RP:25- Property Management
The Compensation of a Property Manager
A property manager could be paid a percentage of income, a salary, or a flat fee. Usually, a property management firm is paid by a percentage of the rents collected. Although this percentage is negotiable and differs according to the company, the larger structures with more rental units tend to offer a lower percentage (as low as 1%) of the gross rent. At the higher end of this scale, a fee of 25% of the rents collected often applies to the rental of resort properties. Escalator clause: A contract provision permitting an adjustment of certain payments either up or down to cover certain contingencies. Many fixed-rental net leases, particularly long-term commercial leases, contain a clause in which the parties agree to an adjustment of rent based on set increases in taxes, insurance, maintenance, and other operating costs. An escalator clause is designed to protect the lessor's investment position against a reduction in the rate of return over the term of the lease by increasing the yield during periods of inflation. Functions of a Property Manager: Budgeting Expenses Renting the Property Maintaining Good Relations with the Tenants Maintaining the Property Handling Environmental Concerns Adjusting rates Showing units
Property Management: The Basics
A property manager is defined as one who preserves the value of an investment property while generating income as an agent for the owners. The relationship between the property manager and the owner is established through the management agreement. Parts of a Management Agreement: A property manager becomes a fiduciary when a management agreement is signed with an owner. This is similar to the relationship between a seller and a listing broker! A management agreement would not contain a statement of the lessee's purpose. A property management agreement would contain: Property Description Term of Agreement Definition of Responsibilities Extent of Authority Reporting Requirements Management Fee Allocation of Costs The owner's objectives will be the deciding factor in an adoption of management plans. A property manager would not want his/her job dependent on the Allowable Vacancy Rate. Example: The owner of the property says, "If at any time during our agreement the property has a vacancy rate of more than 10%, our agreement is cancelled." Under these circumstances the property manager, in order to keep the property occupied, might rent to anyone regardless of credit rating. A property manager must have two escrow or trust accounts: The property management escrow account is for security deposits; and The property management account is for current rents and management.
The Property Manager's Responsibilities
A property manager is usually a: General agent because of the authority vested in him/her by the principal. The Property Manager's first responsibility is to realize the: Maximum Profit on the property that is consistent with the owner's instructions. More specifically, the duties to the landlord include: Advertising Property - MUST BE DONE IN ACCORDANCE WITH FAIR HOUSING LAWS. Evaluating the rental market - Survey Competitive Properties in terms of rental rates, amenities included, number of vacancies, etc. Obtain tenants - Through signs, newspaper ads, flyers, cold calling, etc. Screening Applicants - Cannot use any screening criteria that violate Federal Fair Housing Laws. Tenant Complaints and Conflicts among tenants - Remember that you are in the service business and by providing prompt service on complaints and handling conflicts in a judicious manner, you stand to have a greater tenant retention rate that translates into a higher return for your owner. Fiduciary Responsibility to Owner - Must always act in a manner that maintains your fiduciary responsibility to owner. An Estate for Years is the most commonly used commercial lease. It is for a definite time period. When it's over, it's over. No need to give notice to the landlord. It does not have to be for a year. Watch out for a question on the test that says, "A person leases a property for a period of time from one date to another." (June 1 to Dec. 30). An Estate from Period to Period, or a Periodic Tenancy is a lease that continues for a specific period of time or until proper notice is given by the tenant to cancel. The difference between this lease and an Estate for Years is that the tenant must give notice to vacate. If a tenant in this type of lease does not give notice, the lease either renews itself or may become a month-to-month lease. What is written in the lease regarding this issue will govern. Watch out for a question that asks, "In what type of lease must the tenant give notice to the landlord to vacate?" Make sure you know who the Lessor (Landlord) is and who is the Lessee (Tenant). A salesperson can complete lease forms and option to buy forms. However, he/she may want to consult a broker and suggest the tenant/buyer seek legal counsel.
More Property Management Information
Here are a few additional notes regarding property management: As we've discussed, the STATUTE OF FRAUDS states that leases for more than one year must be in writing. Leases do not terminate because a property is sold. A property manager should report to the owner immediately if a tenant is involved in illegal drug trafficking. A property manager should report a change in zoning to the owner immediately, since this would affect the value of the property. In a net-net-net lease, the lessee not only pays the rent for occupancy, but also pays maintenance and operating expenses, such as taxes, insurance, utilities, and repairs (commercial). The tenant pays all costs! The IREM, or the Institute of Real Estate Management, issues a Certified Property Manager designation. (This designation is nationally recognized and has strict requirements.) While an OFF-SITE property manager MUST hold a real estate broker's license, an ON-SITE manager is not required to be a real estate licensee. Property managers often hire staff to maintain the property's buildings, facilities, and grounds. Often, a property manager hires an on-site residential manager. ** ** In California , any apartment building that has 16 OR MORE rental units MUST have an onsite manager, also known as a residential manager.
Achieving the Highest Rate of Return for the Owner
Income, Expenses, and Rate of Return for the Owner: A good property manager will always work to achieve the highest possible rate of return for the owner. Market studies ensure that the owner and the property manager are charging the appropriate rental rates. If occupancy is 100%, maybe the rent is not high enough. However, if occupancy is 30% and the market is at 85%, perhaps rates are too high. Expenses should be kept in line with the market. The Institute of Real Estate Management publishes standards for apartment building types and areas. An owner and property manager want to keep expenses low, but not so low that preventive or routine maintenance are overlooked. Keep in mind that the property management fees discussed DO NOT include any costs of maintaining the property, but strictly cover the management of the property. A property manager needs to make sure that if he/she is recommending substantial improvements to the property, that the net result will be an increased rate of return for the owner. For example: If most other apartments in the area being managed by a property manager include ceiling fans and mini-blinds, the property manager must weigh the cost to add these to the units being managed, versus the additional income that will be received by charging higher rents or leasing additional units. In other words, will adding these items increase the bottom line for the owner of the property? Remember that the federal and state fair housing laws must be followed at all times. The Equal Opportunity Housing logo should be prominently displayed in your rental office.
Tenant Selection
TENANT SELECTION: Size of the space meets the tenant's requirements. Tenant has the ability to pay for the space available. Tenant's business will be compatible with the building and the other tenants. Space is available if the tenant needs room for expansion. Satisfy the tenant commensurate with fair business dealings. Americans with Disabilities Act (ADA): A federal law designed to eliminate discrimination against individuals with disabilities by mandating equal access to jobs, public accommodations, government services, public transportation, and telecommunications. Special requirements include removal of architectural and communication barriers (if such removal is "readily achievable") in existing privately owned places of public accommodation. The first priority is the "get to the door standard" that includes installing ramps, widening entrances, and providing accessible parking spaces. The second priority is provision of access to all areas where goods and services are made available to the public, and the third priority is accessibility to rest room facilities. The final priority is free access to all remaining areas.
Maintenance
There are two main types of maintenance programs that should be in place: Preventative Maintenance System: Routine schedule of tasks to be completed that keeps the mechanical systems in the best working order, and prevents larger, more costly repairs later. Such as: caulking, changing furnace filters, cleaning gutters, etc. Routine Maintenance System: In addition to preventive maintenance, it is necessary to make repairs as tenants call into the office to report problems. This is called routine maintenance. The work orders allow the property manager to track response times, as well as keep records of repairs made to each unit. Another primary responsibility of a property manager is the proper handling of the owner's money, including fees, security deposits, and rent collection. A written policy should be made regarding the timely collection of all fees, and this policy should be followed at all times in order for you to look out for your owner's best interest. Services to Tenants You owe a tenant the same duties that you owe a buyer when you are the seller's agent: Honesty Accuracy Disclosure of Material Facts. You should be familiar with the lease agreements and be able to explain the clauses to the tenants. When showing property, you must disclose material facts.
