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Chapter 34 - Property Management
At the completion of this chapter, students will be able to do the following:
1) List at least one duty of a property manager.
34.1 Introduction to Property Management
In this lesson, we'll cover the basic principles of property management in the housing market. As you listen to this lesson, remember that each state has a unique set of laws that govern property management services. Usually, a license is required if a property manager leases real estate or collects rent owned by a private party or a business or government entity. You may need a state approved real estate license or other special credentials to start a property management company, or work for an established firm. Some counties and municipalities within individual states have their own set of statutes and licensure requirements specifically designed around long-term planning strategies.
Having said that, let's talk about the role of property management in the real estate industry. Starting with property manager functions and responsibilities.
The Bureau of Labor Management reported there were 313,800 property manager jobs in the United States in 2014, and the agency expected that field to grow about 8%, adding approximately 25,000 jobs over the next decade.
The jobs are held by people with degrees and professional credentials, as well as people who only list a high school diploma and a few years in real estate related fields on their resumes – although advanced education provides a definite career advantage in this competitive sector.
Many of these jobs are on-site positions where the manager resides in a managed apartment complex or commutes daily from a private residence nearby, and assumes responsibility for showing apartments, leasing units, marketing vacancies, maintaining financial records, solving tenant complaints and maintenance issues, and collecting rent.
An on-site manager typically works for a management company. Approximately 125,520 people are self-employed. Self-employed property managers are more likely to work directly with property owners than for an outside management firm. They may do the landscaping and maintenance themselves, or hire outside contractors. Whether the manager works for himself, or for a large corporation, the primary role is to keep the property value intact, and attract and retain highly-qualified tenants, which protects the owner's asset(s).
This career sounds fairly straightforward and simple, but at times, managing properties is about as easy as juggling two ten-pound bowling balls and a twisty-straw. One reason for this is that property management comes in many flavors, each with its own set of responsibilities. Investors and owners seek management services to oversee their income-producing properties. Managers may be asked to negotiate commercial leases for space in a retail mall, vet mechanics and contractors to maintain equipment in an industrial complex, or screen tenants for residential housing. Each of these different scenarios requires exceptional written and verbal communication skills.
Whether a property manager develops a niche business plan focused on a single piece of property, or decides to offer services to owners with a full portfolio, the marketing aspect often presents challenges for first-time managers. Advertising a piece of property for lease is more complex than simply posting a vacancy notice. Some states require rates be posted based on per-square-foot pricing. The actual wording in an ad must truthfully represent the property, and comply with non-discrimination policies. And, pricing must be competitive without sacrificing owner revenue expectations. Whew! That is a lot to expect from a few words.
In our digitally-driven marketplace, it is crucial to monitor comps. Many successful property management companies today use cloud-based software that monitors regional pricing and availability in real-time.
Finding a system that is user-friendly, and affordable, is imperative – the challenge is finding the time to research these solutions when tenants are scheduling walk-through appointments, and owners are calling to discuss revenue and expense statements. Fortunately, there are some really good software options out there today that allow property managers to automate routine office tasks, freeing up more time for dealing directly with clients.
And, then there are a myriad of laws, rules and regulations to protect consumers from discrimination, fraud, unsupported eviction, and illegal deposit retention.
Leases and tenant screening are two areas that deserve a mention here. Rather than creating standardized leases for each property, some managers prefer to hire a real estate lawyer to draft a lease for each new commercial or industrial tenant. This is advisable, unless the manager also holds a law degree. As far as residential leases, it is possible to create a fillable PDF, or online/mobile lease, that works for all tenants in a certain property type. Everyone in the same apartment community would typically receive the exact attachments, such as the mold statement, bed bug and radon disclosures, delinquency policy, online privacy plan, and so forth. Electronic screening is convenient and cost-effective; however rigorous security measures must be implemented to protect identity.
A property manager performs property management functions, which may include accounting, marketing, maintenance, staffing, tenant screenings, negotiating vendor contracts, collecting deposits and rents, communicating with tenants, investors and owners, offering financial advice and even helping owners consider niche markets for their properties. It is an exciting and reward career for the right individual.
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34.2 The Management Agreement
Running a property management company, or acting as an independent property manager, involves overseeing the day to day tasks associated with leasing real estate for owners and investors. Creating a formal management agreement establishes the guidelines for the business relationship. Since property managers assume the role of agent for the property owner, the Agreement is similar to a power of attorney or attorney in fact, granting a wide array of privileges and responsibilities, although most contracts don't allow managers to sell or buy property in the client's name.
Before we talk about what to include in a management agreement, it is important to tell you that this lesson is not intended to replace the advice of an experienced real estate attorney. Every state has different regulations about offering services for hire. Some states require all service providers to charge tax on their labor, as well as supplies. Other states may have restrictions about who can and who cannot provide public accounting services and financial advice for a fee. Before finalizing any contract consult a professional.
Now, let's talk about some of the things generally included in the property management proposal, as well as a contract for management services.
Description of the property
This could be a legal description extracted from the property deed, or a complete address and unit number. Some contracts include additional information, such as subdivision name, the HOA or COA name, and the lot size, if appropriate.
Length of agreement
A contract for residential dwellings could be on a month-to-month, annual or long-term basis with automatic renewal unless advanced notice is provided in-writing by either party. It is fairly standard to see a clause that reads something like this on a one-year renewable contract with an established termination date:
Either party may elect to terminate this agreement by providing written notice, no earlier than 60 days or later than 30 days prior to the renewal or termination date.
Long-term contracts may have an initial term, say three to five years, and an extension clause that looks like this:
After the initial three year term, the Agreement shall continue in perpetuity until either the Owner or Agent terminates the contract by providing written notice to the other party stating the contract shall end in 90 days.
This section details what services and privileges a property manager may exercise during the contract term without getting approval from the owner each time a situation arises. Tenant screening, marketing, rent collection, eviction management, repairs and maintenance, and vendor negotiations are a few possibilities.
Financial reports, often called owners' statements, are generally issued either monthly or quarterly. If the property manager uses cloud-based software, on-demand, self-serve reports allow owners to track maintenance requests, view monthly expenses and see exactly when tenants pay their rent. Other reports include occupancy and vacancy statistics, comparative pricing surveys, and incident reports for on-property accidents or events that triggered a call to law enforcement, such as noise complaints or loitering.
The management fee is typically a “Fee Plus,” arrangement. For example, the management company may charge 10 to 15 percent of the base rent for basic leasing and reporting services. They might also charge extra for additional services like repairing appliances, painting, landscaping and clean up after a major storm, etc.
Accounting services vary widely. At a minimum, every property manager should provide a detailed ledger of income collected, deposited and disbursed, and expenditures for each facility or dwelling. Some property management companies also offer investing advice, balance and operating statements, deposits held on account information (including the name and address of the institution where the funds are kept.), and a list of third party vendors that provide inventory or services for the owners' benefits. These vendors may include HVAC and plumbing contractors, parts suppliers, computer technicians and software host, and utility providers.
Insurance and risk management
The Agreement should clearly show which party is responsible for a host of insurance and risk management vehicles. For example, usually the owner has a responsibility to provide adequate coverage against structural loss caused by fire, flood, riots, and vandalism, and liability insurance if someone is injured on the property. The owner is also responsible for disclosing radon, mold and other potential hazards – and remediating such damage if detected after the agreement is signed.
The manager is responsible for truthfully representing professional expertise, experience and licensing that meets state and federal standards. The manager or property management firm should also provide insurance that covers owners against loss due to employee theft, negligence and lack of training. In addition, managers must carefully screen any contractors hired to ensure they are bonded and certified in their field. Risk management also includes developing a comprehensive emergency preparedness statement that explains how records are maintained, the procedures in place to protect sensitive and proprietary information, and recovery strategy after a disaster or other event that disrupts normal business operations.
Owners responsibility and objectives
The management proposal – a document that is used to start the negotiation process and fine tune details before drafting a management agreement -- clearly defines owner expectations and responsibilities. For example, if the owner requires a minimum rental rate, or has special interest in targeting a certain demographic, like college students, or the over-55-crowd, this is the section to lay out the foundation for the contract. By signing the final contract owners acknowledge they understand Fair Housing Rules and Anti-discrimination regulations must be considered when structuring leases and screening residents. Additionally, every owner must disclose the names of other parties who have a vested interest in the property, liens and encumbrances, and known factors that could influence habitability.
How or why agreement may be terminated
Even though the length of the term is established by the contract, there will probably be certain allowances for early termination. If (1) the property is uninhabitable due to a weather event, (2) the owner or agent dies, or (3) financial hardship forces a sale of the property, are three reasons the parties may want an exit plan. Obviously, if either party makes false or misleading statements during the negotiation, or acts in an illegal or unethical manner during the contract term, this could open the door for early termination, too.
This lesson does not cover everything that is possible to include in a management agreement, but it gives some idea about the complexity of designing and finalizing an agent/owner contract for property management.
34.3 Skills Required of a Property Manager
Becoming a property manager is one career option for real estate professionals who don't necessarily want to be on the front lines negotiating buyer/seller contracts. Entry level positions often involve working in an apartment complex as an assistant to the property manager, or as a maintenance worker learning more about plumbing, landscaping and keeping the property in good working condition for residents or commercial lessees.
Anyone desiring to move up the ranks toward managing a large management company, or growing a small independent business into a successful enterprise that serves multiple owners and investors with diverse property types must have a few basic skills.
So, what does the property management tool chest look like? Let's briefly look at a few skills necessary to best-serve your clients and achieve success in this career.
A business administration degree is often recommended because the course work provides a comprehensive overview of general accounting principles (GAP), monthly and yearly reporting standards and other aspects of operating a business. Maintaining accurate financial records is vital for the real estate professional and property owners.
It has been said that good personnel make great companies and great personnel make extraordinary companies. Human resource management skills ensure a property manager knows how to recruit, train and retain employees. Supervising others is also a daily task. Supervising is more than just monitoring work performance – although that is very important. Scheduling, resolution conflict, and conducting periodic reviews, all fall under the purview of supervising.
Good listening skills, the ability to give concise instructions to workers, and explaining complex laws to tenants and owners are all essential skills for the would-be property manager to develop. He/she must have a working knowledge of local laws, as well as state and federal regulations that apply to leasing residential and commercial space.
While communicating oral, written and digital communication skills are critical to maintain good working relationships among all stakeholders, a large part of being a property manager means the person in charge has a diverse set of skills and a thorough understanding of building systems. This ensures that when the phone rings at two AM, and the caller reports seeing sparks shooting from the furnace, the manager knows exactly what to do. Building systems include:
Heating, ventilation and air conditioning (HVAC) equipment, plumbing, security networks, elevators, water chillers, electrical wiring, natural gas supply lines, and boilers. Supervisors should also have a working knowledge of gas, water and oil delivery systems, waterproofing, preventative maintenance and repair standards and structural engineering – which includes tunnels, underground pipe placement and building design, among other things.
Understanding how to keep a leased space functional and comfortable goes behind simply maintaining the building systems. Efficient space planning, area design and intentional building layout ensure tenants have safe and comfortable spaces to live or work. The ability to maximize every square inch of a space shows the property manager is tuned into the tenants, and looking out for the best interests of the owner.
Advertising and marketing skills directly impact the financial health of any agency that manages rental property. Property managers must know how to effectively market a property to continuously attract prospective tenants. One of the main goals of any property manager is to keep the vacancy rate as low as possible.
Property managers must be up-to-date on all codes and regulations governing building materials before initiating a permanent repair. Safety codes, occupancy restrictions, Fair Housing and eviction laws are just a few of the many regulations property managers must consider every day. Failing to stay abreast of changes to local, state and national codes and laws is setting yourself up for a lawsuit that could be financially devastating.
Union negotiations come into play when a new residential building project is still on the drawing board – cities and states often enter discussions with managers and developers to ensure residents have affordable housing when the project is complete and construction workers are paid a fair wage during the construction phase. Negotiating contracts with plumbers, electricians, contractors and cleaning crews may also require dealing with union representatives. Sometimes these discussions include private trade group representatives who seek tax breaks in exchange for meeting union demands. Each person at the table – real estate industry leader, developer, builder and property manager – has their own unique goals, so embracing compromise is wise.
Purchasing and inventory are two accounting tasks that keep all types of business on budget. Negotiating parts, supply and materials can really drive cost per unit down, which lifts profit margins.
A property manager must possess specific building construction knowledge – it helps to know general construction means and methods. For example, knowing the standard stud spacing in a wall will help to avoid plumbing and wiring installed behind the drywall when ripping out a moldy section. Also, by understanding how a building is constructed, a property manager will know who to hire to make repairs on the property, and ensure they complete the job on-time and on-budget.
Finally, learning different depreciation techniques may reduce the tax burden for owners. Following financial trends and staying informed about financial market shifts may allow a conscientious manager to spot indications it is time to sell or refinance to access equity in the property. And, analyzing local market conditions, as well as knowing how to interpret appraisal data, position the property manager to claim his piece of the pie in a competitive industry.
Becoming a property manager may hold the keys to a brighter financial future. Furnishing your wheelhouse with the right skillset will elevate your desirability score in the marketplace.
34.4 Differences Between Markets
In another lesson we touched on some of the roles a property manager assumes. Now, let's take a look at the different markets real estate professionals may choose as a specialty in more depth. While every business model is unique, we'll cover four common property management market types.
Let's start with office building management. Unlike other commercial spaces which require large open areas suitable for manufacturing or a substantial storage/warehouse to house retail inventory, office buildings typically offer a compartmentalized arrangement with smaller units. Each business tenant often needs enough space for a reception area, individual offices for employees to meet with clients privately and perform daily tasks, conference rooms to accommodate group meetings and secure storage for computer equipment, files and office supplies.
An office building manager spends the majority of the work day interacting with current and potential clients. An exceptional manager has certain skills that ensure the management company and the tenant grow and prosper.
Attracting best-fit tenants starts with analyzing local demographics, both potential tenants, and regional consumers. Local business license agencies and Chambers of Commerce are two great places to get information about the types of businesses in a given area. Developing a competitive rent schedule saves time and frustration at the lease negotiating table. Being armed with comprehensive demographic data, it is possible to market to a targeted group of professionals best-suited to the space available. Perhaps one of the most essential skills is the ability to enhance and arrange the office suite to best-serve client/tenant needs.
Poorly designed work spaces affect performance, productivity and employee morale. According to a survey commissioned by Dale Office Interiors (a retail furniture company), distractions often consume more time than performing actual work. Workers surveyed reported, on average they experienced a work interruption every 11 minutes, and it took more than twice that long to regain full concentration. Office design should provide quiet space to concentrate on work, designated places to relax, adequate collaboration venues and modern technology to facilitate efficient work product development.
One last note about office lease business models. There is no one-size-fits-all solution, even among potential clients within the same industry. As an example, an insurance company may need space for a central claims processing department where 100 processors review, process and pay claims. The client would probably need on-site security, keyed office entry devices, multiple bathroom facilities and dozens of private work stations. A small independent insurance agent that sells home, life and auto policies to the public would need an entirely different space.
Now, let's move on to retail management. Retailers rent in malls, shopping centers and strip malls, as well as standalone buildings in urban settings.
Although people may use the terms shopping center, strip mall and mall interchangeably, they are different property types.
A mall is a collection of stores under a common roof. You'll find kiosks and vendor carts in the corridors, centralized bathrooms, a small office and security personnel, and a food court with a variety of meal choices.
A shopping center is usually a collection of businesses in an area with roadways and sidewalks connecting them, but not a common roof. Kiosks and outdoor venues are rarely seen, and most do not have an on-site management office or public restrooms.
A strip mall is a smaller version of a shopping center, with most businesses sharing at least one wall with another business.
Retail management demands many of the skills of an office building manager, plus a few more. Some retail management business models include on-site security and grounds maintenance in the monthly lease, and include marketing and advertising support to attract traffic.
Another way to drive traffic to a shopping center is to select suitable anchor tenants. An anchor tenant is a well-recognized store or brand that attracts shoppers to the area. Sears & Roebuck, Penney's, and Macy's are among the brands that mall management companies seek most often as an anchor store. In a suburban strip mall or shopping center a large supermarket may be the main attraction, or even a nationally known hardware store, such as Home Depot.
The tenant mix is very important when you want to draw consumers to your property. A strip mall in the suburbs may feature a large supermarket joined with a pet center, an insurance agent, a fabric store, apparel and shoe vendors, hair and nail salon and a party store. In other words, everything a family might need in one place – some strips even rent to Urgent Care and Walk-in Medical Clinics. Large cities – Dallas, Atlanta, New York and LA – as well as some smaller cities, have shopping centers specifically designed for first- and second-generation immigrants looking for a convenient place to buy familiar fabrics, spices, clothing and personal services.
The property management company is responsible for maintaining all common areas – exterior walkways, connecting corridors, elevators and stairs, landscaping, utility infrastructure and parking lots.
Some real estate professionals prefer to stick to residential housing markets. There are two basic types of property management business models – residential management, primarily for renters, and condominium and cooperative management, primarily for homeowners.
Residential management includes overseeing the care and maintenance of different types of rental property including: apartments, and single- and multi-family homes. Managers assume the role of attracting tenants, running criminal background checks, verifying employment and contacting past property owners for references. They are responsible for maintaining the property, making sure all repairs are done correctly, and if necessary, they evict tenants and act as an owner agent in tenant-landlord legal disputes.
Condominium and cooperative management is generally an agency relationship with unit owners, or an association board. The management company may or may not collect rents; however, they participate in the budget and forecasting process, as well as collect assessments to cover the physical building management. One role of a condo-coop manager is to coordinate common area maintenance, such as keeping the lobby, pool, parks and landscaping in perfect condition for residences and guest. This property manage also acts as a front-line enforcer for association boards, effectively making sure everyone follows established bylaws and covenants.
Different markets demand different skills and expertise. It is possible to concentrate on one property type, or build a diversified portfolio and offer many service packages.
34.5 Obligations to the Owner
As a real estate professional pursuing a career as a full-time property manager, it is natural to focus on creating a business model that will generate a healthy revenue stream. In reality, the goal of every agent who desires to grow a business in this specialty real estate market is to ensure the property manager earns the highest possible return on their investment. If the property owner succeeds, the manager reaps financial rewards, builds a reputation as an expert in the field and firmly establishes a path to a secure future.
This lesson covers obligations to owners. Let's start with fiscal responsibilities and duties.
A well-qualified manager understands the importance of managing money daily, as well as planning for the future. Developing an operating budget ensures that both the owner and management team have realistic expectations for income and expenditures. The operating budget is a document that details expected revenue and expenses for a short period of time, typically a year. This budget establishes a spending guideline for individual categories such as maintenance supplies, utilities, management fees, salaries, landscaping contracts, property taxes and other expenses that the manager can spend cash for without first obtaining owner approval.
Since the budget is a mechanism for projecting and controlling short-term spending, a separate capital reserve budget is also prepared. The capital reserve budget is used to establish a savings plan of sorts, that ensures long-term capital investment is funded, without drawing from the general operating account, or creating a substantial hardship for owners via direct billing when the time comes to upgrade a property. For example, if a property anticipated needing a new fence, a modern HVAC system or a replacement roof in three-to-five years, due to expansion or asset age, the capital reserve budget provides a guideline for how much money should be set aside each month or each year, to prepare for the expenditure.
Remember that the operating budget is a baseline for managing income and expenses. However, the rental market is fluid. Rent standards change with the economy, inventory and tax adjustments. Viewing a budget as rigid standard does not allow flexibility to adjust to the market. Property managers must continually compare market comps, the condition and amenities of each property compared to the competition, and the actual vacancy rates and expenditures throughout the year in order to make adjustments to the budget as needed – these adjustments result in a “stabilized budget,” a realistic benchmark capable of evolving as the market changes.
Each of these budgets is typically prepared by the property manager, or an independent CPA, and reviewed by the owner prior. The operating budget, sometime called an Asset Management Plan, includes a detailed summary that helps all stakeholders gain comprehensive information about each revenue and expense line item, and have confidence that the budget will provide measurable standards to ensure financial goals are realistic and measurable as the year progresses. These budgets also help property managers spot potential cash shortfalls and owners understand how income should be distributed.
Stabilizing the operating budget is a technique used to adjust to market shifts, not an excuse to modify the established budget because expenses unexpectedly exceeded projections, or revenues fell short. An operating statement will quickly reveal whether or not the property manager knows how to budget properly for normal operations. The operating statement, also known as a profit and loss (P&L) or income statement, reflects the actual income and expenses for a designated period. Every business should issue an operating statement monthly, quarterly and annually to monitor how closely they are operating within the budget. Actual net revenue, operating income, is used as a starting point for establishing a new budget each year because it clearly defines all income and expense categories and details periodic activity.
Obviously, maintaining accurate financial records and reporting transactions to owners is critical, and accounting takes up much of a property managers time. However, updating records daily makes issuing financial, occupancy and maintenance reports to owners on a monthly basis easier.
Let's move away from the financial aspects of the job and discuss some other obligations to property owners. Maintenance is a good place to start. The property manager must supervise the property, ensuring residents have a safe, well-maintained property to call home. Assuming oversight of property maintenance generally falls into two different categories: preventive maintenance and corrective maintenance.
Preventive maintenance includes conducting periodic inspections of individual apartments or single-family dwellings to make sure all appliances are in working order, the landscape is well groomed and parking areas have adequate security lighting. Scheduling routine maintenance for heating and air-conditioning units, replacing batteries in smoke detectors and changing the filters in water softeners are examples of preventive care.
Corrective maintenance is activity to fix an acute or ongoing problem. An example of a corrective action is when the toilet overflows in an apartment and a plumber has to replace the plunger or float. Another example of corrective maintenance is restoring a rental unit after a tenant punched holes in the drywall in a sudden fit of rage.
Preventive maintenance typically saves owners money in the long-run by extending the life of appliances and keeping property values high. Preventive maintenance is optional, however, failing to keep the property up-to-date and functioning properly could result in lost revenue and higher corrective maintenance costs. Corrective maintenance is almost always necessary, and should be completed as quickly as it is practically possible. This is required in order to maintain a highly desirable property and this leads us to the next point – marketing.
Developing a strong marketing plan for the property that continuously attracts highly-qualified tenant prospects is critical. A comprehensive plan today includes print, digital and face-to-face marketing campaigns.
Online marketing strategies include building an attractive website that features virtual tours, and provides directions to the property. It is necessary to use professional images that accurately represent the property and consumer-friendly tools such as online applications, tenant portals and on-the-fly leasing options that show the management team is fully engaged. There are dozens of web-based marketing tools available at no cost to the modern property manager. Free online business directories are one example. Property manager should encourage happy tenants to post reviews on their favorite sites, and their social media. Speaking of social media, Facebook, Twitter, Instagram, Vine and LinkedIn are fantastic places to promote your brand and connect with would-be tenants.
One aspect of social media marketing campaigns must be stressed. Consumers expect businesses to be committed and fully-engaged. A stellar property management policy includes publishing helpful content that helps renters make sound decisions, and responding to comments and inquiries in a timely manner. Twenty-four hours is a reasonable response time, but not necessarily prompt enough if a prospect is asking for information he can take action on immediately. Prospective tenants may go elsewhere if they don't get a response to any inquiry – whether the question is asked on the phone, in person or on a social site – promptly.
Print ads in local newspapers or as part of a mass mailing to certain zip codes are designed to target specific demographics. And, face-to-face encounters may include hosting an open house event to invite the public to tour your property as well as meeting with local influencers at the local colleges, job fairs and major employers to get your property noticed by people who frequently discuss local rental options with people looking for a new place to rent.
Becoming an owner-focused property manager is the key to thriving in this competitive market segment within the real estate industry. Although every business owner will develop a unique business strategy for growth and prosperity over time, understanding these essential obligations to property owners lay a strong foundation for success. Want to succeed? Budget wisely, control monthly spending, maintain the property as if it was your own, market like a professional to attract qualified tenants and boost revenue, and keep your owners in the loop by issuing monthly reports so they know exactly what you are doing when, and how your actions positively impact the bottom line.
Chapter 34 - Quiz
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