding to tenant inquiries, requests and reporting such inquires to the owner; and
- handling tenant defaults and evictions.
As with any contract, it is important to be as specific as possible with respect to the duties and responsibilities of each of the parties so that the expectations are set from the beginning, and then confirmed in a written agreement. Moreover, any action you expect the property manager to perform on your behalf should be clearly and specifically set forth in the written management agreement so that the agreement is clear as to the rights and responsibilities of both the owner and the property manager.
For example, if you expect that the property manager will keep you informed about the condition of the property, it may be prudent in your agreement to have the property manager responsible for conducting annual or periodic inspections of the property to document the condition of the property and to report the results to the owner. Not only could this ward off potential minor defects from becoming major repairs, but it could also be used as evidence of the condition of the property to rebut any contradictory claims from tenants. Other issues that you may want to consider include:
WHAT YOU SHOULD REQUIRE OF YOUR PROPERTY MANAGER
- Requiring the manager to report who performs major repairs on the property and how much they charge so that you can confirm that major repairs are performed professionally and to code;
- Provide monthly or quarterly accounting of the income and expenses with sufficient detail so you know where your money is being spent;
- Requiring the manager notify you of any defect on the property, or condition either on the property or in the surrounding neighborhood that affects the safety or security of the tenants;
- Ensuring that property condition reports are completed when appropriate (e.g. upon signing the management agreement, upon a vacancy, move in, or termination of the management agreement);
- Termination of the property management agreement. Given that a property manager could be a long term service provider for you, what are the appropriate conditions and compensation arrangements when either the owner or property manager wish to terminate the agreement?
Finally, keep in mind that every contact is negotiable. Contracts are frequently drafted with an eye towards solely protecting the party that requested it to be drafted. Do not assume that because terms of a contract appear in a standard form, even in a standardized realtor’s form, that those terms are necessarily “written in stone.” Of course the custom in the industry will be a factor in what will be acceptable in the industry, but keep in mind that it is your responsibility to make sure your expectations are met in any written agreement and remember that in many cases when you get to court, if it does not appear in the contract, it doesn’t exist.
Lee Chen is an attorney at the Irvine, California office of Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) and helps clients daily around the country with real estate, contracts, and and litigation. Lee has advised hundreds of real estate investors and professionals. In addition to advising clients in his legal practice, Lee is a real estate investor and a licensed real estate broker. Lee can be reached at [email protected] or by phone at (888) 801-0010.