The Problem With Property Management

by Mr. Cheap

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“Almost all neglect the properties they manage and take kickbacks from suppliers and subcontractors who overcharge the property manager’s client in order to pay the kickbacks.” – John T. Reed

People selling real estate advice almost always advocate using property management companies.  John T. Reed suggests they do this to overcome the objection “I don’t want to get up in the middle of the night to fix a clogged toilet.”  “Don’t want to get up in the middle of the night?  Me either!  Buy my $3,999 program and I’ll teach you how to have the best property managers begging to work for you!!!  Let THEM get up in the middle of the night.”

While it may sound great in principle, the reality can be a little less cut-and-dry.  You’re usually going to pay 5-10% of the gross rent, plus expenses to hire a property management company.  Sometimes they’ll charge extra for filling a vacant unit (for the extra work of advertising, showing and setting up the new tenant).  This is all quite reasonable, and if this was the end of the story I’d agree it’s a good way to go.

To get one case out of the way, sometimes real estate agents will offer to be property managers for the owner (or to place tenants for him).  They’ll charge a nominal fee, and will typically do a really crappy job (they won’t do their due diligence screening tenants and whatnot).  Their job is selling houses (not managing rental properties), so when they’re acting as a manager for the owner, they’re doing it to generate good will so the next time he buys or sells he’ll use them (the same reason they give you a pumpkin).  If things work out, they look like a champ for helping, if things blow up, they can just put the blame on the awful tenants (and maybe help the owner sell the place if he’s burnt out).

Genuine property management firms (where that’s what they do exclusively) are an intensively entrepreneurial enterprise.  You can be sure whoever started and runs the company loves business, and they’ll be dealing with all the typical challenges of running a business (advertising, employees, customers [owners!], etc).  As an entrepreneur, they’ll be constantly looking to maximize profit and minimize costs:  for themselves.  Property owners will assume that the property management firm will be doing this on their behalf, and in the case of a small number of HIGHLY ethical companies (that will naturally tend to go out of business, we’ll get to that later), they may be right.  The majority will sell out the owners in large or small ways.  You may think they’re your weasel, but they’re their own weasel.

Greed is one obvious motivation.  If a plumbing company offers the management company $20 every time they’re called to be the “sole supplier” for the company’s clients (or some other similar arrangement), do you think the company will refuse?  They should.  The $20 just gets added onto the cost of the job (and billed to the property owner).  If they could afford to pay a $20 kickback, they can afford to lower their price by $20.  The manager gets the kickback at the expense of the owner.

The same thing can happen in less obvious ways when a friend or relative of the manager is a plumber, and gets the business out of loyalty.  Would the owners want the job to go to the company that does the best job for the best price, or to someone the manager feels loyal to?

Apathy can kick in where greed leaves off.  If you’re not paying a bill, it becomes VERY easy to not work too hard to get the price reduced.  When I’ve had to rent a car for a business trip, I get whatever model is authorized from the first place I call.  When I’m renting for myself, I drive an economy model, use my credit card to cover the insurance, and will track down any deals or the lowest possible price in town.  If I can get a lower price to save myself some cash, I do so.  If I can save cash for a larger organization that will neither notice or appreciate it, I don’t bother.  Which case do you think the PM will be in when the owner is footing the bill?

Property management companies will argue against rent increases.  A higher rent means more money for the owner (and a tiny raise for them), but it also increases the amount of work they do (tenants will be more likely to move out after a rent increase, and may be less inclined to complain if they know they’re getting below-market rent).

If someone ethical is running a property management company, acting as a fiduciary for the owner, often customers won’t even realize or appreciate this.  They certainly don’t seem to realize how often they’re getting ripped off by property management companies, or you’d hear far more owners grumbling about them (economists call this information asymmetry).  The ethical manager will therefore be earning less money (no kickbacks) for more work (hunting for the best deals) and won’t even be getting loyalty from his customers.  How is he going to compete in this situation?  There will be constant pressure to slack off (both from an ethical and a work-ethic perspective) or give up and move into a more honourable field of work.  My reasoning here is (unabashedly) related to the lemon principle (alternative Wikipedia info).

John T. Reed’s advice is “competent real estate investors manage their properties themselves or have in-house salaried employees to do it.” I second this sentiment.

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{ 30 comments… read them below or add one }

1 Dana

When we first became real estate investors, we grappled with this, too. If you are reasonably handy, and only own a handful of units, it is not too onerous to manage your properties yourself. It becomes trickier as you add more properties. We are at the point that if we add more units, it will simply become too time-consuming for us (we also work) but the thought of outsourcing property management duties to a 3rd party company doesn’t sit well with us. I liken it to leaving my kids with a babysitter I don’t know. It feels wrong.

We have decided to try to find an honest, reliable maintenance person to help us with the actual maintenance of the properties and we will continue to do all the administrivia and tenant relations.

It is a challenge finding an honest, reliable maintenance person, too. We have tried several and haven’t found one yet.

2 Four Pillars

Very interesting post. I agree that this is one of those situation where there is a conflict of interest (like real estate agents) and the pm is going to err on the side of his/her own profit.

Long distance property management would probably be the most dangerous situation to be in.

As for people not knowing they are being ripped off – I attribute this to the whole “real estate investing dream/coma” where investors buy rental houses and “have the mortgage paid by the tenants” and basically live in la-la land as far as understanding their investment performance.

If RE prices go up then those people will still do fairly well but in other times they could lose big time (and they still might not be aware of that).

3 Stuart

Some property managers even goes as far as skimming off the top. I have seen this first hand with one of my father’s properties where the property manager has been in charge so long he is able to skim off the profits and my father does nothing because he feels it is not worth the time. I guess you just can’t trust some people.

4 Matt

I’m glad you put out this article. I just bought a triplex in October and have since spent many hours fixing up a unit while a house a few doors down was being retrofitted entirely by a PM company. I felt like a idiot doing the work myself, but now I see that I made the right decision. Besides, when I do the work myself, I know exactly what kind of condition the unit is in and can make sure that the work is done soundly. Plus I’m learning something in the process.

5 herb

i think any the arguements you made against a pm would apply to any business. it could be a dentist, electrician, landscaper, painter. its way to cynical to think that a majority of managers are cheats. my manager calls and provides an estimate before the work is started. i’ll get other estimates or maybe complete the task myself, if i feel the quote is out of line. a pm simply assists with managing my time.

6 Mr. Cheap

herb: I definitely get where you’re coming from. Growing up, we had a neighbour who is a veterinarian and he was caught performing unnecessary surgery on pets (and lost his license for a period of time). Nice guy, eh? Maybe I am more cynical than average (I’ve been accused of this before). HOWEVER, there are certain groups that pride themselves (and try to hold themselves) to a higher ethical standard. For example, Vets as a profession have put ethical codes into place and try to enforce them (and were successful in the case of my neighbour). Other groups, such as property managers and energy resale marketers, are often unabashedly out to get what they can from whoever they can by whatever means necessary.

The last time I hired a painter, I did so through Sears. My thinking was this has a company that cares about their reputation standing behind the job that is done. I realized that I was paying a premium for this, but I preferred that to taking my chances with some guy who’d recently hung his shingle out as an independant painter and may or may not do a good job.

Good PMs do exists, congrats if you’ve managed to find one (maybe you should get him something nice for the holidays).

7 Lea

Property management is an important factor to consider in buying real estate so you will be convenient when you’re using it already.

8 Adam

Mr. Cheap,

All Sears does is outsource the painting job to a private contractor, that you can hire privately, and charge you a premium for it. They are like Rona\Home Depot etc. They take a cut by being the middle man. Save yourself some money and find out who they hire locally to do the work, hire them privately and negotiate a better deal.

9 Mr. Cheap

Adam: Yup, I realize that’s what they do and I’m happy to pay for it. The contractor has a vested interested in doing a reasonable job (if they jerk me around and I start complaining to Sears, Sears can get them to do the job: they have more leverage over the contractor in terms of future work).

Some friends got painting done from a private contractor at around the same time and it was a nightmare.

Sometimes it’s worthwhile to have middle men.

10 Richard

Oh dear, John did get his knickers in a knot over this one. Like any business, there are good PMs and bad PMs. I love the bad PMs because they help me to grow my PM business.
I also like the quiet expansion of legislation that will eventually make it extremely difficult for amateurs like John to manage it themselves. It all goes smoothly until the shit hits the fan, and that’s usually when the Johns of this world call a PM company – to clean up their shit.
As my old mum used to tell me: “you get what you ask for”. Sounds to me like John is asking for a crappy PM.
Try using a professional who actually invests in the market that your property is in – one who does the hard yards for you – one who works at improving the standards of the industry.
And try not to rubbish everyone remotely involved in the industry, including the tradespeople that you will have to use yourself while at the same time accusing them of giving PM companies kickbacks. If you feel this way about it, why invest in property?
Put your money in a bank, John. They won’t rip you off.
Oh…..wait. Maybe that’s wrong too….. and that nice man from Lehman Brothers was soooooo smart.

11 Rachelle

I do some property management myself and I have been a property manager for years. The problems you quote are all there but the real problem is extremely poor pay for property managers in general.

For example I manage a house. For my troubles I get paid a whole 96$ per month. Now what the hell can you get from any other professional for $96 bucks? I attended school for years and have been learning ever since. I get great prices and have very reliable contractors I can call at the touch of a button. They answer my phone call and show up when I call.

For my troubles I am on 24 hour call, if work needs to be done I have to arrange to do it. I have to maintain files and a paper trail on every property. I am responsible for collecting rents, which for some properties driving around and collecting rents in cash. Sometimes I have to go 5 or 6 times. Then if they don’t pay the rent I have to evict them.

Most owners call me when they have utterly ruined their building through deferred maintenance and the property is empty. Do you know how much work is involved in getting a property up from 50% to 100% full. I do and it isn’t worth it. The last property I managed I was getting $750 per month. I was out there 3-4 times per week dealing with issues. I had to go over 20 times just to find a good priced painter that the owner would accept. Even then he complained about the price.

Meanwhile I had to ask and beg for my pay every single month. When I started working there the building was for sale for 1.9 million after some strategic renovations (which I got a $60,000 grant for) the building was sold for $500,000 more.

Currently I am not even considering doing another project like this even though I love the work. I am on the hunt for investors who want to buy these kinds of buildings and do the work and reap the profits. I’m not greedy I’ll share but I’m not doing it for 5% -10% of the monthly rent ever again. It just doesn’t pay and it’s too much trouble.

12 Mike

Rachelle – If the pay for property management is not enough for the work/experience required then why do it? You should find something else.

I can tell you from my experience that wages can be partially based on the economic needs of the company.

For example, I pay Mr. Cheap and sometimes others a certain amount of money for content. Some other sites pay a bit more, but I guarantee that Mr. Cheap could make way more doing his computer stuff on the side.

However, from my perspective I have to look at how much benefit the blog gets from each post and pay accordingly.

13 Rachelle

I don’t do it very much at all anymore. Most of my money comes from renting apartments on behalf of small private owners. I get one month’s rent when I rent something. To compare I can rent a one bedroom basement in Scarborough or manage 24 townhouses for the exact same amount.

Currently I manage only about $1,000,000 in property assets. It serves to even out my cash flow a little. These properties are pretty good.

I’m not sure why but I enjoy bringing the unloved property back into a decent state and I’ve been doing that for years now. I just want to make some decent dough that’s all.

My point really is thought that property managers don’t make a lot of money for what they do and that when you hire one you should keep your expectations in check simply because of that. There is no way on gods green earth that they can do what lots of people expect of them for $100 per month or less.

14 Mr. Cheap

Rachelle: That’s exactly the point I was trying to make in this post. Good property managers, like you I believe, don’t get paid enough to make it worth their while. So the only people it’s lucrative for are those getting kickbacks and/or neglecting properties. The more good people like you pull out of the business, the higher proportion of problem PMs there are (and the entire problem is compounded by the inability of owners to differentiate between good and bad PMs).

15 anonymous

We hired a property managment company four months ago. During this time, we have not received any income from our property and on top of that we have racked up a supposed bill of thousands of dollars in claimed services offered. Even though these services are claimed, we have not seen the results and we have been excessively charged for these claimed services. We had a meeting with the company, however, they were extremely rude and did not provide us with the documents that we requested. We believe that we are being ripped off.

Any advice on where and how to file a complaint and to avoid paying for services that are claimed to have been done.

16 Rachelle

I recommend firing them immediately and filing at Small Claims.

17 Mr. Cheap

I agree with Rachelle.

18 Rachelle

I forgot the most obvious… call the police first. They are very concerned with staff stealing and fraud.

19 Melanie

Before you put all Property Managers in the same class, think about the good ones out there – such as myself. Yes, the bad Property Managers out there do give the rest of us the good hardworking PM’s a bad name. Some of us are hardworking and do our job correctly. It is a shame to read such articles such as this.

20 Tony Sena

Like most of the comments stated, you are going to have your good Property Managers and you are going to have your bad ones.

“and in the case of a small number of HIGHLY ethical companies (that will naturally tend to go out of business, we’ll get to that later)”

Are you serious? So if you are an ethical property manager operating your own property management business you can expect to go out of business? I actually had to read that statement twice. There are many ethical property managers in the business who enjoy what they are doing and make a decent living without having to take “kickbacks”!

21 Mr. Cheap

Tony: I’m 100% serious. Feel free to read the 2nd last paragraph and comments 12-15 if you think I’m joking or don’t understand my reasoning.

Thanks for your comments!

22 Brandon Osman

I am the director of business development for a highly ethical AND successful New York-based property management company. We deal with buildings (mostly co-ops and condos) with over 200 apartments. What Mr. Cheap is saying is 100% true, and our company is struggling to overcome these “lemons” or what we like to call “bottom feeders”. It almost put us out of business at one point. It is sad that one of our biggest competators is probably the worst in the industry when it comes to value of service. With the economic crisis at hand, many co-op board members are choosing the lowest price. What the prospective client does not know about these lemons is that they are looking to make one years pay off the contract with no intentions to do work, or be re-hired. But as a potential client, how can you know the intentions? What has helped out company stay afloat is our reputation in the industry. We always make sure to show our clients exactly how much value we are adding to thier property. We let prospective clients speak to current clients about thier experience with our company. We show our track record to them explicitly showing them that our client retention far exceeds the other PM companies.

23 earl piercy

What recourse do I have against a property manager who has put terrible tenants into my property, not checked on them over a two year period, and now the property is heavily damaged by them far beyond their ability to pay?

24 Stefanie

I have the same problem as Earl does! My property manager talked me into putting an exotic dancer into my property, which I was very skeptical about. My PM has a HUGE business, teaches real estate, has hundreds of properties she inherited from her father and not manages two of my properties, until this morning. I fired her. She was informed SEVERAL times about the tenant having a pit bull that was not on the lease. She went to the house and did not go in the house to see if there was a pit bull. She did see two dogs ALSO not on the lease and did nothing. Now, the neighbors are saying that she is a prostitute and has several people living there. My PM has been informed about all of this and keeps telling me that it is not true. My neighbors found syringes in her garbage that was not properly set out and the animals got to it. When I told my PM of all of this, she told me that she only evicts when rent is not paid. Can’t you evict for all the other things? She has wasted my time and money. I’ll have to do it myself. Any advice would be appreciated. I live in Texas…

25 earl piercy

Hey, Stephanie: Although I’m not an attorney, there is no question that a lease is a legal contract and any violation of the terms (having pets, etc.) gives you the right to redress. If the PM refuses to do their job, you can probably sue them for negligence. As a practical matter, asking the tenant to leave (and even providing finacial incentive) may be the least painful. Earl

26 Rachelle

Hi Earl,

I hope her property is not in Ontario, because here it is a nightmare to evict tenants. Even if they don’t pay rent it takes at least 4 months, we have no security deposit, pet clauses in leases are void, criminal checks are considered an invasion of privacy and discrimination is illegal and enforced.

It depends entirely on where her property is and the laws in that area. Here in Ontario if as long as she paid the rent it would be extremely difficult to get rid of her tenant.

Leases here are superceded by the Residential Tenancies Act and leases automatically go month to month after the year is up. There are very few grounds that can be used to evict even after the lease is up.

The only protection you have really is a thorough screening up front because once they are in not paying rent you’re screwed.

27 Stefanie

Hi again! After posting yesterdays post, my former PM actually called the ‘dancer’ tenant and told her that I fired her and that I was going to evict her and that I was a bi!@&. How unprofessional! I found this out because the tenant went to one of my other tenants house where even another tenant was, which I manage both of them myself, and apologized for the disturbance. Unfortunately, when they questioned her about the syringes and all of the traffic, she totally denied everything. But the good thing is that the lease states that if the lease is broken I can give a one day notice to vacate. She is only 23! She did not rent this house by herself. I was told that when she moved in, there were dozens of people moving her in. Lots of ‘ladies of the night’ showed up too. Her mother is a meth addict, her father shoots something with the needles….she actually TOLD my other tenants that! I don’t want a meth lab or a prostitute in my house. I’m going to post eviction tomorrow. I’m pretty sure she will go because when she put her garbage out and it got spread all over the yard, not only was a syringe found, but a letter from her probation officer. I’m pretty sure I won’t have to do much other than tell her to go. I will tell her that I know she is running a business out of the house….NOT in the lease!

Rachael–If I lived in Ontario I wouldn’t have any rental properties. They are WAY too strict. The law is more on the Lessee’s side here in Texas.

Anyway, thanks for the input! Wish me luck!

28 terry

I hired a property management company and this company turned out to be the worse thing I ever did. The rent is always late, she lets the tenants get away with just about everything, even not upholding the lease agreement. When I call her all she does is yell and scream at me and now she refuses to answer my calls and emails and does not give proper documentation of the three days late notices for pictures. I recieve via e-mail total black pictures and she thinks this exceptable. what can I do

29 Scott

Just started using a property management company for the first time. Within 3 weeks of renting a property for us, we received requests for repair including, I kid you not: fix toilet paper holder – $100.

One screwdriver and 5 minutes later, the holder was fixed by me. Property managers are like the current wall street bankers, pure scammers.

30 frank

Re Kickbacks. In todays economy having steady work and keeping your good employees busy is a challenge. After getting paid for a substantial job by the property management company I received a call from the property manager to meet for coffee. After a few minutes he explained how he expected to be paid for his cut in cash at our next meeting. That’s if I wanted another job from him. His cut was to be 10 percent. This is happening at all property management firms. Its sickening as the homeowner is the one that pays for these crooked bastards.

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