What You Should Look For in a Property Management Contract

allianceproperties-ca-1Before hiring a property manager, it is imperative for you to read their management agreement carefully. This measure will help you understand the terms that you agree to. Please keep in mind that verbal agreements do not have any value if they are not stated in the agreement. Let’s take a close look at six vital parts of the contract that you should look at carefully.

Services and Fees

This is probably the most important part of the property management contract. In this section, the manager will clearly state the services they will provide and the amount they charge for these services. It is important for you to have a full understanding of the services you will receive during the term of the agreement, what services can be rendered for an extra fee, and what services will not be rendered under any circumstances.

Included Services:

Compensation for property managers is known as the management fee. The prospective property manager will break down their price in the contract. You should focus on hiring a property manager that offers a reasonable fee, but some property managers are notorious for disguising their fees. For example, the prospective property manager may not be up front about the fact that they will charge extra fees for what they view as “extra management duties.” Extra management duties include paying bills, filing evictions, filling vacancies, and taking care of maintenance issues.

Reading the management agreement carefully will help you see what types of services are included in the management fee, and what type of services need more money.

Extra Services:

The agreement should clarify how you will be charged for extra services. Will be you be charged a flat fee, a percentage fee, or will the fee be calculated on a case by case basis before service is rendered? You must get a clear explanation before signing the agreement.

Excluded Services:

Excluded services are the services that will not be provided during the term of the agreement. This varies with each company, but extensive remodeling and refinancing a property are two common exclusions. It is your responsibility to make certain that the prospective property manager is not excluding needed services such as locating tenants for your property, collecting rent from your tenants, and taking care of emergencies.

Responsibilities of the Property Ownerproperty-management

This section of the contract thoroughly explains your responsibility as a landlord. This section also explains what you cannot do as the landlord.

Two general examples of property owner obligations are:

To Create and Maintain a Reserve Fund – The property manager will expect you to put a certain amount of money into a reserve fund. You must give the property manager permission to get access to the fund. The property manager will use the money to take care of daily operations, maintenance, and sudden emergencies. You are also responsible for making sure that the fund stays at a certain level.

To Obtain and Maintain the Proper Insurance – The management agreement should clarify the types of insurance and the amount of coverage required. It should also point out if your coverage included the prospective property management company.

Two examples of restrictions on the property owner are:

Most contracts between property owners and property management companies do not allow the property owner to place a tenant in the property themselves. This precaution protects the property manager from being responsible for a tenant they did not choose. Property managers are only interested in dealing with tenants that meet their strict guidelines.

The property owner may not enter the property without notifying the tenant ahead of time. The property owner cannot enter the property without permission from the property manager.

Equal Opportunity Housing

You should make sure the property management contract has an Equal Opportunity Section. It should say they obey state and federal fair housing laws.

Liability

This part of the agreement restricts the property manager’s liability. In the real estate industry, it is known as the hold harmless clause. This clause protects the property manager, except in cases where they are negligent of performing their agreed duties.

However, the property manager is not responsible for the actions of third parties hired by the property owner. For example, the property manager is not responsible for the actions of a contractor hired by the property owner.

You should make certain that a “reasonable care” clause is in the agreement. For example, the property manager will not be legally liable if “reasonable care” was taken when hiring a third-party.

The experts at Red Hawk P.M. in Phoenix told us: “A property management company should be able to take proper liability to their mistakes. If they don’t specify it in the agreement, don’t hire them.”

Contract Duration

You should evaluate the services of the property management company before avoid entering into a long-term agreement. This will help you avoid entering into an agreement with a company that may not provide positive results. Unfortunately, many management companies will not do a deal for less than a year. In this instance, you must review the termination clause and make certain you are within your legal right to end the contract if the management company is not providing positive results.

Termination Clause

Do not sign an agreement that does not have a clear termination clause or cancellation clause. The clause should state why and when the property manager/management company has the legal right to terminate the agreement. The clause should also state when you, the owner, have the legal right to end the agreement.

Notice to Terminate:

You will be allowed to end the agreement if you send a 30 to 90-day notice. Make certain the contract states the property management company is required to give you a 30 notice if they decide to terminate the contract.

Fee for Early Termination:

Normally, you will have to pay a fee for terminating the contract before its expiration date. The fee can range from several hundred dollars to paying the fees that the management company would have earned during the term of the contract.

Reason to Terminate:

You should focus on getting an agreement that does not require a cause to terminate the contract. You should also concentrate on getting an agreement with a provision that will give you the legal right to end a contract without penalty if the property management company does not find a tenant within a specified amount of time.

Obligations upon Termination:

The agreement should contain a list of duties that must take place upon termination and the period they must be completed within. For example, all money owed to either party must be paid within 30 calendar days of contract termination.

Written by Red Hawk Real Estate Company

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