Out-of-State Rental Investors: Clauses In Your Management Contract
We manage lots of properties for landlords who don’t live in the local area (Metro Detroit), or even in the country. For out-of-state rental investors like these, having a dependable property manager to be their eyes and ears is probably the most critical part of their strategy.
Because of this, out-of-town landlords need to be very picky with choosing which PMC to manage for you–and be extra critical when reviewing the clauses in the management contract.
Much like any binding agreement, it’s essential to understand both parties’ responsibilities–the PMC, and the investor or landlord. And since the contract will be coming from the PMC themselves, they’ll naturally skew some details their way. Not only that, but if something happens that’s not covered by the contract, things will default in their favor! Since you’re out-of-state, you’d be limited to filing a lawsuit, and not much more, if they don’t follow through with their obligations.
So, make sure you comb through the agreement with critical eyes, checking if everything is covered. These clauses apply to turnkey properties as well. Don’t skimp or be careless with hiring management because you’ll (literally) pay for it in the future if things go wrong – so just because a turnkey property comes with baked-in management, that doesn’t mean you should just accept this at face value. Always check the contract to see what you’re actually getting.
These are the important clauses you should look out for in your management contract:
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Management Coverage
You should want to know their management coverage, mainly because the “management fee” may not be where most of the cost actually lies when working with a PMC. Ask for a detailed breakdown of the inclusions and evaluate if it’s worth it – a high management fee isn’t necessarily bad, if it includes more services.
For out-of-state rental investors, you’re going to need the most comprehensive offerings possible to make sure your properties are managed well. Often, a lower management fee actually means a company will charge more for “extra duties,” like maintenance and eviction procedures, and these little things can add up to more than a higher management fee would have cost you.
Sample questions to ask:
1. What services will they provide as standard?
2. What will be considered an additional service and incur an additional fee? Will the extra costs be flat rates, percentage fees, or decided on a case-to-case basis, like hourly fees?
3. What services cannot be provided at all (like help with refinancing a property or extensive remodeling)?
2. PMC Liability
The management contract should contain wording that requires the PMC to do their best to provide you with efficient, high-quality service, and give you crucial information within reasonable time frames.
For example, the management company will include a “hold harmless clause” that protects them if their hired contractor does damage to the property. Therefore, you should also have a “reasonable care” clause in the agreement to prevent the PMC from abusing the “hold harmless clause.” It will force the PMC only to get contractors of good quality and reputation, because they will be held accountable for any damage done due to their negligence.
Since you won’t be able to vet contractors or check the work carried out yourself, it’s important to make sure your property manager is going to accomplish maintenance projects to a high standard.
3. Rent Payment
You definitely don’t want your PMC to be disorganized with collecting rents! Late-paying tenants are often “masters of excuses,” and will take advantage of any manager that they know doesn’t pay much attention.
So, make sure it’s clear in the contract how the PMC handles these issues: What is their process for communicating with tenants about rents? How soon do they contact tenants when rent is late? How do they inform you? What reward or penalty system do they implement for early or late payments?
4. Documentation & Communication
Furthermore, how do they document payments? If their contract doesn’t describe this, then ask. A property management company should have an organized system for monitoring payments and following up on any late or missing rent. Without this, things easily slip through the cracks, and this can translate into potentially months of lost rent for an out-of-state rental investor who isn’t following up with their PMC.
They should provide you with a comprehensive, organized monthly report of all the incoming and outgoing funds, and clearly itemize all charges.
For maintenance, when will they seek your approval before making repairs? How will they document the repairs were needed and if the tenant should be charged or not? You should require a threshold amount that requires your approval to exceed and also at least pictures if not videos to show why a repair was needed and how the work looked after it was completed.
Ideally, you should look for a PMC that makes this information available online, or can send it to you regularly via email. Especially if you’re an overseas rental investor, communicating any other way would be nearly impossible.
5. Duration and Termination
Ideally, you shouldn’t agree to a long-term contract until you’re confident that a property management company will provide a great service. However, the shortest contracts PMCs usually offer is a year (although some do also offer month-to-month).
So, the least you can do is to make sure the termination clauses are fair, and ideally that there’s an option to cancel any time within the first few months of the contract, without incurring any fees. This way, you have a kind of trial period to get the feel for working with a PMC, before committing to a long-term agreement.
Furthermore, they should have to cooperate with the transfer of management to your new PMC, e.g. by providing all documents, leases, tenant contact information, and financial records in a timely fashion.
For out-of-state rental investors, your property management company is what makes or breaks the success of your rental investments. The basis of a good investment should start with screening PMCs to find the best one in the area you want to buy in, so you can be confident that they’ll manage your properties well, even without you there to constantly look over their shoulder or chase them for updates.
This all starts with the management contract – if they’re vague in their contract, beware. It probably means they’re not very meticulous in other areas of their work, either.
Got more clauses you think out-of-state rental investors should look out for? Share them in the comments below.
Image Courtesy of mentatdgt