Property Management Blog

The Essential Parts Of A Property Management Agreement

A Level Up Realty LLC - Friday, January 3, 2020
Property Management Blog

“The Essential Parts Of A Property Management Agreement”

Are you preparing to sign a contract with your chosen property management company?

Any contract, even a property management agreement, is considered to be a serious matter. Since it binds two parties into one relationship, it’s wise that you first have a thorough knowledge of what should be included in your agreement. Having a thorough knowledge of the contents of the agreement will help you to be wiser in negotiating your contract with a property management company.

There are essential parts of a property management agreement that you should thoroughly check before you sign it. That’s why today I will teach you what you should look for when it comes to a property management agreement.

What To Look For In A Property Management Agreement

There are two ways you may be approaching a property management agreement.

As The Property Manager: When starting or building a property management business you need to have reliable clients who entrust their investment properties to you to watch over and to manage to help to make them profits on their investment properties. When an investor comes to you with a property to manage it is important to have a property management agreement that is comprehensive and allows you to take care of the property, make profits for your property management company, and to be able to make a profit for the owner of the property. Every agreement that you sign with property owners and investors has its own important parts that must be clarified and clearly spelled out.

As The Landlord: As an investor or property owner signing a property management agreement is a legal document that allows you to enter into a business relationship with a property management company that allows you to have your property managed for a monthly or agreed upon fee. When reviewing property management agreements you need to have the basic knowledge of what should be in your agreement and what is important or needed to manage the property you want to be managed. Knowing and understanding what is in a basic property management agreement as well as what some of the customizations that should be negotiated is key to making profits on your property while it is managed by a professional property management firm.

This article will be focussing on the property management agreement from the perspective of the landlord or property owner.

Knowing the essential parts of the property management agreement will help you further understand why a property management agreement is needed and help you to protect your rights as a property manager…

Why Do You Need A Property Management Agreement

As an investor or property owner, you might be wondering… Why should you have a property management agreement for the investment properties I own?

When starting out investing in properties it could be easy to handle the purchase and management of the properties that you have bought and wish to rent. As you become more diversified in buying or investing into properties for rentals the specific needs and responsibilities of managing of each property could begin to take up all your time and cut you away from investing and other business that you are doing. Being able to sign a property management agreement with a qualified property management business means you mean you can step away from your investment property without neglecting it and focus on other investments and buying of properties.

Additionally, a property management firm will for a fee take on the responsibilities of renting, repairing, and other day to day running of the property allowing you to take on other important responsibilities and business. When signing the property management agreement you have a clear identification of who is involved in the contract, the property owner, and the property manager and a clear identification of the property that will be managed.

The agreement will provide you with all the necessary terms that you and your chosen property management company have agreed on. A property management agreement serves as a legal reminder for both parties of what they promised to provide for managing the property as well as the length of the agreement that they will manage the property for you…

1. The Fees And The Services

When reviewing property management agreements the first thing you will look for and the first essential part of the property management contract is the fees and the services. It is important to understand the services that the property manager will perform along with the charged fees for the services.

Normally a property management agreement allows you to step aside completely from the property and allows the property manager to manage the property completely. So knowing what services are included in the management fee and any additional fees for repairing or fixing up property should be detailed. If the property management agreement is not comprehensive for the property then you must know what is included in the management fees as well as what is not included, and understand the services that the manager will not perform or are your responsibilities to perform.

Included Services

The most common type of fee that property managers will charge is called the management fee. This fee is associated with services like accepting and processing rent payments, ensuring the property is repaired when damaged or needing upgrades, and servicing tenant need when they arise during the rental of the property. The management fee can also include services of the property manager that deals with property inspections, maintenance management, and emergency maintenance call.

Apart from the management fee, there is also the leasing fee. The leasing fee often covers the cost of the advertising and showing your rental property as well as cover costs for reviewing applications, screening tenants, processing lease paperwork, and preparing a property for move-in.

Make sure that you thoroughly read the management agreement very closely. This will help you to determine what services are actually included in the fee that you paid.

Extra Services

Extra service is a list of services that are not included in the agreement. These are services that may not qualify as “work exceeding normal management duties”. It can be services like filling vacancies, paying bills, and maintenance issues.

The agreement should clearly spell out which services are considered extra or additional. There should also be an explanation as to how you will be charged for these services.

Check whether you will be charged for a flat fee, a percentage fee or if you will be charged on a case to case basis.

Excluded Services

Excluded services are those services that the property manager will not perform no matter what the circumstances may be. Be aware of what services are excluded. These may be services like refinancing a property or an extensive remodeling.

Be sure that the agreement does not exclude any service or services that you consider absolute necessities when hiring a property manager.

When developing the sections that outline the owner responsibilities it is important to cover everything needed to manage and run the property efficiently. Leaving out costs could make you obligated to cover these costs once you sign the contract.

Often times in the excluded services part of the contract it is important to detail if the owner or the property management firm is responsible for costs associated with certain types of upgrades to the property etc. A simple way to avoid misunderstandings is to propose in the contract a reserve fund that is helpful for specifically excluded services. The property manager will expect you to have the reserve fund ready and supplied with the needed amount of money when signing the property management agreement.

You may also be obliged to specify the types of insurance along with the amount of coverage that they will require you to obtain.

Apart from your obligations as the property owner, this section of the property management agreement also highlights the tasks that you are prevented from doing.

A comprehensive property management agreement will detail your specific responsibilities as well as what you can’t do after signing the agreement. Often time you give up the ability to placing a tenant in the property or entering the property without noticing the tenant beforehand.

3. Equal Opportunity Housing

Equal Opportunity Housing is an essential part of a property management agreement. Make sure there is a section that clearly states they support Equal Opportunity Housing.

Having this section means that the property management abides by both the state and the federal fair housing laws in your area.

4. Liabilities

An important part of the agreement outlines the limitations of the property manager’s liability. This section of the property management agreement is also known as the Hold Harmless Clause.

The Liabilities clause helps protect the property manager (except in cases where they are considered negligent, for example when there is damage caused to property by a contractor hired by the property manager).

In order to protect yourself, you have to make sure that a “reasonable care” clause is in the agreement. This only means that the manager will not be held liable if reasonable care has been taken when they hire a third party. This means that they won’t hire contractors with a history of negative feedbacks.

5. Duration Of The Contract

In most cases, a property management company will not sign a contract that only lasts less than a year.

If you will be locked into a contract for at least a year then you must carefully review the termination clause. Make sure that you can terminate the contracts if you found something unsatisfactory about their service or if you are no longer happy with what they are providing to you.

6. Termination Clause

The termination clause is a very important part of the property management agreement. This clause will tell you in what circumstances you or the property manager can end the relationship that was bonded by the agreement. Ending the relationship prematurely comes with penalties or costs so make sure you thoroughly read this part of the agreement.

A clear termination or cancellation clause must be present in the agreement. If terminating the contract is on the property management company’s end, then they must give you a notice 30 days before ending the contract.

Early Termination Fee

The early termination fee varies from a few hundred dollars to pay all the fees the management company would have accumulated during the agreement. Not all managers charge a fee for terminating the contract early. However, if they do charge a fee, it’s either a straightforward flat fee around $300 to $500 dollars or something conditional.

Conditions can also vary widely. You might pay have to pay a fee when you cancel the contract during the initial vacancy period or after a tenant has occupied the rental unit.

Reasons For Termination

You might want to consider looking for a contract that does not require reasons to terminate the agreement. Your agreement should at least have a provision where it allows you to terminate the contract without any penalty.

A contract that can be terminated without a cause should have a 30-day notice. And if you don’t want any penalty involved in the termination of the contract, it’s advisable that the termination date reflects the exact contract term expiration date.

Obligations Upon Termination

Obligations upon termination is a list of duties that must take place upon termination. The time window for the list of duties that must be completed within a specified time must also be presented.

Here is the list of obligations of the property manager upon termination:

  • Provide owner with a final financial report
  • Provide owner with necessary records and documents
  • Provide owner with a record of tenant security deposit obligations
  • Transfer security deposits either to the owner or the owner’s new property manager
  • Provide tenants with a written notice of the exact dollar amount of the security deposit
  • Provide tenants with a written notice that they are no longer managing the property

7. Questions The Property Management Agreement Should Answer

After checking and understanding the essential parts of a property management agreement, it’s recommended that you review the agreement. After all, the agreement will serve as your reference to the business relationship you will have with the property management company that you’ll be working with. That’s why you should make sure that every clause will be fair on your side.

Look at how the agreement for answers to the following questions:

  • How long is the property management agreement for?
  • How much is the management fee?
  • What other fees does the property management agreement list?
  • Who will keep the late fees, interest on security deposits, and rent collected after eviction?
  • What responsibilities does it list out for the property management company?
  • What requirements and obligations does it place on you?
  • What happens if the contract is terminated early by you or the manager?
  • How will disputes/arbitration be handled in the event of a dispute over the agreement?

Final Thoughts On The Essential Parts Of A Property Management Agreement

In this article, we talked about what you should look for in a property management agreement. A property management agreement is an important material that binds a property manager and a property owner. It’s wise that you thoroughly check the agreement before signing it. Make sure that the essential parts that are included in the agreement.

Each part of the property management agreement is essential because it regulates what you should do during your contract with the property management company. You have to make sure that you familiarize yourself with what responsibilities you will have to face when the contract begins, and what responsibilities are not bound to you. That way you’ll know who has what responsibilities.

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