I am weighing in on Property Management in this blog. This is a huge issue for our clients. The effect of poor PM on real property value is staggering. In this market we need every advantage to get fair market value for our Multifamily and Condo clients.
Editors: note: In my examples, I am not talking about a simple rental of a home or condo. I am specifically talking about properties above 4 units where purchases are based on NOI and CAP rates. I still think good PM is important for all rentals.
If you ask most property and condominium managers the real property market value of a building or home they manage, they will tell you they don't have a clue. Furthermore, if you press them, they will tell you that it's not their job, nor can they affect it anyway. While the brochure may pay heed to "protecting your asset" nowhere in the contract will it address maximizing its value.
The problem lies in the job description and in the contract terms usually dictated by the management firm themselves. They are compensated by fees which have nothing to do with real property value or even results. So what's the problem?
For starters....fees. These are from a local contract: The marketing fee - one time - up front. The meeting fee to show up at a meeting of tenants or owners, the maintenance or after-hour call fee, the emergency fee, the application fee, admin fees for letters and communications, the move in and move out fee, the pet fee and best of all the maintenance "mark-up" fee. Oh yeah, I forgot condo's --- the "per door fee"
Compensation based on a % of rental: Now I know a few of you think you have me here because of the % fee on rentals. I mean, who isn't going to maximize rental rates and keep vacancy down, when they get paid more? Unfortunately we see this all the time. If a unit rents (in a day) at $900 per month with nothing but a Craigslist ad, but requires effort, marketing and diligence to rent at $1,100 per month guess what? The easiest path to a check rather than the best result will win everyday. What does that $200 per month cost our client or the owner? ($200 * 12) /cap rate (lets use 6%) = $40,000 per unit. You have an 18 unit building? Ouch! Make that $720,000!
Condominium Management Agreements are the worst. The only way these guys get paid is per door (empty, rented or owned) plus fees and markups on services they provide or that they contract. That water heater repair just went up. We recently had a 22 year old CM Rep attend a special meeting of an HOA - the contract said that these meetings are $125 per hour for her presence. No offense but she was making about $20 per hour.
Property and Condo Management is both a service business and a fiscal responsibility. Firms are responsible for more than tenant/owner satisfaction. They should be held to rigorous standards for maintaining market rents and keeping expenses down, eliminating deferred maintenance, reducing impact and ultimately building more real property value.
It's time for a PM firm to propose reduced fees and higher incentives for measureable results such as increased NOI (net operating income). This is a completely manageable and easy to review number. And I am not talking about deferring maintenance or needed expense. Those numbers can be based on previous % of income. I am talking increased top line, reduced fees and reasonable investment in upkeep.
The estrangement between property management and real property value needs to end. Contracts should be re-worked to incent PM firms to achieve the highest real value for the asset at all times. I also think the days of standalone PM firms are numbered. Ultimately, Real Estate businesses need to take charge of this aspect of their client's success. No more buck passing!