What You Should Know about Property Management Agreements for the Real Estate License Exam
For the Real Estate License Exam, you will need to know that the basis for the relationship between a property manager and a property owner is a contract called the property management agreement. Although every agreement is unique, particularly with respect to the details of duties, responsibilities, and payments, certain elements need to be specifically addressed in any property management agreement, including:
Who: The parties to the agreement (both the property owner and the property manager) need to be clearly identified. In any partnership situation, both partners need to sign. The appropriate corporate officer needs to sign for a corporation.
Where: The property to be managed needs to be clearly identified at least by its address and possibly by legal description. If any elements of the property are not to be managed by the property manager, they need to be identified.
How long: The term or length of the agreement needs to be stated. Owners tend to want a short time frame; managers want a longer one. A minimum of one year is the general recommendation, because that gives managers a chance to show their skills and recoup some of their initial expenses in setting up a management program for the building.
What — manager’s duties: The manager’s duties need to be clearly defined and stated. All parties to the agreement need to know whether the manager will collect rents, pay bills, contract for maintenance, and so on.
What — manager’s authority as an agent: As a general agent, the manager usually has authority over a range of activities on behalf of the owner. The extent of this authority needs to be spelled out in the agreement. For example, the agreement should specify whether the manager has the final word in setting rent rates or must check with the owner for approval.
What information and when — reporting: The principal form of communication between a property owner and a manager are the periodic reports prepared by the manager. The timing and content of these reports are negotiable and vary with the type and complexity of the building being managed. Monthly reports are typical and can contain a variety of income, expense, vacancy, expiring leases, and maintenance information.
Who pays what — allocation of expenses: This part of the agreement states which costs, if any, are paid out of the manager’s fees rather than from the income of the building. For example the manager may be responsible for the costs of advertising, especially if the manager receives an extra bonus for new leases.
How much — the fee: The fee for any management agreement is completely negotiable, but it’s usually based on one or more of the following:
Commission on new leases
Percentage of the gross (before expenses are deducted) or net (after expenses are deducted) income from the building
A combination of any two or three of the first three
What the landlord wants: A clear statement of the owner’s objectives for owning the building can be made part of the management agreement or addressed in some other written format. The manager must have a clear idea whether the owner is seeking long- or short-term profits or other financial objectives from his investment. Furthermore, it’s important for the manager to meet the owner’s objectives without compromising honesty or ethics.