5 Basics of a Good Property Management Contract
Written by: Veronique Hart, Property Management Specialist - Updated: Aug 31, 2022
Finding a good property manager involves reading customer reviews, visiting properties in person, and conducting interviews with your top options. Overall, it can take many hours to determine which property manager in your area stands out as the best.
Even when you’re finally at the finish line and ready to sign a contract, you shouldn’t relax just yet. Indeed, you need to put in some extra effort at this last stage of the process to ensure you get a fair deal. In this guide, we’ll review everything you should know before committing to a contract for property management services.
Figuring out how much you will be charged for property management can get quite complicated. First, you need to consider that property management involves many different individual services, including:
- Advertising vacant properties
- Conducting tours for those who are interested in renting available property
- Screening potential tenants for criminal backgrounds and credit concerns
- Performing market research and determining the optimal rates for setting rent
- Collecting rent and security deposits
- Ensuring tenants are not breaking the terms of their lease agreements
- Conducting move-out inspections and determining how much of the security deposit should be returned
Most firms charge a basic property management fee, which can range from 5-12% of rent collected. Be careful with firms that have a base fee on the lower end of that range, as some companies will use low base fees as a strategy to lure clients in, then make up for the discount by charging a separate fee for every service they perform. Collecting rent is usually included in the basic management fee, but you should check to make sure, especially if the base fee is particularly low. Firms that have a management fee in the double digits might actually offer the best deal if most of their services are included in that fee.
It’s also important to establish whether you will be charged when properties are vacant. This is somewhat common, as managers need to check vacant units regularly for break-ins and squatters. Some firms also use this fee to cover the cost of advertising available properties. Ideally, though, you’ll only need to pay for property management services when your units are occupied.
You should pay especially close attention to the language regarding maintenance and repairs in these contracts. Generally you can expect the cost of major repairs to be passed on to you, while general wear-and-tear is often covered by either the management fee or a fixed maintenance fee. If the original contract puts you on the hook for all maintenance expenses, then you should consider negotiating better terms before you sign.
In addition to figuring out how much you will be charged for different services, it’s important to understand exactly what the property manager will be responsible for regardless of how much it costs you.
Above, we listed responsibilities around keeping units occupied and interacting with tenants. In addition to these duties, you should consider that property management involves maintaining insurance policies as well as enforcing leases with legal action when necessary — if you don’t plan to keep up with these tasks yourself, make sure they are assigned to the property manager in the contract.
Don’t be surprised if the contract includes language that prohibits you from placing tenants in your units. Since property management firms make most of their money by keeping units occupied and collecting their share of the rent, they’ll likely want control over who leases these units in the first place. It’s also common to see language that requires the owner to get approval or at least notify the property manager before entering one of their buildings. If you have any reason to maintain a physical presence at your properties, some negotiation may be required to relax these rules.
Property management contracts often include a “hold harmless” clause, which will protect the firm from liability in most cases. While this is reasonable, you’ll want to make sure the contract still holds the property management company accountable for any damages that are the direct result of negligence on their part.
Also consider what happens if a third-party contractor hired by the property management firm accidentally causes damage to one of your properties. You can anticipate these scenarios by including a “reasonable care” clause in the contract — with this language, the property manager will be held accountable for the third-party contractor’s actions if it’s clear they did not take reasonable care when hiring the contractor (for example, a quick Google search may reveal that dozens of previous customers complained about the quality of this particular contractor before the firm hired them).
You can do as much research as you want before making this hire — you won’t really know how well a property manager performs until you’ve actually worked with them for some time. For this reason, you’ll want the initial contract to be as short and flexible as possible. Most property management services will only sign agreements of at least one year, but you can still make sure the duration of the contract doesn’t go beyond that.
Finally, you should ensure the language in the contract regarding termination is reasonable. Of course, the firm will want protection in case you change your mind at some point down the road. If you cancel the agreement abruptly for no reason, you can expect to pay an early termination fee, which may be as significant as paying for the entire cost of the property management fees over the remainder of the contract.
To avoid such fees, the contract should establish that you can leave without any penalty as long as you give sufficient notice (we recommend you aim for 30 days’ notice in the negotiations and refuse to accept anything over 90 days). You should also be able to cancel the contract immediately with no penalty in extreme cases such as criminal conduct or gross negligence.