Is property management in your future?

Learn from the past ...

by Guy Chipman Jr.    It takes years to gain experience in new aspects of the real estate business, and your mistakes along the way can cost time and money. If you’re delving into the world of property management for the first time, maybe my advice and knowledge from more than 50 years of managing properties can save you some headaches and mistakes.

Whether you plan to create a property-management department in your office or expand an existing one, you should know that property management does not generate big commissions and fees. Rather, its strength lies in providing steady income—in good times and bad. Also, you can park listings that do not sell in the property-management department and generate income from them.

Always remember that the goal of a property manager is to maximize the owner’s net income from his property rather than maximizing the company’s income. The company’s return builds more slowly this way, but the long-term return is surer.

Getting the right people

I recommend property-management agents focus their energies on their department and do not list and sell. Too often, agents who try to do both become enamored with the larger commissions offered by sales and neglect their management duties. The result is that the property-management department goes to the dogs. Agents need to realize that property-management income is steady and reliable—not flashy.

The ideal property-management agent is a detail-minded individual with reasonably good sales skills who doesn’t mind paperwork. Often, sales agents who are good with paperwork but weak on prospecting make good rental agents.

Property-management agents will normally be employees of a real estate firm instead of independent contractors. The landlords and tenants are usually clients of the company, not the agents.

Although some firms have been successful having the listing agents handle the management of their own properties (under the supervision of the broker), in my experience, this is a last-choice scenario. Not only due to the potential distraction and lure of larger sales commissions, which I mentioned earlier, but also because most sales personnel lack extensive knowledge of rental and management laws and regulations.

A successful property-management department requires each member of the staff to first possess a thorough knowledge of landlord-tenant laws of the state and city in which they operate, and there are some special federal rules governing rentals. As transactions become increasingly complex, it’s difficult for an agent to master the myriad rules governing both sales and management. As with sales of real property, violations of property-management regulations invite lawsuits and visits from the real estate commission, as well as fines.

Legal considerations

A smart property manager never says or writes anything he would not want to be put before a judge or jury. Treat every conversation, whether over the phone or in person, as if it were being recorded. (And some may be recorded without your knowledge.) Also, consider e-mail communications the same as any written document; even "deleted" electronic messages can be recovered. Not only will this protect your business interests, but it helps keep you ethical.

A property manager needs to remind tenants that he will be fair with them, but, ultimately, the manager works for the landlord. The manager’s primary job is to protect the landlord’s interests. This information may surprise tenants, so it’s in your best interest to ensure they understand this from the beginning.

A manager should not sign a lease for a landlord unless the firm has a written agreement to lease or manage the property that authorizes such a signing. If possible, let the landlord sign the lease papers, because that removes some of the legal liability from the property manager and firm.

If the manager must sign a lease, ensure that he signs on behalf of the landlord, not your company. As with all legal considerations, consult with your attorney on this.

Situations occasionally arise that require a manager to take immediate action without time to consult with the landlord. To prevent problems during these emergency situations, have written emergency procedures in place with the owner ahead of time. It’s important to act only with written authority.

Find property to manage

Sales agents in your own company represent the best source of new property-management inventory. They will have properties where the owner cannot wait for a sale and needs income. But unless your property-management department has a good relationship with your sales agents, these deals will never happen. The property-management staff should attend company sales meetings and make an effort to help sales agents with hard-to-sell properties.

The department manager or broker should join the local board of REALTORS®’ property-management committee and be an active participant. Local and national apartment associations are good sources of knowledge and business. In exchange for their services, builders occasionally accept homes and other properties, which they rent out; ask local builders if they need help managing any such properties.

Some smaller firms find property management too burdensome and can be a source of rental listings for your company. You can agree to return the rental property to the original agent if it goes up for sale, or at least agree to let the original agent solicit the property when it comes up for sale.

Maintenance issues

The maintenance of rental properties can cause constant problems, both mechanical and interpersonal. It’s difficult to please landlords and tenants at the same time; the tenant wants the property manager to spend money on repairs, while the landlord does not.

Some companies have their own in-house maintenance department, and others use contract repair professionals. The problem with in-house maintenance staff is the perfectly normal desire of the real estate company to make this division be a profit center, which often results in inferior workmanship and materials.

Regardless of the type of maintenance system in place, work needs to be inspected at least two times: before it starts to determine the extent of work required and upon completion to determine the quality of the work. Also, a system of periodic inspections of rental units—other than move-in and move-out checks—may uncover developing problems that, if left uncorrected, could cause expensive damage.

If a repair is expensive, and the landlord is notoriously slow to pay, the property manager should ask for the repair cost up front. If the landlord refuses, and his payment habits don’t improve, the manager should abort the listing. If a landlord will not pay to keep up a property, the company is better off without his business—especially in today’s world of knowledgeable and litigious tenants.

Many conversations about repairs and other complaints occur between property managers and tenants. Put in writing any verbal agreements from these conversations. According to recent court cases, the manager can be legally bound by verbal promises; written agreements are harder to misunderstand.

What are you waiting for?

Maybe my observations and recommendations about property management will save you some headaches, but no amount of advice can replace first-hand experience. Assemble a department of personable agents with broad shoulders and good problem-solving abilities who will commit to getting the job done—even if it means long hours. With individuals like that and a good business plan, property management can be a very rewarding experience.

Take it from me. I began managing rental property in 1948, and I still love real estate.

Guy Chipman Jr. is the former chairman of the Guy Chipman Company (recently merged with Coldwell Banker D’Ann Harper, REALTORS®) in San Antonio. He was honored as the 1979 TAR REALTOR® of the Year, served as TAR president in 1983, and headed the TAR Risk Reduction Committee in 1995.

Photo © PictureQuest.

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