Best Practices for Property Management Agreements
A property owner can choose to manage their own properties, or they can choose to hire a professional property manager. While the property manager option will obviously cost more up front, it can provide significant savings in terms of time and effort for the owner over time. All too often though, we hear stories of owners entering into agreements with property managers that don’t pan out the way they had initially hoped. We previously blogged about best practices for selecting a property management company. However, the key to the success of the relationship is not just selecting the right partner, but also setting that partnership up for success. That means that the agreement between the owner and the property manager has to be thorough and clearly articulated.
While any agreement can never contemplate every possible issue that might arise, it can and should address the term of the agreement, what fees will be paid and under what circumstances, what the responsibilities are of each party, under what circumstances the agreement can be terminated early, and more.
Term of the Agreement:
The agreement should clearly state how long it will be in place. A typical duration for such an agreement is one year.
Management rates are based on the monthly rent collected and typically range from 8 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 the 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.
In addition to quantifying the base fee and what it includes, the agreement should also address other categories of fees not included in the base fee and what the amounts of those fees are. For example, there can be additional fees to property managers for handling insurance claims, major repairs and capital improvement projects.
The agreement should also specify to whose benefit certain fees collected should inure, such as late fees and rent collected after eviction.
Responsibilities of Each Party:
The responsibilities of each party should be clearly delineated in the agreement. The area that seems to cause the most friction between owners and property managements is repairs/maintenance. The agreement needs to explicitly state how repairs and maintenance are handled and how they are paid. The property manager’s base fee will likely cover handling routine maintenance and repair requests, which are often outsourced to contractors and billed (with no markup) to the owner. It may be most efficient to establish within the property management agreement that repair and maintenance expenses up to a certain dollar amount can be made without the owner’s consent. The agreement should also spell out who will perform inspections of units and when those inspections will take place.
A management contract should also clearly define time frames for the property manager to inform the owner of important developments and explain how these updates will be delivered (e.g., through an online portal, via email, by phone). The agreement may also specify different communication channels and deadlines for routine versus emergent issues.
The agreement should specify what insurance coverage is required by the property management company. The agreement should be specific in terms of types of coverage (e.g., Professional Liability, General Liability, etc.) and the corresponding amounts of coverage.
The agreement should cover under what circumstances each party can terminate the agreement early, what notice is required, and what responsibilities each has to the other in terms of the transition. The agreement should permit the owner 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.
The agreement should also specify whether early termination without cause is allowed, and if so, what notice should be provided to the other party. It should also specify whether there are any early termination fees.
Whether the termination is early or not, the agreement should spell out the obligations of the property manager upon termination. These might include the following:
- Provide owner with a final financial report
- Provide owner with necessary records and documents
- Provide owner with a record of tenant security deposit obligations (if the property manager maintains the security deposits)
- Transfer security deposits either to the owner or the owner’s new property manager
- Provide tenants with a written notice that they are no longer managing the property
- The agreement should address how disputes between the property manager and the owner will be handled.
- The agreed should spell out where security deposits will be held.
- The agreement should specify who will sign all leases, addendums and extensions with the tenant.
- The agreement should require that the property management company provide the owner with tenant contact information; all keys, fobs and access control codes; and monthly and annual financial reports.
- The agreement should include an Equal Housing Opportunity section that clearly states the commitment to abide by both state and federal fair housing laws.
Please note that this post is not intended to provide legal advice. It is simply a compilation of suggestions provided by real estate professionals. Any property management agreement should be reviewed by legal counsel for completeness and accuracy before being executed.