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Avoid These Mistakes With Property Managers

By Rodney Moore

Julie Johnson, a mortgage specialist in Brentwood, Tenn., recently bought her third investment property in the past two years. She's hoping to find a fourth by the end of the year.

However, Ms. Johnson's first experience as a landlord two years ago was anything but promising. Her tenants failed to pay their rent, and she tried in vain to evict them. Desperate for help, she hired a local rental agent to manage the property, knowing next to nothing about it. Six months into the job, the company still hadn't asked for a key and had reneged on its promises. When she gave it 30 days to rent the property, it failed. Ms. Johnson found another management company on the basis of a solid referral. The company now manages all three of her properties.

Rental agents and property managers should make life easier for landlords, not give them ulcers. These professionals typically handle:

  • collecting rents,
  • preparing units for rental,
  • leasing units and
  • day-to-day maintenance.

First-time landlords should manage their property themselves when they're just getting started, says Peter Conti, co-author with David Finkel of "Making Big Money Investing in Real Estate" (Dearborn Trade, 2002) and other real-estate-investing books. They'll get to know the business and learn how to oversee a rental agent. What's more, they'll have a better understanding of the frustrations that managers experience on a regular basis.

Ms. Johnson made what seasoned real-estate investors say is a classic blunder in working with a property manager or rental agent. "Probably the very biggest mistake is going into a relationship based on an ad they saw in the yellow pages or another kind of ad they saw without having a referral," says Mr. Conti. Ask for the names of five to 10 existing clients to contact for references, he says.

The best source of referrals is another investor. If you need help finding one, call a real-estate-investor group that meets in your area. To find a list of groups, visit the American Real Estate Investors Association's Web site.

When interviewing an agent, Mr. Conti suggests asking:

1.     What is your fee? (usually 8% to 10% of collected rents on a monthly basis)

2.     Do you also charge a fee to find renters?

3.     Are you licensed?

4.     How do you take care of repairs and whom does the tenant call to report problems?

5.     Do you make money from having repairs made?

6.     What do you do when a tenant doesn't pay the rent?

Chuck Perry is a student admissions adviser in Denver for Mentor Financial Group, Messrs. Conti and Finkel's workshop and seminar company in Lakewood, Colo. He has several properties in his portfolio, but he admits to making his share of mistakes as a landlord.

For example, when he bought a duplex with a partner in a low-income area of Denver, his first tenant turned out to be a suspected drug dealer who had to be evicted quickly. The partners then found a rental agent to manage the property.

"We weren't having any problems because basically we were just collecting a check and out of the loop," Mr. Perry says. "The agent was handling everything."

Apparently not. Three years later, he got a call from the agent saying the tenants were moving, and the property needed major renovations. When Mr. Perry inspected the property, he found holes in several walls and missing light fixtures and doors. To top it off, the place was infested with cockroaches. He fired the agent and sunk $7,000 into repairs.

His first mistake was hiring the agent without a referral. His second was not checking on his investment periodically. He should have arranged for biannual property inspections, he says.

Landlords err in not treating the management of their property like a business, Mr. Conti says. "What I mean by that is they don't have set policies and procedures that they follow," he says.

Don't Be a Micromanager

Smart property owners establish ground rules for their property managers early in the relationship, says Fred Parassis, president elect of the Institute of Real Estate Management. Before shopping for an agent, prepare a list of areas where you want to be involved and seek an agent who's best suited to meet your needs, says Mr. Parassis, president of Property Management Consultants of LaCrosse, Wis. Your agreement should define your goals clearly and set terms for monitoring performance. Work with the agent to prepare a budget and ask to be informed of any changes to it.

It's important to review the fine points of a rental-agent contract. "Mistake No. 2 is going into a long-term contract without an ability to get out of it," Mr. Conti says. "If you hire a rental agent to oversee your property and [he or she isn't] doing a good job, you need to have a way to undo that relationship that's fair for everyone involved."

Negotiate as short a period as possible, ideally one year, Mr. Conti says. Landlords should have the right to cancel a contract if they aren't happy with the agent, but this often is difficult to negotiate. A simple solution, he says, is to "have language in the agreement that allows the owner to sit down and talk with the property manager about why the rent isn't coming in, why there's a high vacancy rate, and address other issues where they would like to see improvement. If the property manager doesn't move forward on the issues, you still need a way to undo the relationship."

Follow the Money

Mr. Conti advises scrutinizing how money to maintain the property is spent. He suggests landlords handle all aspects of income and expenses, including paying subcontractors, particularly early on in the relationship. Have the agent deposit checks into your bank account and never accept cash.

Don't fall into the trap of micromanagement, says Mr. Parassis. "It's most destructive to the success of the relationship when the owner makes decisions without input from the managing agent," he says. For example, an owner may give conflicting orders directly to site employees; insist on using certain vendors and contracting with them directly; or make different marketing and operational decisions than the agent's.

Rental-property owners should budget for a rental agent whether or not they plan to use one. Doing so reduces the risk that unforeseen events such as job or lifestyle changes will throw a monkey wrench into your investment.

"If everything remains stable," Mr. Parassis says, "the question becomes: When have you reached the point where you no longer have the time, capabilities or focus to do it yourself?"

-- Mr. Moore is a free-lance writer in Thompsons Station, Tenn.