Contracts can range from 3-10 pages; however, 5-6 is the average. Some contracts are very comprehensive, and others are quite simple. Not every contract can be predicted. That said, they should be including some of the basic clauses and concepts discussed below. Contracts need to be looked at carefully when comparing property management companies to see which company is the ideal fit for your particular needs. Here are some important issues to take into account when reviewing potential property management contracts:
Most contracts will commence by stating that it is a legally binding exclusive management agreement while naming the parties to the agreement and the legal address of the property being managed. There will also usually be a section that stipulates the broker will be working on behalf of the owner in the managing of the property. Terms including “Grant,” “Employ,” and “Appoint” are all transferring agency to the broker. It is important to understand what the agency is. Agency is defined as an individual who acts on behalf of another person, company, or government known as the principal. The basic idea is that the principal becomes responsible for the acts of the agent as if they were acts of the principal.
This is the section of the contract that needs to specify exactly what services you will be receiving and how those services are going to be performed. Broker responsibilities can include:
- Handling Tenant and Owner Funds
- Property Maintenance and Inspections
- Setting and Collecting Rent
- Marketing, Screening, and Retaining Tenants
The contract must contain a due diligence clause where the property management company indicates that they will do their best in the management of the property.
Some contracts have a list of services that the agreement doesn’t include or qualify as “work exceeding normal management duties.” If this clause exists, you need to find out which items are listed and what the precise billing rate is for these particular services. If a billing rate is listed, it will likely be “an hourly fee equal to the current monthly management.” In other circumstances, the contract may state that the fee shall be agreed upon before the work begins, which you want to know so that surprise fees do not occur later on. If the list simply services, they don’t provide under any circumstance, make sure you are comfortable not having those services available to you. Many times, refinancing, modernization, rehabilitation, fire restoration, advising on proposed new construction, or assisting sales agents or appraisers are not included in the contract. Check the contract carefully so that it does not fail to include any service that you assumed was included.
Some contracts include a section called “Equal Housing Opportunity,” which describes compliance with fair housing laws. This is only part of what is required. Here is a more sophisticated clause that could be utilized:
“The parties shall comply with all obligations, duties, and responsibilities under the State Name’s Property Code, fair housing laws, and any other statute, administrative rule, ordinance, or restrictive covenant applicable to use, leasing, management, or care of the property.”
Having a clause such as this provides more comprehensive protections shielding the owner from liability.
An advance clause addresses the issue of the Agent expanding its funds to pay owner bills. Many contracts indicate that the property management company is not required to advance the owner’s funds. Others say they maintain the sole right at their discretion to advance funds to cover necessary expenses. The owner is obligated to make an immediate repayment under these circumstances and there may be fees if repayment is late averaging at 1.5% per month. Be sure to be clear on this policy so that you can have enough capital ready to cover repairs.
The purpose of this clause is to disclose facts about the property and your ability to agree legally. Read the clause carefully and be forthcoming to the property management company if there are any potential conflicts or if you have uncertainty about particular points.
In this clause, the owner’s responsibilities in the relationship are clearly outlined. Pay close attention to see what you will be committing to exactly. Here are some common terms that are included:
- Not to hire another company to lease or manage the properties included in the agreement while the contract is in effect.
- Not take any action that would jeopardize the management company’s ability to offer the property for rent while simultaneously complying with fair housing laws.
- Abide by restrictions on entering the property. This will vary, but the basic idea is that the owner cannot enter the property whenever they choose once it is occupied since this would cause a violation of the tenant’s rights. The clause could have a provision that it only requires informing a tenant beforehand, or it may require the owner to notify the agent and work through them to schedule an appointment.
- Transfer security deposits paid by existing tenants to the management company. This could not be relevant depending on your state’s particular laws.
- Providing the broker with all necessary records and documents the management company will need to do their job.
- Reimburse the management company for any expenditures they make on behalf of the owner while managing the property.
- Immediately notify the management company in the event the owner’s representations as described in the contract are no longer valid or if other circumstances have arisen that are legally required to be disclosed to the agent to enable them to properly perform their duties or would impact the habitability of the property.
- Immediately inform the manager if the owner has missed payments for financial obligations related to the property such as insurance, property taxes, HOA fees, or the mortgage payment.
- Not rent the property to anyone without the management company’s prior consent.
- Not deal or negotiate with current or prospective tenants about anything related to the leasing or management of the property, but instead have them converse with the broker directly.
- Maintain the property in a condition necessary to comply with all relevant laws.
- Set-up and maintain a reserve. These funds are designated to pay day-to-day operating expenses making sure that services are performed promptly and that bills are paid on time. Usually, a reserve of $200-$500 is normal for single-family properties. The owner is obligated to maintain this reserve fund.
- Have proper insurance.
Find out what kind of insurance and what amount of coverage they require you to maintain. The contract will normally require that the policy cover the management company in the same manner as the owner and require notification if the coverage is changed in the future. In some instances, the contract may authorize the manager to purchase insurance on the owner’s behalf at the owner’s expense in the event they lack sufficient coverage now or in the future.
Another important aspect of legal contracts associated with the legal relationship between the property owner and the property management company is the terms associated with contract termination. For example, if a contract is terminated on schedule or early, certain stipulations have to be agreed upon between the parties. To learn more about how contract termination implicates property management companies and property owners, continue reading the next section of our guide.