The Cal State Companies: Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership
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How to Pick the “Right”
The following is what you need to know before you hire someone to manager your property:
Be Wary of “Mom-and-Pop” Operations
I prefer to use a medium-size property management company, rather than a “mom-and-pop” company. These kinds of operations usually don’t have the staff to do an adequate job. In addition to managing smaller units, they are typically involved with real estate brokering. I’ve actually seen these operators give prospective tenants the key to a vacant unit, rather than showing it themselves. This type of marketing effort won’t do if you’re trying to keep vacancies down.
Be Just as Wary of the “Giants” in the Field
Larger property management firms are geared to institutional investors. Midsize apartment buildings somehow get lost in the shuffle. Individual attention suffers. The needs of your building might have to wait until those of a much larger complex are met. Your building might be assigned to a new or relatively inexperienced property supervisor to provide training.
Procedure Manuals Are Critical
Ask to see the operations or procedure manual of the firm. Read it and ask questions. You’ll get a clear indication of how a property management company manages apartment complexes from the manual. Be leery of the company that doesn’t have one. In fact, do not consider using a company unless they have a formal plan on how they manage apartment buildings.
What to Expect from Your Property Manager
Under no circumstances should you run the day-to-day management operations. Your role is to properly monitor the project in order to establish effective policies and to make management decisions.
What support should your property management company provide? Ideally, they should be able to provide all services in the areas of acquisition, operation, and disposition of your property.
After you’ve pinpointed possible property locations, a good property management company should be able to give statistical, as well as subjective, information concerning socioeconomic, political, and developmental conditions. A quality firm should be capable of preparing physical inspection reports, capital improvement requirements, and an effective operations budget.
During the operations phase, a competent property management company will issue timely monthly operating reports that compare actual income and expenses to budgets. They should be able to give you a detailed explanation of any major variances, and their representative should meet with you periodically.
During the sale phase of your property, your management firm should be able to communicate with the potential buyers on your behalf regarding the building, and to assist in various inspections. They should have no problem providing these services because it gives them the opportunity to display their own expertise to the new buyers.
Controlling Property Management Fees
How much should you pay a property management firm? Payment should be based on the various tasks you want performed. In assisting you with the acquisition, you should contract out on an hourly basis that’s comparable in the area. Under no circumstances agree to an inspection contingent on signing a management contract. You can readily see where this could lead. More property managed equates to more in-come, a flagrant conflict of interest. Work with a reputable company, one that won’t recommend you buy the building just to get the management contract.
higher percentage than larger ones. Re-member, management fees are always negotiable. There are no fixed rates. Make sure all services and related costs are spelled out in writing before you enter into a management contract.
It is important to note that fees based on the percentage of rents collected should not include other items such as total cash collected, projected rents, gross possible rents, security deposits, and laundry income, for example. Be careful. Know exactly what the rate is and how it’s applied.
If you want to give additional incentive to the property management company, offer them a bonus based on the building’s performance. It could be based on net operating income or the overall improvement of the complex over a period of time, usually one year.