Reviewed April 2016
What You Need to Know Before You Take on Landlords, Tenants & Other Unknowns
Perhaps a client wants your help leasing a property while she rides out the market. Maybe you have a relationship with a builder who is sitting on unsold inventory. You might even be doing a favor for an out-of-town client by paying a bill or adding chemicals to the pool. Suddenly you’ve dipped your toe in the property management waters. Before you dive right in, there are some important factors you need to consider.
The first thing to do is ask yourself if you really want to be involved in this area of real estate, advises Steven R. Urie, a GRI instructor and president of Mesa Verde Property Management in Gilbert. A repeat commission without repeat sales is alluring, but there are liability and other issues to consider. “It sure looks like good money—unless you mess up,” says Urie.
What Is Property Management?
That aspect of real estate devoted to the leasing, managing, marketing and overall maintenance of the property for others.
What Is a Property Manager’s Purpose?
To provide the client-owner the highest possible continuous net return from the property consistent with the best use while, at the same time, providing the tenants the best possible service and value for the rent.
TALK WITH YOUR BROKER
Absolutely, positively don’t undertake property management duties without discussing it with your broker first. Not all brokers are set up to handle property management. “A lot of brokers don’t want to do it because of the liability,” says Sue Flucke, an experienced property manager and broker at RE/MAX Achievers in Scottsdale. “They don’t have or want the trust account, and they don’t want the scrutiny of the Arizona Department of Real Estate (ADRE).”
Even those who handle property management sometimes restrict which agents can work on which types of jobs. For instance, some brokers allow sales agents to market a property for lease but limit the actual management of the property to those with expertise in the field.
- Trust Accounts. Brokers who handle property management must have a trust account and be prepared for regular and thorough auditing by the ADRE. In fact, Commissioner Lowe recently promised more enforcement by the department in this area. (See the interview with Commissioner Lowe in the August 2009 issue of Arizona REALTOR®.)
- Insurance Needs. Brokers who oversee property managers must secure appropriate E&O insurance coverage. Some brokers also require agents to have bond insurance because they are handling money.
- Guidance & Support. Think twice about property management if your broker gives you the thumbs-up but does not offer specialized training or have written policies and procedures in place. “When I got started, I had a broker and legal counsel who were both experienced in the issues and laws,” Urie reports. “That’s crucial because if you take a wrong step in this business, it will zing you.”
- For Brokers. Property management opens up many benefits as well as liabilities for a broker. If you’re considering expanding into property management, read “Manage Property Right,” an article from REALTOR® Magazine.
Just because your license says you can do it doesn’t mean you should do it. People who are great at sales are not necessarily great at property management. The skill sets and knowledge bases are very different. Ask yourself:
- Do I have good people instincts? “You’ve got to be the type of person who can read people pretty well,” reports Matthew E. Brydenthal, a property manager with Coldwell Banker NARICO in Flagstaff. When you meet prospective tenants (or clients!), consider the whole package. Is their car a mess? Do they take off their shoes? How do they talk to you? Do they make eye contact? “My wife and I have been doing this for ten years,” says Brydenthal. “We manage over 100 rental properties and have only had to evict two people.”
- Do I handle conflict well? When an angry tenant comes to you, will you be able to defuse tension and solve the problem? A good property manager “remains calm under pressure [and] hears what a person is saying rather than the anger that’s being conveyed,” Urie explains.
- Can I balance the needs of my clients and tenants? The owner is your client, but it’s critical that you stay on good terms with the tenants too. You need to understand both parties’ points of view. “A lot of times we have to keep the owners in check,” says Brydenthal. “A lot of times we’re defending the tenants’ rights as tenants.”
- Do I like problem solving? Property managers are problem solvers for the property. It helps if you enjoy the process of researching a problem and then taking action to resolve it.
You’ve gotten approval from your broker and have the personal skills to be a good property manager. Now it’s time to get educated so that you do not act outside your area of expertise. “Flying by the seat of your pants is not the way to go!” says Flucke.
- Understand the Law. Landlord-tenant law is complicated and unfamiliar to most real estate agents, warns April Starr of All Starr Property in Phoenix. Be sure to study the Arizona Residential Landlord and Tenant Act. “In general, residential tenants have a great deal of statutory protection,” reports Michelle Lind, AAR General Counsel. (Lind offers an overview of the law here: Leasing and Property Management.)“There are a lot of landmines out there,” explains Urie. For example, new property managers often get into trouble with “wrongful eviction.” The term doesn’t necessarily mean that you kicked the tenant out, just that you took back possession of the property without due process. Say you hear from a third party that the tenant has abandoned the property. You swing by and find it vacant—no tenant, no furniture. “If you use your passkey to enter the property, it’s just as illegal as breaking in through a window,” Urie explains. “You have to follow due process.”It’s also important that you understand the implications of the federal and Arizona Fair Housing Acts. No one may refuse to rent on the basis of race, color, national origin, religion, sex, familial status or handicap. (Lind provides an overview here: Fair Housing Law & Practice.) You should also review AAR’s Legal Hotline: Landlord-Tenant Issues.
- Take Classes. Sign up for courses that focus on property management. The state’s real estate schools are a good resource. AAR also offers courses such as GRI 318: “Property Management for Property Managers” and rCRMS: “Leasing Essentials.” In fact, if you’re on the fence about property management, Urie recommends that you take GRI 318 for C/E credits to help you make up your mind.
- Seek Out Mentors. “Talk to somebody who has been doing it for awhile—and successfully,” recommends Brydenthal. In Flagstaff, he notes, property management is very seasonal. You might ask an experienced property manager if you can help out part-time in the busy season to learn the ropes. Ask your local association if they have a property manager networking group. For example, the National Association of Residential Property Managers (NARPM) has a regular meeting at the SouthEast Valley Regional Association of REALTORS® (SEVRAR) office. Attendees share challenges and offer advice. “It’s cheaper than therapy, and you get a straight answer,” says Urie. If your local association doesn’t offer a networking group, consider starting one.
- Choose a Specialty. Within the residential property management arena, there are different areas of expertise: single-family, multi-family, vacation home, long term, etc. Decide where you want to focus your time. “I’m very efficient at single-family homes mid-price range,” says Urie. “Get me below $1,000 or above $2,000 [in rent], and I start to struggle.”
DEVELOP A PLAN
Next, you’ll want to put in place a plan to minimize risk and maximize profit for your property management business.
- Establish Policies & Procedures. Ideally, you will build on what your broker has available. Well-developed policies and procedures take into account landlord-tenant law, fair housing standards and other factors. They establish standards that protect your business as it grows. For example, a good property manager does a thorough tenant screening—credit reports, criminal background checks, employment verification, reference checks—to help weed out problem tenants. They’re not swayed by a fancy car or nice clothes. “Sometimes it’s the people with the flash that don’t have the cash,” says Matt. Property managers also use specialized software programs that can help them track rent collection and other tasks.
- Seek Legal Counsel. In property management, the lease and property management agreements are critical to your success. Hire an experienced, specialized attorney to review these important documents regularly. “This is a very regulated area of the law, but just below the level of regulation, it is vague,” Urie reports. “The law says, ‘The tenant shall not destroy or waste the property.’ Well, what does that mean? If they let the landscaping die, is that normal wear and tear or wasting the property?” As a consequence, it is important that your lease agreement spell out the responsibilities of each party and available remedies when responsibilities are not met. (View AAR’s lease agreement form.) The property management agreement should establish clear standards, such as a maximum amount you can spend without authorization from the owner. If a hot water heater fails and replacing it will cost more than you can authorize, don’t take action until you’ve gotten the okay. Otherwise, “you give the owner an unauthorized loan, which the owner doesn’t have to pay back,” says Urie. (An AAR task force developed a Property Management Agreement form in 2010.)
- Prepare for the Unexpected. “What if there is police activity on the property, and you have to do an immediate eviction?” asks Starr. Will you know what to do? Or say the washing machine breaks. Whether your client is obligated to fix it depends on how you represented it to the tenant. “If you advertise it, you fix it,” says Urie. “If you use a disclaimer to exempt it, you don’t.” Plan ahead for problems, and you’ll avoid unnecessary crises.
REAP THE REWARDS
“It’s not all gloom and doom!” says Urie. “Our property management company is booming.” Property management can provide a new source of income for real estate agents and brokers. And there are other reasons agents become property managers:
- Meet Client Needs. When an owner can’t sell her property for the price she wants, you can offer your help finding a tenant to provide cash flow and keep the property occupied.
- Differentiate Yourself. A property management niche makes you attractive to new types of clients, such as investors and builders. “We tell our agents that it’s a separate business that they can sell,” says Flucke.
- Weather a Down Market. Property management can be a counter-cyclical revenue source. “We have very few vacancies right now,” reports Flucke. “The foreclosure market is forcing people that want to live in single-family homes into rental properties.” (On the flipside, a downturn can lead to property management headaches, such as tenants who can’t make rent and owners who avoid needed repairs.)
SAY “NO THANKS”
Perhaps you’ve weighed the risks and rewards of property management and decided it’s not for you. Here are a few items to keep in mind:
- Refer business to an experienced property manager. Help your clients by putting them in contact with a reputable company. Ask an attorney who specializes in landlord-tenant issues for a recommendation. Ask your broker. Or consult the NARPM website. “We belong as a company to NARPM, which handles residential rentals only. There are 75 or so members in Maricopa County, representing just over 40,000 properties,” Flucke explains.
- Do not give property management advice. Remember, you should not counsel your client on issues outside your area of expertise, such as whether they should make the property an LLC, how to manage the tax implications of becoming a landlord or what specifics to include in the leasing agreement. Always advise your client to consult with the appropriate professional—attorney, accountant, insurance agent or property manager.
- Avoid accidental property management. If you are a listing agent and you turn on the utilities and make sure that the pool is being serviced, you should have a written employment agreement in place giving you authority to act, spelling out what will be reimbursed and protecting you from liability.
Property management can provide a steady source of income, even in a down market. The commission checks come in each month and can build up over time. There are challenges in property management. But if you develop systems, know the rules and love solving problems, you can succeed with this specialty. “For the right person, it’s an awesome career,” says Brydenthal. “People say, how do you do it? How do you stand it? If you do it right, there’s not a problem with it. I really love it.”