Rentals – A Blessing or A Time Bomb?

I never intended to have a property management department.

Then my Mother-In-Law got laid off when her company closed, and I wanted to help her with a little additional income. I owned a few properties, and some clients were asking if I would manage properties for them, so I opened a property management department in my real estate firm. Now I collect rents on over 500 properties every month.

Single family Property management is pretty labor intense and is as profitable as residential re-sales, so as other brokers in my marketplace decided to divest themselves of their property management accounts, I found the opportunity to buy some practices that allowed me to accumulate a large enough group of accounts to operate profitably. Property management has the benefit of providing a constant, income stream, even if its not the immediate profit center that re-sales can be. Of course the down side is that it requires a lot of attention to detail and potential liability. But if you own a number of properties and have a real estate company already paying for the physical location, it is an opportunity that real estate professionals often consider.

As the market has faced challenges in the past few years, more agents and brokers have turned to rental collections. But because they are unfamiliar with the operation of,  or may not have considered the issues raised b, y operating a rental department , they often generate more problems than profit when they get started.

Perhaps the most dangerous problem is the problem the broker doesn’t even know about – the agent who does their a favor for a client by helping them with the rental collections on the property they just bought. In most states, they are in violations of licensing laws that don’t allow agents to perform licensed activities independently of the brokerage they work for.  In addition to that license violation, most agents have no training to prepare them for the tasks they are undertaking – and that usually ends with an unhappy landlord  or tenant or vendor or broker or all of the above.

It’s just so easy for the agent to get started. Seems like a no harm no foul type of favor for their client after all. And in most companies, there isn;t a lot of conversation about rentals because the emphasis is on making sales and taking listings.  So the agent agrees to help the client out and find them a tenant and then collect the rent. And that’s where the trouble starts.

Did the agent create a special account for the rental collections? Did they set the security deposits aside in a special account as the state (usually) mandates? did they have a special contract signed authorizing them collect rents? Are they reporting the management fees on their local state and federal taxes? Have they used the company name on any of the papers they generated? Are they perhaps using the electronic forms provided by the company to generate leases etc.? Now the original illegal action by the agent can be compounded, and the brokerage can become involved without their knowledge or consent because of the actions of their employee!

The brokerage involved? without their knowledge or consent? Sounds absurd until you realize that if they use the office address on anything, or a lease is brought to court with the company name or license numbers on it, the plaintiff’s attorney will certainly add the company as a defendant on the “deep pockets” theory. Whether the company can be removed or not, there will be legal expenses involved , even if the result is what the company desires.

While the company can try to isolate themselves from liability by addressing rentals in their training and their independent contractor agreements, even that may not be enough. I hired an agent last year who had worked at another national franchise where she had desk expense as part of her ongoing costs. When we interviewed, and when she was hired, we talked about her experience in residential re-sale and in obtaining tenants for a different former company’s property management department.

After she had been working for us for about 10 months, her office manager received a letter from a gentleman who had bought a property from her at the previous firm, and for whom she had been collecting rents since his purchase. It seems that she had advanced money for repairs which exceeded the amount he felt should have been spent. He refused to reimburse her, and she threatened to sue him. Obviously it was a worthless threat since she wouldn’t have had any legal authority to spend money for him, but the threat infuriated him and he was angry at her , and her new firm. He now wanted to sue her for doing a poor job as a property manager, and if the situation escalated to that, we could have been involved in defending the firm from a lawsuit that we had no real position in.

As soon as we became aware, we brought the agent in, explained what she had done wrong, and that there was to be no real estate activity in her life outside the parameters of our independent contractor’s agreement. We contacted the landlord, calmed him down, explained that she would be absorbing the costs of the repairs, and avoided a bullet that came from a situation we had no way of knowing about.

The best course an agent can take in this madness is to make a decision about what they do for a living. If they want to be in the rental business or learn property management, then go in that direction. If they want to be in residential re-sale, then concentrate on that , and leave the property management to the appropriate department in their company. And if the brokerage hasn’t had a rental; department? Then maybe its time to think about creating one. And if you do, then here’s a few tips for starting:

  • Make it simple on yourself and collect all of the rentals on the first of the month. Then whatever you need to do, in terms of late notices, notices to quit, rental increases, etc, will all fall through the month in an even flow.
  • Make sure that you’re listed as an additional insured on the liability policy of your client. Rental agents are often sued along with the owners of the property for anything regarding the property. Just having your “For Rent” sign on a property is often enough to get you sued by someone who slips in the snow or trips on a crack walking by the property.
  • Check your E&O insurance to see what coverage you have for your property management activities. Don’t assume that every new activity you choose to expand your business  is automatically covered by your actions.
  • Be familiar with all of the forms used to rent properties, not just the lease, but additional rules for tenants, addenda for the lease agreement, credit applications, rental collection forms, late notices, eviction notices, and the myriad of other form letters and agreements you may need.
  • Establish systems for the intake of property repair issues, how you will handle responses to tenants. You need to respond in a uniform manner, and whether you keep a log of calls it has to be the same for every tenant and landlord you serve.
  • Remember your obligation to the landlord – adding cost to the vendors you employ as an additional profit center is not only bad business, and a conflict of interest,  but a potential violation of NAR’s Code of Ethics.

And if you do decide to be in the rental business, remember that you need to have a large enough portfolio of properties to pay for the clerical staff you’ll need to get the job done right! Good luck with whatever you decide

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2 comments for “Rentals – A Blessing or A Time Bomb?

  1. Tiffany
    April 23, 2012 at 10:38 am

    that was fantastic. I am a part of NARPM and our local chapter has had recent round table discussions about this very matter. In addition, I am looking into my own brokerage company and undecided on the property management addition to my  future company- good food for thought

  2. April 23, 2012 at 7:00 pm

    Glad you enjoyed it Tiffany- NARPM does a great job- as does NAR with their property management courses. 

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