In order to start service with a property management company, you must first enter into a property management agreement with that company. But be careful, entering into such an agreement can be the start of an absolutely terrible experience depending upon the property management agreement.
You only get one shot initially at a contract. Be careful that there aren’t terms in the agreement that stacked heavily in favor of the management company, that can later cause you grief.
The article is about what to look for in a property management agreement to ensure that you aren’t taken advantage of.
#1. What are the fees?
Any and all fees must be disclosed on the property management agreement (PMA). The most common fees include leasing fees and management fees. Leasing fees are charges for advertising, showing, taking applications, screening the applications, and establishing a lease agreement between the owner and the tenant.
However, some property management companies also charge a whole host of other fees. Here are some examples of those fees: releasing fees if the tenant’s renew their lease, a lease preparation fee, service fees, maintenance administration fees, etc.
The property management agreement should also specify how the late fees are distributed. Do they go to the owner? Are they split between the owner and property management company? Do they all go to the property management company?
#2. How are rents, security deposits, and reserve funds handled by the management company?
Rents, security deposits, and reserve funds, by Oklahoma state law, must be deposited by the management company into FDIC insured trust accounts that are registered with the state. The treatment of these funds must be designated in the property management agreement. Also, the distribution of interest in these accounts must be disclosed in the agreement, even though those amounts are typically very small (interest rates on these types of accounts is less than 1%).
#3. Does the property management company guarantee the tenant?
Most property management companies don’t guarantee their tenants. In those cases, if the tenant moves out before the end of the lease, the owner is forced to pay another leasing fee. The property management company puts in another tenant, pocketing another leasing fee at the expense of the owner.
Property management companies should have enough confidence in their ability to screen tenants to offer a solid guarantee. Otherwise, their is no accountability.
#4. How will maintenance be handled?
The property management company should not be able to spend the owner’s money without any oversight. There should be a threshold in place. For example, if the property management company expects that a repair will exceed $200, they should contact the owner before proceeding. This is the amount that I would recommend.
#5. How is the accounting provided, and when is it provided?
It is essential that the property management company provide itemized statements. Otherwise, how will you possibly know what the actual income and expenses are? I have several clients who have mentioned that their prior management company never provided them a statement. No! That’s not how it should work.
In addition, they should provide you a copy of all itemized invoices for maintenance and repairs with the statements.
Statements should be provided on a monthly basis. Here is an article that has more about what information should be provided in the itemized monthly statements.
#6. What should be term (length) of the agreement be?
According to Oklahoma state law, the property management agreement must have a beginning and ending date.
However, I believe that either party (owner or management company) should be able to terminate the agreement with notice. Suppose the management company is not doing what they promised, and the property is not leasing. You should not be tied up for a year waiting for the contract to expire! Sadly, many property management companies will hold your feet to the fire on the term of the agreement no matter how poorly they are performing.
#7. How can the property management agreement be terminated?
The property management agreement should stipulate how the management agreement can be terminated. I recommend that either party (owner or property management company) be able to terminate the agreement with a 30-day written notice for any reason.
#8. What if you decide to sell the property?
Property management companies must have a licensed broker, and therefore it’s likely they will have realtors who would list the property for sale. However, that doesn’t mean the property management company can demand that if the owner wants to sell the property that the property management company must be allowed to list the property for sale.
In fact, a contractual requirement like this is not allowed by the Oklahoma Real Estate Commission. The property management company would likely find themselves in trouble if this came before the commission.
#9. What exactly are the duties of the property management company? What are the duties of the owner?
The management agreement should explain what the management company will be responsible in regards to marketing the properties, negotiating leases, who (in a general sense) the management company can employ to manage the property, what expenses the property management company can pay, and other items discussed in this article.
The agreement should also explain what is expected of the owner. For example, that the owner should reply quickly to requests make by the property management company, that they insure their property, etc.
#10. What documents can the property management company sign on behalf of the owner?
The property management agreement should allow signing of routine documents, such as work orders and service agreements as long as they aren’t prohibited by the owner. You should allow your property management company enough latitude to get things accomplished. However, the owner should be signing lease agreements for the owner, not the property management company.
You absolutely must read any proposed property management agreement line-by-line.
You don’t necessarily need to have your attorney review the contract, but you might do that if it makes you more comfortable. The prospective clients wouldn’t have needed an attorney to discover these onerous terms. They just needed to read the contract.
OKC Home Realty Services Property Management Agreement
Here are the terms within our property management agreements:
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