This blog is part of our series for How to understand your Property Management Agreements. The previous blog was about general monthly Management Fees. If you missed or want to review, click here for that blog.
When you are considering to hire property management, the first task is talking to property managers about their fees. The second task is understanding their fees…
The essential component for receiving any rental income is renters! Obviously. When the unit is vacant, no rent comes in. Property managers are tasked with the responsibility of not only finding a tenant but getting a good rental rate that will increase your income as a landlord. Not all tenants are created equal, and not all leasing fees are created equal as well.
Before we dig into the details, here are the topics for the next several blogs. We will define and review elements that every investor should understand when comparing proposals. This will cover:
Lease and Renewal Fees
Late Fees / Miscellaneous Fees
Not all tenants are created equal.
The unfortunate truth about becoming a landlord is acknowledging that there are great tenants and then nightmare tenants. Luckily you hired a property manager to handle all the tenant issues, right? Not necessarily.
Placing the right tenant is crucial for success, regardless of the class of property you own. The right tenants should have referrals from previous landlords, provide pay stubs, and have a background and credit check performed.
If you choose the first warm body willing and able to pay first month’s rent, then you probably have the wrong tenant. With minimal or no due diligence performed on the tenant, you have no proof that the tenant will be reliable.
Property manager’s have the responsibility of finding the right tenant, making sure they can afford rent and won’t be evicted. There are a lot of unknowns when you first meet applicants; performing proper due diligence can mitigate those risks.
NEW LEASE / TENANT PLACEMENT FEES
How much to find me a new tenant?
Finding a new tenant takes time and effort. This single task is typically the most time-consuming for management firms. Due to that, it’s also the biggest fee they typically earn.
There are two standard methods for lease fees:
Percentage of rent: Property manager will earn a cut of the first month’s rent. The majority charge 100% of the first month, but some are as low as 50% of the first rent check.
Flat Rate: Depending on the area and amount of rent, management firms can also charge a flat rate. This is common for areas that have very low or high rents. Managers in low rent areas prefer to make it worth their time. Managers for high rent might not want to charge an entire month’s rent.
What else do I owe for finding a tenant?
It is important to clarify with management if they have any advertising fees. Management firms might tell you a very competitive leasing fee. When combined with an advertising fee, the overall charges can become quite expensive.
Do I have to advertise my property myself?
No. Always clarify with your manager what their tenant placement and leasing fee is up front.
However, if the property is sitting vacant for too long then you might consider self-advertising. This is not the ideal situation since you have to perform your manager’s task, but it does help you minimize vacancy! Especially since vacancy can start to limit your earnings.
What about a lease renewal? Are there fees?
The dream scenario for an investor is great tenants that pay on-time and want to renew their lease! It’s like an exhale of pleasure and satisfaction.
The majority of property managers will charge some type of fee for coordinating the lease renewal. It is important to clarify those fees. Here are the most common:
No Charge: Seriously. Free. Zip. Nada. These management companies might consider it a customer experience expense or they factor any annual coordination effort into their monthly fees.
Flat Rate: Typically a few hundred dollars for their time and coordination.
Percentage of Rent: Similar to the new lease fees, they will charge a portion of the new rent. They might negotiate increased rent rates as well. These percentages are typically lower than the new lease percentages, but there are still a good amount of firms that will charge 100%.
Why would a tenant move out before their lease expires?
There are numerous reasons why a tenant might move out before their lease has expired. The most common are evictions and relocating for work. It is unfortunate when this occurs, but you need to clarify with your property manager their process for replacing that tenant.
What is your tenant placement guarantee?
When you ask this question, often they will state they never have had an eviction. It is important to understand your Property Management Agreement acts as a safety net in case of unfortunate events.
The property management firm needs to clarify how often they will charge you a leasing fee in the event tenants move early. The best scenario is charging only 1 leasing fee per year. If the tenants move out, they will not charge you again. If that is not the case, you need to understand two key variables:
Months Guaranteed: How many months will the manager guarantee the tenant stays without charging another leasing fee? Most commonly they are 0 months, 6 months, or 1 year.
Tenant Replacement Fee: Not the same as a New Leasing Fee because the scenarios are different. New Leasing Fee occurs after a lease has been fully exhausted. These can be the same rates, but they are different. If there are no guarantees, expect to pay another full month’s rent. It can be an expensive year if this happens! Management firms might charge you minimal fees to cover advertising and showings, so have them define that cost in the contract.
Know the right questions to ask.
This will help you understand exactly how much it will cost you every time you get a new tenant or if an existing tenant stays.
Some questions include
- What rate do you charge for leasing a unit?
- Are there any advertising fees?
- Do you lease internally or hire a third party?
- What rate do you charge for a lease renewal?
- How many months do you guarantee the tenant for?
- What is your tenant replacement fee? (Remember, this is different than new lease!)
If I self-manage, can I hire a leasing agent?
Absolutely! This is a great way to continue self-managing, especially if you are a distance away. The three options are hiring:
- Property management firms
- Real estate agencies
- Leasing agencies
Why are real estate agents interested?
Real estate agents, especially those new to the industry, will take on lease listings as a way to expand their network. It can be more affordable as well to use them. As a Realtor, they are not only meeting landlords/investors but also tenants who might consider buying after renting.
Where to find leasing agents?
If you are looking to self-manage but need someone to help lease your rental unit, then consider registering with Burbz. You can create your property profile, tell the leasing agent your specific requirements and then receive proposals from interested leasing agents.
Where to get property management proposals?
Burbz marketplace requires all property managers to submit their full fee structures. We believe any successful business starts with transparency, and that often starts with the proposal for fees. You are paying them for a service, so it is important you understand everything you are paying for and which services are included.
If you are seeking property management proposals, Burbz presents proposals from different management firms in an easy to compare format.
Check out Burbz at www.theburbz.com and get free proposals for your property.