G.M. Filisko is a Chicago area freelance and former editor for REALTOR® Magazine.
Manage Property Right
Rental management can slowly but steadily boost income for your brokerage.
June 1, 2009
In January 2008, Jack Meeks was in a tough spot. He had recently sold his Orlando, Fla., real estate brokerage when the new owner defaulted on the purchase agreement. Meeks was forced to jump back in as broker-owner to save the two offices.
But gloomy market conditions were working against him. He needed a reliable income generator, and fast.
Among his first decisions—and in retrospect, perhaps his smartest decision—was to reopen the property management division. "When the Orlando market went to zero, it was the only way to keep my company solvent," says Meeks, whose company, Real Estate Professionals of America, now manages about 230 residential properties.
"In a normal market, property management is less profitable than residential sales. You have to do a lot more work to get the same money. But it’s safe and dependable and doesn’t go away overnight, because most accounts are year-round."
Meeks isn’t alone in relying on property management to sustain business in a down market. More and more brokers are offering property management to help sellers who’ve become accidental landlords, and they’re finding it a dependable source of income during difficult economic times. Some are even looking to lenders for foreclosure business.
However, this line of business isn’t for the half-hearted. "Property management is more—much more—than just collecting rents and paying bills," says Christopher McGarey, CCIM, CPM®, who ran his own property management company until earlier this year, when the business merged with Prudential Americana Group, REALTORS®, in Las Vegas.
"It’s dealing with personalities and problems, which you can never plan." In addition, the laws governing brokerage and property management are "not even similar," says Meeks. "It’s easy to make mistakes if you don’t have someone experienced running it."
Define Your Services
If you’re considering a foray into this multilayered field, you can learn a lot from brokerages that have recently launched or beefed up their property management services.
Most brokers who are expanding this side of business are offering two basic services: "full management of properties, which includes collecting rents and arranging for maintenance, and dealing with tenants on behalf of owners," says Kathy Connelly, senior vice president of corporate services at Prudential Georgia Realty in Roswell, Ga.
The company’s property management business, which over the past two years has tripled the volume of units it manages, also offers services geared toward owner-managers. "Owners may want help finding a tenant and doing up-front permitting, but they want to manage the property themselves."
Fees depend on the level of service and the brokerage’s business model. For full management, brokers can earn anywhere from 5 percent to 20 percent of each month’s rent. When brokers only place tenants, they typically earn a fee equal to the first month’s rent.
However, some brokerages do things a bit differently. Madison Properties in Issaquah, Wash., has just begun to offer residential property management and boasts of a cost structure lower than most of its competitors.
The firm charges a monthly accounting fee of $100 to $200 per unit, depending on the size of the property, and a flat leasing fee of $1,000 per unit. "It’s more typical to charge one month’s rent," acknowledges Scott Mallard, designated broker, "but that’s a lot of money on a $3,500-per-month rental. Our flat fee can save the owner a lot of money over time."
Mallard says the creative fee structure gives his company a foot in the door even when it doesn’t have a huge market presence. "Talking to us is almost a no-brainer for folks with higher-end rental housing," he says.
Some companies forego management fees entirely, at least temporarily. Ben Chudnovskiy, broker-owner of Ben Realty Group in Boston, offers a no-fee management service for the first year of a two-year agreement and applies the money that would have been collected in the first year to property upgrades.
Property owners then prioritize the work that needs to be done, and Chudnovskiy’s firm hires a contractor and oversees the work for a 10 percent to 20 percent fee, depending on how much oversight is required.
"We’re looking for a long-term relationship," Chudnovskiy says. "Investing money in capital improvements makes the property easier to manage because it’s in better condition. And the money still comes into our firm through the renovation oversight services. We increase property values for people, and they’re happy to spend that money with us."
McGarey also offers renovation oversight through Prudential Americana. "Most of the work is on an hourly or fixed-fee basis, but sometimes it’s based on a percentage of the work," he says. "If a home has to be restored and the owner is spending $6,000 to $9,000, the fee might be 5 percent to 10 percent of the total."
When it comes to building a strong property management business, brokers incorporate a variety of strategies—with most favoring word-of-mouth marketing over paid advertising. Many spread the word to sales associates who are familiar with unsold properties in need of renters. For sellers who need to move but can’t find a buyer, a brokerage can step in to handle property management until the market picks up.
For the same reason, Prudential Georgia has found relocation companies to be a solid source of business. When sellers have to pick up and move, the company steps in to find a renter or maintain the property. The brokerage also seeks out work from builders who have entered into lease-purchase agreements on unsold inventory. Thanks in large part to these two client groups, Prudential Georgia is currently managing and marketing nearly 600 single-family homes, townhomes, and condominiums.
"We’ve also been asked to provide services for Fannie Mae’s rentback program," Connelly says. Through the program, Fannie Mae allows tenants of foreclosed properties to rent on a month-to-month basis. "We have several sales associates who work with foreclosed properties and were the first Fannie Mae turned to. The associates weren’t equipped to manage properties, so they reached out to our property management division."
Daniel Hedaya, director of leasing and management for Platinum Properties in New York, caters to international investors."We devised our elite management program in response to the influx of foreign buyers we’ve seen in the past year," he says. The high value of the euro against the U.S. dollar spurred international investors to buy condos, which created a demand for management. "We handle all aspects of management, from renting the unit to providing insurance," he says.
Some brokers manage bank-owned assets, but securing those accounts often depends on having a strong reputation and good connections. "We’ve gotten a few bank assignments outside Las Vegas," McGarey says. "Banks are contacting Prudential at the top levels and asking for help with assets they’re taking back. Part of getting that business is being affiliated with a company that can handle it. You have to know who’s working with banks and develop a relationship. Everybody’s trying to get in with banks right now, but banks are watching whom they refer business to."
Staff It Well
Though your accounting staff can probably transition fairly easily from sales to property management, the same may not be true for your sales team. Though there’s no law or rule that says sales associates can’t manage properties, most brokers prefer experts for hands-on property management. "It’s not that our sales associates couldn’t do it,"
Hedaya says, "but it’s time-consuming to manage properties, and we think their time is better spent doing what they do best—selling and leasing properties."
Similarly, Prudential Georgia allows its sales associates to market properties for sale and lease but draws the line at property management. "The intricacies of managing a property are different from managing the home sale process," Connelly says. "Sales associates may not have the resources and the skill sets. Plus, there’s a tremendous amount of liability in managing properties."
The company has, however, retrained two sales associates to become property managers. "We identified those who had exposure to management of vacant property or managing the resale of REO properties. But they needed to understand that property management is a bit different. You represent the owner, but you also need great tenant relations." The company brings in other administrative staff as needed, most commonly at the beginning of the month when rents are collected and owners must be paid promptly.
Proper licensing for property managers is another issue for brokers to bear in mind. In many states, a real estate license is sufficient for practitioners managing property. But a few places, including Nevada and South Carolina, require a separate license or permit, and several, including Massachusetts and Kansas, do not regulate property management at all. Because of the patchwork, check with your state’s licensing agency to be sure your operation meets the legal requirements.
In addition to staff costs, brokers delving into property management incur a host of other expenses. Among them: beefed-up errors and omission insurance coverage and dedicated accounting software to handle property management functions. Though such costs aren’t usually onerous, the additional overhead means brokers aren’t setting unrealistic profitability goals for their property management divisions. "In this economy, anything over expenses is going to be welcome," Mallard says.
Still, a property management division can be a lifeline during tumultuous times. "It began to give us an income of several thousands of dollars a month, which enabled us to continue to operate when many of our competitors were falling by the wayside," Meeks says. "It gives us some stability."
Essential Tips: Dos and Don’ts of Property Management
- Do know the law. Laws governing property management are different from those governing the way you operate your residential real estate brokerage. "The laws aren’t even similar, and they vary from state to state," says Jack Meeks, president of Real Estate Professionals of America in Orlando, Fla. "You have to educate yourself." To improve your knowledge, tap into the resources of the Institute of Real Estate Management (www.irem.org) and of your local independent brokers’ associations and rental housing associations.
- Do create checks and balances. "Don’t get personally involved with tenants," advises Drew Sygit, manager at Royal Rose Properties in Birmingham, Mich. At his company, "business decisions aren’t made by the staff members who directly interact with tenants." For example, tenants must sign and fax a document to an offsite bookkeeper showing the amount of deposit they’ve given to a staff member. "That helps us guard against theft and mistakes."
- Do set owners’ expectations. "When we set up an account with an owner, we establish our limits," explains Christopher McGarey, CCIM, CPM®, property manager at Prudential Americana Realty in Las Vegas. "We’re allowed to approve repairs up to $300; any amount over that requires us to have owners’ verbal or written approval."
- Don’t make assumptions. "In the past, we assumed owners were viable and reliable," says Kathy Connelly, senior vice president of corporate services at Prudential Georgia Realty in Roswell, Ga. "Today we’re doing our due diligence to ensure that owners are able to fulfill the lease term. We also want to ensure that if we spend dollars on repairs, we’ll be reimbursed."
- Don’t use just any lease. "Standard leases don’t cover everything," Sygit says. "We’ve paid attorneys to write our leases, and every year they make changes." This year, they added a paragraph identifying how many smoke detectors are in the house and whether they’re in working order when the tenant moves in. Tenants must initial the form. "If there’s a fire, we don’t want tenants claiming the smoke detectors didn’t work," he says.
- Don’t start until you’re ready. It’s not smart to jump into property management unless you have a solid, well-thought-out business plan, Sygit says. "Sales associates can’t be responsible for placing tenants, managing properties, and calling handymen. That’s not going to work. There’s no consistency, which will harm relationships with landlords and tenants."