Suggestions on how to improve property management agreements

One of the complaints with property management agreements is the incentive structure is not always consistent with the landlord. Here are some common fees and whether they have property manager and landlord interests aligned:

• A monthly fee based on the rents collected. The landlord and property managers interests are aligned. 
• A maintenance oversight fee. The property managers interest is to achieve the highest fee which could lead to inflation of the repair price. 
• Resigning fee less than the advertising fee for finding a new tenant. In this scenario, the financial motivation would be to find a new tenant as the property manager could potentially get the advertising fee as well as the oversight fee for repairs (if any). An unscrupulous property manager could promote turnover leading to increased maintenance and repair costs. 

A goal would be to have property management agreements align interests with landlords. For example, an incentive based bonus based on the year over year operational costs would provide additional incentives for reducing repair costs and turnover. 

Working with Property Managers

Real Estate for most investors requires securing tenants to rent the property while waiting for the property to appreciate. One way to manage a property is to employ a property manager to find tenants, collect rent and oversee repairs. The concept of a property manager is considered by some a necessary evil as the investments don't necessarily present themselves where it is practical to self manage (or if you are like many investors don't have time to do this yourself).  In case you need to use a property manager, here are indicators of a good property manager:

• Available and responds promptly to your desired communication medium. I like to use email because of its asynchronous nature
• Has relationships with repair vendors. Some property management companies do their own repairs. This is not necessarily a red flag, but you want to make sure the repair costs are reasonable. One thing to be aware of is that many property management contracts charge a fee for overseeing repairs, so make sure the repairs costs are not artificially inflated. 
• Perform periodic property inspections. This can help detect problem tenants early. 
• Own their own investment property. This will help them think from an investor perspective. 
• Advertise effectively for the market. Craig's list is effective in markets like Phoenix. 
• Distribution of rent. Some property managers offer direct deposit which will save a trip to the bank and the mailing time.
• Relationship with a collection manager. Occasionally you may have tenants who break the lease, move out without paying, or damage the property. Turning them over to a collection agency can help you recover some of the money as well as possibly impacting the tenants credit.