The Importance Of Property Manager Due Diligence

Rod Khleif Real Estate Investor, Mentor, Coach, Host, Lifetime Cash Flow Through Real Estate Podcast.

For investors looking to advance from owning one or two small properties to an entire portfolio of medium to large properties, the transition can be challenging for many reasons. One difficult change is going from managing the property themselves to surrendering operational control to a third-party manager.

Outsourcing property management responsibilities allows an investor to delegate day-to-day management activities to a true expert in the field while spending their own time on high-level strategic activities, like property identification, due diligence and purchase. In addition, partnering with a good property manager can add significant value in the areas of accounting, reporting and market research.

Because a property manager has access to the most important — and confidential — elements of a property’s operations, it is absolutely critical to hire the right one. Whether the manager is in place at the time of purchase or will be new to the property, the decision to hire a property manager is not one to be taken lightly.

What Does A Property Manager Do?

Not all property managers do the same thing. Some may do more or less than others, but their responsibilities can be grouped into the following categories:

• Tenant management: Finding and screening new tenants, lease negotiations and managing move-ins/outs.

• Rent management: Setting rental rates, collecting rents and assessing late fees if necessary.

• Maintenance and repairs: Working with tenants to make necessary repairs to individual units and working with the owner to manage routine maintenance items.

• Financial management: Setting and managing the property budget, tracking budget to actual results, monthly reporting and management of all funds that move through the property.

• Employee management: For larger properties with several full-time staff members, management of the entire staff including leasing and maintenance personnel.

Evaluating Property Managers: Comparative Analysis

When looking for a property manager, it is logical to start by asking other investors and property owners in the market who they would recommend. Doing so should help you produce a list of candidates who can be compared across the following dimensions:

1. Reputation And Experience

To maximize the chances of partnering with the best property managers, emphasis should be placed on their reputation and experience in the market in which the property is located. To get a feel for the property manager’s reputation, I recommend reviewing each candidate’s trade association membership, certifications, references, internet reviews and potential conflicts of interest.

2. Fees And Insurance

In most cases, a property manager will charge between 3% and 8% of a property’s gross income for their services. However, the structure of the fees may vary from one candidate to another. I recommend querying candidate managers about additional fees for maintenance calls, leasing activity and chargebacks to fund expenses for cell phones and office supplies. In addition, it is critical that the manager carry adequate liability, casualty, and errors and omissions insurance coverage to protect both themselves and the owner in the event of an unexpected incident.

3. Policies And Procedures

A property manager has two customers to serve: the owner and the residents. In order to do so with efficiency and consistency, they should have well-thought-out and clearly documented policies and procedures for dealing with both groups.

Resident policies and procedures should deal with things like what property advertising platforms are used, who is responsible for performing maintenance activities and emergency communication protocols. Owner policies and procedures should outline communication frequency, reporting expectations and issue escalation protocols.

4. Technology And Reporting

In recent years, common property manager activities are made easier with the use of popular technology platforms, like Yardi or AppFolio. But not all managers use them. To maximize resident experience and drive efficiency, candidate managers should be graded based on their use — or potential use — of technology tools, their data security, data controls and whether or not tenants have the ability to pay their rent electronically.

5. Intangibles

At their core, all potential property managers do the same thing. What is likely to set them apart from each other is a category that I call “the intangibles.” These are the items that don’t show up on a resume or in a referral but may be the difference between a good manager and a great one. In my experience, important intangibles include:

• Organization: Is the leasing office clean and presentable? Are client files neat and organized?

• Friendliness: Is on-site staff friendly, approachable, positive and cheerful?

• Additional services: Does the manager strive to create a community for residents? Do they perform surveys of the competition in the market?

Hiring a property manager may be one of the most consequential decisions that a property owner is required to make on their way to building a portfolio of properties at scale. The process for making the decision should be measured, methodical, data-driven and based on referrals. This is one area where there isn’t much margin for error, so it’s always best to get it right the first time.


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