Make sure to read our introduction to this series on property management contracts.
While contracts can range in size from 3-10 pages, 5-6 is average. Some are comprehensive, while others are very basic. While we can’t tell you what exactly what the agreements you see will look like, there is a good bet they will contain some of the items outlined below. Remember that each management company must be viewed in its entirety when compared against another. While some issues are more important than others, making a true comparison between the property management companies you interview requires taking into account the full scope of their management fees and services.
Here are some things to pay attention to in the property management contracts you review:
Most contracts start off by stating this is a legally binding exclusive management agreement and then naming the parties to the agreement and the legal address of the property being managed. This is also typically the section that communicates the broker will be working on behalf of the owner in the managing of the property. Terms like “Grant”, “Employ”, and “Appoint” all communicate that the owner is transferring agency to the broker. Agency is defined as:
Agency: n. the relationship of a person (called the agent) who acts on behalf of another person, company, or government, known as the principal. “Agency” may arise when an employer (principal) and employee (agent) ask someone to make a delivery or name someone as an agent in a contract. The basic rule is that the principal becomes responsible for the acts of the agent, and the agent’s acts are like those of the principal (dictionary.law.com)
Broker Responsibilities (AKA “Authority and Powers”)
This is the section of the contract that should specify exactly what services you will be receiving and how those services will be performed. We have already covered the majority of this section in the following posts:
Two people exchaning a contract and a set of keys
Handling Tenant and owner Funds
Property Maintenance and Inspections
Setting and Collecting Rent
Marketing, Screening and Retaining Tenants
Make sure that the contract contains a due diligence clause (AKA “best effort”) where the management company states that they will do their best in the management of the property.
Some contracts contain a list of services that the agreement does not include or qualify as “work exceeding normal management duties”. If this clause exists you need to find out what items are listed and what the billing rate is for these services. If a billing rate is listed, it likely may be “an hourly fee equal to the current monthly management fee”. Otherwise the contract may state the fee shall be agreed upon before the work begins, in which case you want to find out more so there are no surprises down the road in the event you need any of these services. If the list is simply services they don’t provide under any circumstances then make sure you are comfortable foregoing, or outsourcing the items listed. Services typically listed are things like modernization, refinancing, fire restoration, rehabilitation, process serving, advising on proposed new construction and assisting sales agents or appraisers. That said, sometimes the list can be more comprehensive and include things you might have assumed would be included in the management fee so its important to check the contract.
Some contracts have a section entitled “Equal Housing Opportunity” which outlines compliance with fair housing laws. This is only part of the equation. Here is an example of a more comprehensive legal compliance clause:
“The parties will comply with all obligations, duties, and responsibilities under the Texas Property Code, fair housing laws, and any other statute, administrative rule, ordinance, or restrictive covenant applicable to the use, leasing, management, or care of the property.”
This clause addresses the issue of the Agent expending its own funds to pay owner bills. Many contracts clearly indicate that the management company is not required to advance the owner funds. Others go further stating that while not required to advance funds, the firm retains the RIGHT, at its sole discretion, to advance funds to cover necessary expenses. The owner is of course obligated to make immediate repayment, and there may be fees if repayment is late (1.5% of invoice per month is average).
The purpose of this clause is pretty straight-forward, you are simply disclosing the facts about the property, your ability to enter into the agreement etc. Read it carefully and make sure you let the company know if there are any potential conflicts or if you are not sure about certain points.
Here is where the owner’s responsibilities in the relationship are outlined; pay close attention to see what you will be committing yourself to. The following are some of the items that may be included, some being more common than others. The contract may specify that the owner agrees to:
Not hire any other 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 in compliance with fair housing laws.
Abide by restrictions on entering the property. This will vary, but the basic idea is that owners can not enter their property whenever they want once it is occupied as this would be in violation of the tenants rights. The restriction may only require informing the tenant before hand, or it may require the owner to notify the agent and work through them to schedule a visit.
Transfer security deposits paid by existing tenants to the management company (This may not be applicable depending on the laws in your state).
Provide broker with all necessary records and documents the management company will need to do their job.
Reimburse the management company for expenditures they make on behalf of the owner in the management of 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, are necessary for the agent to know to perform their duties, or would affect the habitability of the property.
Immediately inform the manager in the event the owner has missed payments (becomes delinquent) for financial obligations related to the property such as property taxes, insurance, HOA fees, and most importantly, 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 management or leasing of the property, but instead refer them directly to the broker.
Maintain property in a condition necessary for it to comply with all relevant laws.
Set-up and maintain a reserve
These funds are used to paying day to day operating expenses making sure that services are performed promptly and bills are paid in a timely manner. A reserve of $200-$500 is normal for single family properties. The owner is obligated to maintain this reserve fund.
Maintain Insurance – See below.
Find out what kind of insurance and what amount of coverage they require you to maintain. The contract will likely require that the policy cover the management company in the same manner as the owner and require notification in the event coverage is changed in the future. In some cases the contract may actually authorize the manager to purchase insurance on your behalf (at your expense) in the event you lack sufficient coverage now or in the future.
Keep reading to find out how the terms of your management contract will effect your, or your management companies decision to break off the relationship early.
Posted by Jordan Muela in Property Management