When selecting a property management company, you also need to look out for the fee they charge. One thing you can do is to do a comparison among property management companies. Look at the quality of their services and how much they charge for it. Chances are, a company charging a lower fee will produce a low-quality service. This is why you need to be mindful and research the company before making any decisions.
Beware Of Cheap Fees
A lower price could be an indication that they do not provide a top tier service or a strong strategy to gain more clients. This is so they can undercut their competition’s pricing. If that’s the case, it means there’s a major setback to the services they provide because they will have a price ceiling if they have lower margins to remain profitable. Also, if a property management company is undercutting their prices, there is a high chance that they have more responsibilities than they can handle. The result is, managers assigned to you will not be 100% focused on providing the best service.
Fee VS Quality
The fee is one of the last things you should consider. Quality service should be at the top of your priorities. But you can also do a price and quality analysis to see which company offers the best possible services to your tenants. If you look at the equation that way, you will find a company that charges decent fees, but also encourages high tenant retention rates through their high quality of service.
Understand And Compare Fees
Another common error that new property owners make is failing to understand all the costs involved in getting property management. And then comparing those costs to several different property management companies to see which one is charging the best rates. A lower total management cost, for example, could be eliminated by the requirement of costly back-end charges. Don’t forget to negotiate and do your best to get the best rate from the property management company you think will do the best possible job.
Property Management Fee Breakdown
When attempting to calculate the cost of property management services, consider the following breakdown of services’ cost:
The average cost of a property management service ranges between 4 to12% of the monthly rent but there might be a difference between a commercial and residential property. For a single-family home, you should look to pay closer to 10%. Of course, it still depends on how many properties you need to be managed, the properties’ condition, the services included and where the property is located. Depending on the market that you choose, the cost will vary. Other pricing models can include flat fees while others may have both a percentage and a flat fee depending on whichever is lesser or greater. You should also be aware of the payment method and you should know if you are billed or fees are deducted from your account. This way, you know what to watch out for and you can avoid any possible billing errors
Some companies do not require this. It’s best to choose a property management company without this. But in case your property manager requires it, make sure you pay attention. Depending on the circumstances, they might charge $50 that is prorated when a tenant is secured. But that is not the case for other companies, they might require you to pay the full monthly fee regardless of vacancy. Make sure you study the contract language carefully and ensure that the language says, “paid out of collected rent” or “paid out of rent collected,” rather than “paid out of scheduled rent” or “paid out of rent due.” If you structure your contracts this way, you can avoid paying management charges if a tenant stops paying their rent.
This is for the time invested in setting up a new account and it can range from $0-$300. It is wise to find out if the cost is per unit or property and whether it changes if the unit is occupied or not.
This compensates the manager for the time and effort associated with getting your property a new tenant. Most property owners don’t like paying for this and think that it is padded into the management fee so there is a further incentive for the property management company to find long-term tenants.
What Questions Should I Be Asking About the Leasing Fee?
- What does the leasing fee cost?
This can range from 25% to 100% of the first month’s rent, but 50% is the industry standard. Some firms can also charge a flat fee or a percentage of the gross amount of the lease.
- Does their leasing fee decrease or get waived if it takes too long to find a tenant?
- Is the leasing fee designed in a way that it motivates the company to bring good tenants?
- This can mean that there is a full or partial refund in case a tenant breaks their lease within 12 months from the original move-in date. Some firms have a policy of only charging once every 12 months per unit.
- Find out if they use the services of leasing agents. If so, how much will you pay for every tenant they find?
- Is it okay to advertise the unit yourself or is there a policy regarding unit advertisements? If you find a tenant, do you still pay?
- Are there any restrictions or extra charges for additional showings?
There are many ways to generate leads by using free resources including signs or craigslist; however, with vacancies, time is money, and prolonging the search process to save a few dollars is not wise. This fee could be charged in addition to the leasing fee. It is important to ask who pays and what the typical fees are. With a good strategy, it should range from $100-$200.
Some property managers charge this fee whenever they have to create paperwork for a new lease. It is between $0-$200. This process doesn’t require a substantial amount of work, and if there is a large fee, it should be a red flag. You also need to ask if the lease requires renewals or if they allow tenants to go month-to-month after their lease term is up.
Reserve Fund Fee
Reserve funds are used for the day-to-day operating expenses, making sure that services are performed promptly and that bills are paid promptly. The normal cost of this for single-family properties is $200-$500.
It is wise to ask whether they will contact you if a maintenance fee exceeds $500-$1,000 or even lower, $100-$200, to be sure your money is being used well. Make sure you define what they define as an emergency to decide without you to be clear. Ask the company whether they have their maintenance/repair crew and how much they’ll cost you. If they do, it could be an asset to you later on. If there are larger remodeling projects, ask if they act as the general contractor and oversee the work for a fee.
This can include serving notices, communicating with attorneys, court appearances, and evictions themselves. Hourly rates can range from $25-$50 or can range between $500-$600 plus court costs. Find out the company’s typical fees to be sure you are not being overcharged.
Unpaid Invoice Fee
This is a small service charge that is usually 1.5% added each month to all unpaid invoices that are past due.
Bill Payment Fee
A fee for making owner payments including insurance, mortgage, or homeowners association dues.
Sales Commission if Property Is Sold
Some management firms require an exclusive arrangement to broker your properties. If this is their policy, make sure you find out the brokerage rate, and add in a clause to relist your property if they do not sell it in a reasonable period of time. The usual commission is 1-3%, be sure to check this amount in your contract.
Other Additional Income
- Clarify if they are keeping any portion of the income from sources such as:
- Late Fees
- Returned Check Fees
- Pet Deposits
- Lease Violation Fees
- Interest on Security Deposits & Owner Funds Held By Manager
- Income from Laundry & Vending Machines
Extra Duties Fee
Some contracts contain a list of additional services not included in property management fees mentioned in the contract and the billing rate in the event the owner requests them to be performed. Be sure to verify whether the clause exists, and if so, what the corresponding billing rates are.
The next important area to assess is how a prospective property management firm would manage your tenant and owner funds. To learn more about this, review the next section of our guide.