A Tough, Honest Property Manager is an Asset to the Owner
A real estate property manager provides toughness to deal with tenants. Many owners who start off managing their own properties tend to allow tenants to pay their rent late, inconsistently collect late charges, and allow the tenant to dictate how they want to pay their rent and maintain the property. A professional property manager considers the tenant as just another one of the many tenants that occupy their properties under management and will treat the tenant accordingly. Once the tenant understands that the professional property manager is not flexible regarding late rental payments, usually caused by a prompt three-day notice to pay the rent or quit the property, the tenant will usually pay their rent on time in the future or know they are on the way to being evicted.
A Poor Quality Property Manager is a Liability to the Owner
Poor quality property managers may charge below market rents, needlessly spend the owner's money to make life easier for the property manager, accept illegal referral fees from vendors and suppliers, and illegally float an owner's money.
1. Charges below Market Rents
Less scrupulous property managers may use under-market rents to rent the property up quickly and save the property manager's time, at the expense of the owner's lower-than-market decreased income.
The property manager may charge below market rents to speed up the rental process and save the property manager's time. Of course, this is at the risk of providing under market rental income and violating the property manager's fiduciary duty of utmost care, integrity, honesty, loyalty, truth, confidentiality, and competence to the real estate investor.
Charging below market rents is not a truthful way to do business. It produces a win-lose situation where the property manager wins and the real estate investor loses. This is not conducive to long-term real estate investor relations and retention.
Property managers should perform a complete rental comparable analysis to determine the market rents for the subject property being managed. These are rental properties that are as close as possible in type, size, condition, and location to the subject property and provide both the real estate investor and property manager with a good indication of rental prices in the area. Rent that is received for a comparable space in an open market is called economic rent.
2. Needlessly Spends Owner's Money to Make Their Job Easier
For properties located in lower socio-economic areas, PM will want to over-improve the kitchen and bathroom(s) to get a good tenant. It will also save the PM time showing the property, but cost the owner more money than if she managed it herself as is and spent the time finding the right tenant.
Some property managers may want to improve a property to make it faster and easier to rent up with better quality tenants, providing less management intensity, and reduced physical damage to the property. The property manager may be spending the owner's money a bit excessively, but there is fine line between "over improvement" and enough improvement to attract a good quality tenant.
3. Accept Illegal Referral Fees from Vendors and Suppliers
Older properties generally incur a tremendous amount of maintenance costs to keep them in a rentable condition. A poor property manager may accept undisclosed referral fees from vendors who provide maintenance and repair services. Undisclosed referral fees paid from vendors to property manager are illegal in California if they are not disclosed by the property manager to the owner.
Vendor referral fees are very common in the real estate property management business, however, the law requires that all property managers disclose these fees to the owner. The costs to the owner, after paying the vendor for a service call including a small referral fee to the PM, will probably be very close to what the owner would pay for the services if they were contracted directly from the vendor. The property manager's volume of business usually allows him to obtain better vendor prices.
4. Illegally Float an Owner's Money
A good property manager collects rents and pays the owner promptly. A poor property manager may "float" an owner's money to pay their own bills that are past due. This is considered commingling and is illegal in California. In fact, commingling is routinely investigated by the California Bureau of Real Estate and is the number one reason property managers lose their real estate license in California.
Whether your clients decide to manage properties by themselves or hire a professional property manager, managing properties over a long-term hold is not an easy job. There are a multitude of things that can go wrong and cost the real estate investor cash flows and profits.