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How to Avoid Pitfalls When Negotiating with Prospective Property Management Companies

The management agreement is a pivotal document for your rental property because it spells out the obligations of the property management company to you, the client. Study the fine print; doing so is tedious but necessary in order to avoid unpleasant surprises. Even the management agreements available through state and national real estate organizations may contain clauses that are clearly one-sided in favor of the management company.

For example, many management agreements call for the property manager to collect and keep all the income from applicant screening fees, late charges, or returned check charges. Of course, property managers justify this policy on the basis that they incur additional time and costs when handling such situations.

But these fees should belong to you because you want to give the property manager a financial incentive to fill your unit with a resident who pays rent on time and cares for the property. A management fee based on actual rents collected is a better arrangement.

Read on to find out what other nuggets may be hidden in the fine print of your management agreement and how to protect your investment:

  • The “no management fee charged when the unit is vacant between residents” line: Although this seems like an arrangement that saves you money, especially when rental revenues aren’t coming in, the property manager can rush to fill the vacancy without properly screening residents — and a destructive resident can be worse than no resident in the long run.

  • The “hold harmless” clause: This clause protects the property manager from liability for his own errors in judgment or the mistakes of the workers the firm sends to your rental unit. One solution is to include a “reasonable care” provision so the property manager is motivated to be diligent in his management and avoid workers that he knows have had problems in the past.

    Your agreement should also mention such obvious requirements as informing you of what’s happening with your rental property.

  • The long-term management contract request: Some property management companies request long-term contracts that can’t be canceled or can only be canceled for cause. Avoid signing contracts that can’t be canceled by either party with or without cause upon a 30-day written notice. A company that knows it’s only as good as its most recent month’s performance will stay motivated to treat your property with the necessary time and attention.

    But the company can make a reasonable argument that it needs a minimum term in order to amortize the significant time and cost of taking over a property. So, rather than agree to a long-term, non-cancelable agreement, you should negotiate an early termination fee that’s waived after a certain number of months.

    If the property manager won’t agree to reasonable clarifications of the contract language or a complete list of the services provided for his fee, he may not go out of his way to help you later. Consider this refusal a warning sign and find a property management company willing to accept your reasonable terms.

  • The “I’ll use my own agreement that suits my best interests” maneuver: Many property managers use their own proprietary agreements written strictly in the best interests of the property management company. Be sure to have your attorney review this agreement very early in the discussions with your prospective property manager.

Make sure that the management agreement addresses all your concerns. You need to know how much the manager can spend without your authorization, what weekly or monthly reporting the company provides, when your property expenses will be paid, and who is responsible for payment of critical items, such as mortgages, insurance premiums, and property taxes. Leave nothing to chance.

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