In my last blog post, I discussed eight reasons why you should fire your on-site manager. If you didn’t read this article I suggest you do. Go to article. Today I’ll give you my reasons when it’s appropriate to fire your property management company.
A property’s operating statements are the first indicator of how well a property is functioning. They should give you a cursory “snaphot” about the property. Is it operating smoothly or is a problem possibly brewing?
I’ll give you a real life example. I was noticing over the last few years that turnover expenses at an apartment I was helping to refinance were extremely high. Now part of the problem was the owner had significantly raised rents over this time period which “encouraged” some of their tenants to move out. But that answer didn’t completely satisfy me. So I reviewed the general ledger for the past four years. What I discovered was the same type of repair work was being done over and over again on the same units. For example, one unit had been turned three times in four years and each time the carpet was replaced. As we all know, carpets have a longer life expectancy than one year. Or if the tenant abused the carpet then they should be charged for it.
In this example, good recordkeeping identified a problem with management making unnecessary carpet replacements as well as other unnecessary repairs. But many times, the recordkeeping is so rudimentary that there is no way to find out why expenses are out of control.
Consistently Not Keeping Expenses Within Budget
An operating budget is the roadmap for how the owner wants the property to be managed and maintained. We all know there are times when things happen that are completely outside the control of the property management company that can blow a budget to smithereens. And we also know that an operating budget can be unrealistic from the get-go. It can be a pretense that both the owner and the property management company go through once a year as an exercise in futility.
That said, I’ve observed property management companies that have made absolutely no effort in keeping operating expenses in line with budget. The example I mentioned above about replacing the carpet in the same unit three times in four years illustrates my point. A mortgage broker shouldn’t be the first person to point out an out of control budget. A good off-site property manager should have recognized this problem long before I did but unfortunately that wasn’t the case. She was clueless.
Not Adequately Training the On-Site Manager
As a mortgage broker I visit lots of properties every year. Many times I’m shocked by the lack of professionalism of the on-site manager. It’s embarrassing to see how poorly they represent the owner with their poor appearance and overall demeanor. It calls into question whether they have been adequately trained by the property management company. Do they know the appropriate policies and procedures about:
qualifying prospective tenants
completing work orders in a timely manner,
maintaining a property’s appearance, etc.
If not, it’s not the problem of the on-site manager, it falls on the shoulders of the property management company for not training properly.
Lax Oversight of the On-Site Manager
As I’ve said many times before, “You get what you inspect, not what you expect.” On-site managers need to be shopped on a regular basis by the property management company. A shopper is someone who pretends to be prospective renter but in reality they are observing how well the on-site manager does in greeting them and showing them a market ready unit available to be leased. Does the on-site manager try to overcome any objections that the shopper mentions or do they passively not respond?
The property management company also needs to regularly inspect
the property’s appearance,
the lease files for all the paperwork being completed properly, as well as
monitoring how long it takes for a unit to be made market ready.
A good property management company does of all of this and much more.
More Concerned with Maintaining a High Occupancy Rate Than Raising Rents
An apartment owner was consistently told by the property management company that his property’s current rents were at the top of the market. Raising rents they said would cause a mass move out of tenants. The property management company was replaced a short while later. The new property management company raised rents an average of $250 per unit. And more importantly, the property’s occupancy did not suffer from the hefty rent increases.
Sometimes property management companies are more concerned with keeping the property occupied than maximizing revenue. Increased vacancy requires more effort than they want to expend. In their mind, it’s just easier keeping the property full. They think, “How can an owner have a problem with a property that’s always full?”
Lots of employee turnover
I’m a part owner in a small office building. We have had four off-site property managers in the three years we’ve owned the property. When that happens on-going issues lose out as the new manager needs to re-learn what the previous manager was doing to solve the issue. If the property management company has high employee turnover something is wrong with how they treat their employees or their compensation for employees.
I asked the last off-site manager why he was leaving. He said he had a portfolio of thirteen properties he had been managing. He felt he could adequately manage three. This high turnover of managers suggests I should be looking for a new property management company. Employee problems don’t go away until they address the issue.
These are my six reasons for firing a property management company. What have I missed? What would you add to the list?
About the author:
Doug Marshall, CCIM is a veteran commercial real estate professional of 36 years, 30 of which are related to financing apartments and commercial real estate. For the past 10 years he has also invested in rental properties. In 2003, he founded Marshall Commercial Funding, Inc, a commercial mortgage brokerage firm located in Portland, Oregon.
Doug Marshall is also the award-winning author of Mastering the Art of Commercial Real Estate Investing. Check out his book on Amazon!