As an investor seeking the best returns with the least hassle, be careful. Be very careful. The old adage rarely fails: If it sounds too good to be true, it more than likely is. The enticement of low property management fees are no different.
Buffet said it best: “Price is what you pay, value is what you get.”
You have to wonder just how much someone like Warren Buffet, back when he handled such things, would dicker on a fee paid for important services – particularly when they involved preserving a hugely valuable asset, like a commercial property. While a low initial fee or price for anything you pay for might sound attractive, here’s the potential “cost” to you in terms of what you might experience in terms of property management:
- Less than world class service (You do deserve great service, don’t you?)
- Your property or tenants ignored – not given the attention they deserve
- An inaccurate or non-existent budget, to include capital replacements & reserves
- Tenants who may not pay, stay or renew (The killer for commercial property value!)
- Slow or no response to your concerns and questions (Why put up with that?)
- Financial reporting that’s inexcusably late, inaccurate or both
- Declining property values due to lack of attention, care and reinvestment
- Vendors left to do as they please, when and how (You’re paying the bill; shouldn’t your property management company be holding them accountable?)
I could go on. And, yes, you could experience all of this from the natural desire we all have to “save” a few bucks. I know, it’s very satisfying, and, those savings often go right to the bottom line.
Yet property management is one of the most important ongoing investments you make in your property. It’s a line item expense. But retaining a great property management company aligned with your values and vision is truly playing the long game to preserve and ideally improve the value of your property.
Let’s walk through this via example and demonstration:
Let’s say you invest $5,000,000 on a property purchase. Of the $5MM, $2.5MM of that is your cold, hard cash. The other $2.5MM you’ve borrowed and personally guaranteed. Let’s say the rents are $29,000 per month. You opt to go with a firm that charges 3%. Your monthly property management “expense” (I see it as an investment in tenant retention/care, building care, accurate reporting, high-quality repair supervision, and so on) is $870 per month. (3% x $29,000)
Prior to your choosing this firm you received bids from a company that was going to charge 4% and another that was at 5%. Both significant jumps over 3% when one considers only a base management fee.
If your question is, “How can the fees vary so much?” that’s good… That’s the question you must ask. After all, that’s a difference of $1450 @ 5%, $1160 @ 4% or $870 @ 3%. So, what does one get for the 5% they might not get for the 3%? There’s one way to tell and that’s to hunt for the hidden fees you’ll never see coming until it’s too late, or, the potential lack of a comprehensive approach in managing the property. Here’s what I mean:
- Be careful of the wording of the property management contract. For example, are fees calculated based on “scheduled rents” or collected rents? If scheduled rents are $29,000 and tenants pay only $20,000, you’re still on the hook for 3% of $29,000 of the management company, regardless.
- Is the “minimum” fee reasonable if the building is vacant? Will that minimum fee allow the PM company to still provide their best service?
- What are they charging for special projects “outside the normal course of property management operations?” And, what in fact, is considered outside the normal course of property management? Every firm will be different. But, this should be clear and spelled out in your agreement. Fees can vary from 4% to 10% of project costs with minimums and no maximums. Are you comfortable with that? And, what does that “buy you” in terms of peace of mind and truly enjoying a hands-off investment?
- Is the PM company getting kickbacks from their vendors and as a result, their vendors charge higher prices? Is this disclosed? Do they have a pecuniary interest in any of the vendors? If so, what and why? For example, if your PM company owns the janitorial supply company, how easy might it be to pad your bill?
- Are they using vendors that really know the property? Are they insured? Are they bonded?
- Are you being charged a fair or “market” rate for work done on your behalf outside the course of normal property management – for example, in lease renewals or lease administration? Is it spelled out?
- Are they conducting regular inspections on your property – both inside and out?
- Do they maintain excellent tenant relationships to ensure renewals? Losing a tenant can be a huge, catastrophic expense and destroy the value of your property.
- Are they communicative to you and your tenants?
- Can they handle the “big stuff” like remodels, improvements and remediations?
- Do you feel like it’s all about them, or, does it feel like you are important to them?
There are probably at least a dozen other points to consider.
Here’s the thing: You want to deal with a commercial property management company that is not only fair, but, reassuringly expensive compared to the other options on the surface.
After all, your income, your return on investment, potential future profits and your peace of mind are all on the line. Don’t sacrifice any of those for what on the surface might look like a great deal. It could be said that you can easily pay too little for property management.
There are always more layers to the onion. Keep peeling it back to find out the real cost and where the real value truly is – and it’s very likely you’ll be pleased to be paying a professional commercial property management fee that appears, on the surface to be “high” versus the competition. That 4% or 5% vs. 3% may well mean the difference between a property that performs for years or, struggles mightily and drains the reserves, causing bitterness and regret.