Collection of Fees for Property Managers. How are they determined?
Rental income and fees are the lifeblood of the business. If the mechanisms are not put in place to bring in the right amount at the right time each month, the business will eventually wither and die. When properly performed, this is what allows top real estate investors to achieve a higher than average return on investment.Here’s a list of issues to review and questions to ask the Community Association Management firms you interview: How do they determine their fees & rates?
There is a science behind maximizing rents for a community association manager to achieve this requires them to have knowledge of the local market and perform solid research on the last 10-20+ most recently rented comparables. Rules of thumb like the 1% rule (charging 1% of the property’s value as the monthly rent) are handy for reference, but can not replace thorough research using current market data. Aside from affecting rental income, your rental rate can also impact the properties value. The goal should be to get the unit rented within a month.
How often do they raise fees & rents?
Rental rate surveys should be performed at least annually, and more frequently if there are vacancies or lease renewals. Contractual rent escalators allow the rents to be raised without the need to negotiate, offer an explanation or give notice. Tenants know they have already agreed to it so it doesn’t feel arbitrary, and tenants are actually grateful if the firm decides to not enforce the full rate hike.
How is rent collected?
It’s a plus if the management company offers direct debit for tenants. Processing fewer checks improves cash flow and saves time and money. This lets you know as soon as possible if funds aren’t there and eliminates excuses about checks lost in the mail.
How do they deal with bounced checks?
This is usually a warning sign of trouble ahead; after the first bounced check tenants should be prohibited from writing personal checks until at least 6 months of good payment history has been established. Additionally, there should be a provision in the rental agreement that says tenants agree to pay the maximum the law allows for all returned checks.
How do they deal with delinquent payments?
Find a Community Association Management company with a process that is firm but reasonable. Tenants & Owners will start paying later and later if the management company lets them, therefore it is imperative they enforce ALL aspects of the lease. Once they identify a tenant with a trend of delinquencies, they should keep a close eye making sure they either get back on track or deal with the consequences. Remember that a strict collections process is only balanced out by the community association manager quickly responding to owners & tenants’ needs with quality service.
What is their current rate of delinquency?
Find out if they run a tight ship or allow things to get out of hand. When is rent due? Is there a grace period, if so how long? Due on the first day of the month (in hand not postmarked), late on the second day of the month is standard. A grace period that extends to either the 3rd or the 5th is also standard. Keeping it shorter prevents it from getting significantly delayed in the event of a holiday or long weekend.
How much is the late fee?
While late fees can generate revenue, their primary function is to get owners & tenants back on track to timely payments as quickly as possible. This community association management fee is typically between five and ten percent of rent, sometimes a small daily fee is added to this as an incentive to catch up ASAP. In theory, the late fees are supposed to reflect the penalty the owner would experience in the event of a late mortgage payment.
How do they handle evictions?
How quickly do they usually get repossession of the property when an eviction takes place? Their process should be well documented, and although the best course of action will vary based on the circumstances, they should be able to explain to you the basic checklist they go through each time. You want to deal with a company that acts quickly, documents their actions, and understands your area’s unique laws for this process. Find a manager who excels at containing and eliminating the problem as quickly as possible. This is basically a small monthly fee that insures that the management company will pay for all attorney and court costs associated with evicting a tenant they placed. It’s not a widely offered service, but it’s a valuable service that speaks to the property management companies confidence in their screening process.
We have a partnership with www.NationalEvictions.com A Web based Eviction Information Company helping Landlords, Building Owners, Property Managers, and Real Estate Professionals with the Process of an Eviction in their State. Offering Information on Landlord Tenant Laws, Eviction Process, Articles State Specific, Access to All Forms for Evictions along with Business Forms ( ie: Leases Letters to Tenants, Amendments, and many others) Filing Services for Property Managers and much more…
State of Florida Property Management Association Offers this to the Management Members.
The State of Florida Property Management Association has partnered with NationalEvictions.com – Many of our Managers are using them for protections and filing of Evictions in Florida.
NationalEvictions sets their fees accordingly Managers send them a list of who has not paid rents in the month, Letters, Notices to Quit are prepared and served to Tenants and Renters every month. These Notices for Non Payment of Rents have a set time – Usually 3 days Notice, If the Tenant, Renter does not pay, The Property manager must make the decision to go forward with the Eviction. As a company being serviced the fees are much lower than calling NationalEvictions for one Eviction. EX: We change from 300 to 450. per Eviction – When a Management company is under contract we charge our fees at 275.00 We prepare and file the evictions for them ( Clerks fee for payments to file are not included in our fees, ( clerks filing fees plus our fees ) ). Serving the Tenant with Notices are also set lower if we are contracted each month to prepare and serve to the Tenant, rather than calling our office to serve one or two in any month. ( We can charge for each Tenant in any month 35.00 for preperation and service to Tenant) with Managers that usually have about 5-7 Tenants that do not pay, this on the 1st of each month comes to about 250.00 and we follow up and keep track of each tenant’s Time as per the Notices given.
Its really not a lot of money for the services we provide! We get results, When Tenants see that you are ontop of your rents and management! THEY KNOW YOU MEAN BUSINESS.
Find out more about them on NationalEvictions.com
Breakdown of fees for a management company
While Community Association Management fees are important they must be viewed in light of what other firms are charging, 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. If a firm is under-pricing their services across the board it is possible they may try to make up for it by overloading their managers with as many properties as they can (or can’t) handle.The truth is that price is one of the last things to consider. Not because it is the least important factor, but because you should only think about price, and actually hiring an MC after you have determined that they will provide quality services tailored to your needs. What good are low fees if the management company does a poor job?Other common mistakes are failure to identify all the potential fees for Community Association 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.Remember that all fees are negotiable, so before you make your final decision, you should try negotiating the best rate possible from the firm whom you think would do the best job.
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. (Fees also vary market by market, 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 should be around $100 and certainly not more than $200.
Lease renewals
Some community association managers charge this fee whenever they have to draw up the paperwork to renew a tenant’s lease. The fee typically ranges from 0-200$. 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?
For larger remodeling/upgrade projects, do they act as the general contractor overseeing the work that is done? Is there a fee for this?
Do they get at least three independent bids for larger ($500+) projects?
Do they belong to a network to get better repair rates on the work they outsources
Do they charge a “mark-up” fee?
This fee is stacked on top of the final bill for the work performed. Not all firms have this fee; if they do it should come in around 10%.
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.
Unpaid invoice fee
This is a small service charge (typically 1.5%) that is added each month to all unpaid invoices that are past due.
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.
Sales commission if property is sold
Some management firms require an exclusive arrangement to broker your properties. If this is their policy, find out the brokerage rate and make sure there is a limited term which will allow you to re-list with another firm if the property does not sell within a reasonable period of time. Also, if the firm requires it, how much would the sales commission be in the event that a tenant ends up wanting to purchase the property they are occupying? This is typically 1-3% but we have seen higher, always make sure to check the contract.
Other income
Find out if they will be keeping any portion of the following sources of income:
- Late fees
- Returned check fees
- Pet deposits
- Lease violation fees
- Interest on security deposits (may not be applicable depending on state laws) and owner funds held by manager
- Income from laundry and vending machines
Extra duties fee
Some contracts contain a list of extra services not included in the contract along with the billing rate in the event the owner requests any of them be performed. Check to see if this clause exists, what services are listed, and what the billing rate is.
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