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Property Management Fees. How are They Calculated?

Property Management Fees. How are They Calculated?

Doug Brien
Doug Brien
Jan 21, 2017 |

What are the typical property management fees?

Property management companies rarely operate on a one-size-fits-all model. So, the cost of property management fees in East Bay depends on the scope of work that’s agreed upon. As the property owner, you have the ability to structure the arrangement you want to work with. Do you need help evaluating the property and determining an appropriate rental rate? Perhaps you need help marketing the property and screening potential residents. Or, maybe you want property managers to help you with problem residents, evictions, and legal services. Some East Bay property management firms provide comprehensive services while others may only offer assistance in a few areas.

East Bay is currently the most populous subregion in all of Bay area, spanning across Alameda and Contra Costa Counties and including a major port and edge cities like Oakland, Berkeley, and Hayward. The type of property management companies vary widely in the East Bay, and fees can also vary by location.

General property management fees

At the most basic level, the typical residential property management fees range between 8–12% of the monthly value of the property. Rates fluctuate depending on the breadth of service provided, the number of units being managed, where the property is located in East Bay, and whether the PITI charge (mortgage payment that is the sum of monthly principal, interest, taxes, and insurance) is included in the price, among other variables. And with any professional service, additional expenses may be incurred. For property management professionals in particular, these additional expenses can include management fees, vacancy fees, advertising fees, maintenance fees, and other fees that are not outlined in the original scope of work.

Some property management companies may charge a low monthly flat rate. Lower costs can sometimes be reflective of the quality of service provided, or it might simply be an attempt to outbid their competition. The issue with the latter is that practicing this could end up backfiring, since cutting margins tends to lead to overworked property managers, which may end up reducing the quality of service provided anyway. Or property management firms may offer lower costs to get you in the door only to make up the pricing with several add-on fees. Assess whether or not the level of service included in these pricing options is right for you. It’s critical to make sure interests are aligned for both parties. Property management companies charge fees and get paid regardless of performance. As a result, property owners get frustrated because they get paid a defined amount to lease no matter what the price is or how long it takes to find renters. Finding a pricing structure that mutually benefits the property owner and manager is hard to find, but it is possible and extremely valuable to boot.

Other potential expenses

  1. During vacancies, some property management firms charge a fee while units are vacant in order to pay real estate agents to help fill the property. Other times, this fee may be applied to the cost of advertising the unit, man hours required to show the unit to interested renters, or the cost of preparing leasing paperwork. This fee is usually in the amount of one-half to one month’s rent, but varies depending on the company you work with.  Property managers may also charge a fee for placing new tenants in your property. Be wary of several up-front charges. Again, the frequency and amount of additional charges depend on a multitude of factors.
  2. Maintenance, repairs, and remodeling.  There are several property management firms that work exclusively with select maintenance teams or repair companies or ones that they have ownership of. Some firms negotiate hard with maintenance crews and may be able to pass those savings onto you. On the other hand, there are some property managers that may work with expensive repair service companies and tack on an additional fee that because of it. You can discuss what kinds of routine maintenance services are necessary and appropriate for your property. Be sure to set a limit for how much your property managers can charge in your agreement. If the property management firm you’re working with charges a markup on repair or maintenance, this could be a huge red flag. The last thing you want is to see your hard-earned cash dissolve by way of greedy firms and arbitrary costs. In the case of needing to remodel or renovate older units, property managers may act as a general contractor and require an additional fee in order to manage the project.
  3. Evictions and legal affairs.  There are a variety of scenarios that can play out that may result in a necessary eviction. The Bay is a transient area where anything can happen at anytime. A tenant may suddenly become unable to pay rent, or the resident may need to relocate for their job on incredibly short notice. Or, they may become a major disturbance at the property. Whatever the case, evictions can be difficult to deal with. Typically, property managers will charge a fee to manage evictions. These fees can range between $200–$500, on top of any legal fees that might ensue. Also, it’s not uncommon for property managers to collect between 25-50% of late fees for overdue payments.

Offloading your responsibilities as a property owner to management companies is wholly dependent on the how involved you want to be. Some owners prefer to do more of the heavy lifting themselves, and seek help from property managers for customary tasks like screening tenants and getting them to sign leases.

If you are only working with property managers to engage them in more intermittent tasks, you may end up just being charged a one-time fee based on commission. These figures can be anywhere from 50–100% of one month’s rent and can waver depending on the duration of the confirmed lease.

What to look out for when working with property managers

When engaging with any kind of professional service companies, there’s a lot to be watchful for. Contract language can be confusing, and you need to understand every implication. Review the agreement thoroughly for payment terms, any abstract clauses, and key details. Distinct nuances with language can completely change the way payment terms are defined. For instance, does the agreement explain that you’ll be paying out of “rent collected,” “rent due,” “or “rent value”? All three of these options suggest very different amounts in fees. From the property owner’s perspective, the best option would be to pay out of collected rent. This means that you only pay if you have a valid tenant, and the amount you pay is from the amount collected from your tenant. It is also recommended to talk to other owners that use property management services to compare costs. Chances are, other property owners are curious about what others are spending as well. Is the amount you’re paying returning value?

Be sure to also check specific ordinance changes for East Bay cities, upcoming ballot measures that may affect your property, and policy measures that might influence renters’ rights. It’s up to you to know what your own rights are so you can be well-equipped to not only defend yourself, but to be proactive with your partnerships. That’s what you essentially sign up for when working with a property management company––a partnership; an agreement to work together. It’s a matter of asking yourself if the fees and conditions that come with this partnership are working in your favor.

Questions to ask property management companies

When deciding to work with a property management company, you have every right to ask key questions so you can make informed decisions. The following is not an exhaustive list, but it’s a good start for what to inquire about when investigating if working with a property management company is the best option:

  1. Get the names of 10-15 different property owners. Pick a few and give them a call to see what the experience has been like for them. You can use public databases and other public information hubs to gather this information.
  2. Request full transparency on all property management fees, including administrative fees and other undisclosed costs. Make sure you clearly understand all of them.
  3. Ask about Service Level Guarantees. Is performance and satisfaction of work contracted in any way? If not, why?
  4. Ask about what type of software is being used to manage properties and track activity. For compliance reasons, it’s important to have an accurate audit trail in case you are called upon by the rent board or questioned by residents. Are repair and maintenance services being timestamped? Are conversations with residents being properly documented?
  5. What is the experience level of the property management company? Be sure to ask about more than just years of experience. Are they versed in your property type and regulations? How detailed are they in property inspections and how responsive are they to residents?
  6. What does the property management team look like? What is their background in property management, and are they credible?
  7. How much is spent per unit on an annual basis on repairs and maintenance? Are these expenditures warranted?
  8. Ask about other key metrics like average time to lease, average time to prepare a unit for lease, and average response time to resident requests and inquiries. Ask to see print-outs of these stats instead of getting estimates over the phone.

At the end of the day, you’re making an investment that should be delivering value. Does the property manager provide support when you need it, or are they trying to simply make some coins off of you? Are they versed in the latest compliance laws and regulations and can they offer helpful recommendations? Do they utilize any technology to make property management process more streamlined? Before hiring a property manager, evaluate what the partnership will look like, what you’ll have to sacrifice, and if it makes sense for you.

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