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Craig234

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Posts: 4
Reply with quote  #1 
Hi, I have a property I bought to rent to a friend and they never paid rent as agreed and I plan to evict them and get a property manager to rent it.

I'm talking to one, and most of it sounds ok - 10% rental fee, $100 setup, etc., but there are a few red flags.

I mentioned that I'd like to get an estimate on the cost of repairs to make it rentable and then decide whether to rent it or not and they agreed - but then keep insisting I sign the contract for property management before they'll do anything and it's a one year contract. First question - is a one year contract normal or should it be month to month?

Here are some red flag costs:

- If the property is sold - they want a 4% cut for nothing.

- If the service is terminated before the contract ends, the early termination is the full remaining balance of the contract.

In other words, they get the full 10% of a year's rent even if they're fired in 2 months.

- Tenant placement fee is 6% of annual rent. This seems high. They also want a $150 'holdover' fee every year just for the tenant remaining.

Are these normal? Should I accept them, or negotiate them, or find another vendor because one that would ask for these things is a problem?
OHlandlord

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Posts: 3,717
Reply with quote  #2 
Let me address these fees and terms.  First, the contract is for a year because most leases are for a year.  It would stand to reason that they want to represent you for the whole length of the lease.  That's the norm.

The 10% management fee is also average.  Most companies charge between 8-15% of each month's rent to manage the property.  You should ask what this covers.  Does it cover collecting rents, writing receipts, scheduling repairs (you pay for those repairs), doing inspections, handling complaints, writing violation notices, and notifying you if there's a problem?  It should.

$100 set up fee?  What are they setting up?  If this is a realty company, their procedures and paperwork should already be set up.  So should advertising templates.  Unless your property has something different than most properties, I don't know what this would be for.  If I were you, I'd ask.  Sounds like a made up fee.  They shouldn't charge you just to put your property in the system.

Most of these contracts have a dollar limit on repairs.  This eliminates constantly contacting owners for small things.  The property manager doesn't want to have to contact each owner every time a toilet needs a flapper or a fill valve.  Asking them to contact you and get estimates for every repair is too time consuming.  Ask that you be contacted if repairs are over a set amount.

If the property is sold they want 4%.  This makes sense if they are a realty company.  Most property management contracts with realty companies require that you use them to sell your home.  This is just another way of saying that.  If you sell under contract, or sometimes within a set amount of time after the end of the contract, you owe them the realtor fees.  This assures them that you won't use their competitor to sell your house.

The full 10% of the contract being due, even if you dump the company, is a clause that has made it's way in due to necessity.  Companies have found excellent tenants for owners.  Once the owners realized that they now had great tenants in the rental, they felt like they no longer needed the company they contracted with.  They'd cancel the contract and pocket the money they should have paid the company for finding them that excellent tenant.  So companies started inserting this clause.  I suggest that you negotiate it so you will pay them the full amount IF you retain the tenant and they aren't being fired because they aren't doing the job.  If they are getting fired for being incompetent should be another story!

6% placement is above average.  Most companies charge 1/2 of one month's rent for placement (just over 4%).  And the holdover fee just seems greedy.  They want turnover over year so they get that 6% fee.  That fee is a penalty to you for the tenant staying.  You'd have higher costs because you'd have to pay for prep to get that unit ready every year.  Your turnover costs would be too high.  Ideally, you'd like to limit turnver costs by retaining the same tenant for several years.  Having to pay them extra so you don't have to pay for the turnover prep is ridiculous.

I think I'd look at other companies.  Compare not only rates, but services they provide.  Ask lots of questions, and ask for owner and tenant references you can contact.  You want to talk to owners to be sure they are satisfied with their service and to tenants to be sure they are keeping up with repairs and preventative maintenance.  Review their leases and addendums.  Do they address lawn care, pets, parking, simple maintenance tasks like smoke detector batteries and furnace filters?  Check their policies and  procedures for dealing with holdover tenants, repair requests, non-pays, lease violations, etc.  Only then will you be able to rest easy knowing your rental is in good hands.

Craig234

Registered:
Posts: 4
Reply with quote  #3 

Thanks for the reply. I guess the 'talk to owners' advice is good but wonder if it's really useful if they might point me at atypical
customers who will say good things.

On the 10% fee if terminated, it seems it gives them no incentive to keep me happy other than after the first year - they get
paid the same for a year if I like them or fire them, so it's actually in their interests for the year to get fired and paid.

On your issue of the abuse of this, my feeling is that my paying them the tenant finder's fee (whether half a month or their 6%
of the annual) has covered their legitimate compensation for the tenant and they're not entitled to 16% of the annual for it.

I'd talked to a few companies before this one and none felt as good a fit. Some sort of had an attitude, the first one telling me
'the clock's a tickin'' nagging me to hurry in their first e-mail and not keeping some basic commitments) and others just didn't
feel that good or weren't that responsive or didn't like the property saying it was in a less desirable area that didn't fit their
upscale market.

This one has things I like - they say they 'do everything' and have a good can-do attitude, and that they don't profit from
the services they bring in.

So for the eviction it's just the $250 for the lawyer which is less than others said, for repairs they just charge the rate of
the repair people and claim they get good rates and will use someone I want if I prefer.

On the other hand, in our conversation I indicated I'd like to get an estimate of the repairs needed before committing to
renting it and they said 'no problem, it has to work for you' but then said I have to sign documents for every step.

I had to ask three times to see the actual documents which have the terms I described - the documents they wanted me to
sign before they can do the eviction, inspect the property, get repair estimates.

So they wanted me to sign these documents that give them 10% of an estimated rent for a year even if I chose not to
do the rental. That feels a little shady like I was being told whatever I want to hear to get me to commit to all that money.

I don't like the idea of being locked in to them to sell the property with that 4%. I understand why it's in their interests, but
why should I care about their interest on that? I'm hiring them for property management, not selling the property.

The 'setup fee' is vague and I suspect a money grab, but I don't mind $100 too much if they're otherwise good. In fact, it's
$300 setup fee they 'give you a $200 coupon' discount for.

I think I might counter-offer them with the changes above as well as capping the tenant placement fee at one per year - I'm
not interested in paying for that more than once if the tenant I pay them over $500 for doesn't last a year.

Thanks for your comments - let me know if you have any more to the above.

jordansand

Registered:
Posts: 12
Reply with quote  #4 
@craig234

Have you looked at other managers in your area? I would not take a property manager who wants to lock into the sale contract of the property. Most real estate investors want to use their own broker, not their manager.

My recommendation is to look at the other managers. There are ones on Yelp, NARPM, and Hemlane. I'm using two on Hemlane and have been happy with the overall process.


- Jordan

__________________
Jordan
Craig234

Registered:
Posts: 4
Reply with quote  #5 
Thanks for the reply. Perhaps that's not a bad idea. As I said, I have talked to a few who haven't fit, and there's only so many, so wasn't sure.

But while they say the right things - they do everything, everything is done at cost - these aggressive terms in the contracts they push hard to sign suggest issues.

So, appreciating advice.
Craig234

Registered:
Posts: 4
Reply with quote  #6 
I sent the a mail, they responded as below.

"- It wants 4% of the sale if I sell the property, for nothing - no, zero is owed for that. I don't want to be locked into who I'd sell it through.
The 4% is if one of our tenants we place actually purchases the property; we are also a full service brokerage and most brokerages charge 6% to list; we offer a reduced commission of 4%"
 
I think this one is addressed as long as we clarify in the contract it's only if the tenant purchases.

"- 6% of the annual rent is high for tenant placement; the standard seems to be 50% of one one month's rent. This is almost 50% higher than that. Also, it should be capped at one fee per year - if a tenant placed for over $500 doesn't remain a year, there shouldn't be another fee that year.
Many places take the entire 1st month rent for placement; yet off if 1300 rent for 12 months in that example 936 would come out of 1st month rent; you can find someone cheaper yet they will make it up off repairs or tenant charges or other hidden fees"
 
So they're insisting on this high amount.

"
- $150 tenant 'holdover' fee? So $150 for nothing (signing a renewal contract) for a tenant remaining? I don't see that as justified.
150 lease renewal does cover executing another addendum and inspection with pics uploaded"
 
I'm not impressed. Is $150 worth refusing over?

"
- It says that 10% of the annual rent is the fee no matter what, even if it's terminated early for whatever reason. So if it were ended after two months - a full year would still be owed. That's not ok. I don't think more than a 30 day notice for termination is needed for that.
If there is no incoming rent then there is no management fee; management fee is only received when rent is received; yet if we secure a tenant for 12 months and 30 days later you decide to cancel and self manage as example yes the early termination fee would apply"

I think I'll offer this is agreeable if I keep the same tenant - but I think the tenant placement fee should address this, and it doesn't address if I'm dissatisfied
with their service and cancel.

Basically, they didn't compromise on anything - and I wasn't feeling they should insist on any of this.

Thoughts?
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