Don’t Sign if your contract says this …
Posted by Dike Drummond MD CPC on Multifamily Insiders
Your relationship with your Property Manager is key to the success of your Commercial Property Investments. This relationship starts with your Contract AND we have found a lot of Property Managers Contracts are heavily weighted in favor of the Property Manager.
These dangerous contracts are often presented as if they are “standard”… Not True. You get what you negotiate. The last thing you want is to be locked into a contract with a poorly performing Property Manager… and no easy way out… OUCH.
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Contract Red Flags:
* The One Year Contract: The typical version is a Contract with a one full year term and you cannot replace the Property Manager until the year is up. Never sign a contract with anything more than a 30 day dismissal period
* Termination Fee: Are you kidding. You fire your Property Manager and then you owe them money. Heck, if they performed poorly enough to get fired, they should owe you money.
* Lease Signing Bonus paid to the Property Management Company: This is a big conflict of interest. They get paid to do a poor job of Tenant Retention. The higher the turnover, the more fees they make AND the less money you keep.
* Right to Represent the Property at the Sale Or First right of refusal to purchase the Property at the Sale: These are an even bigger conflict of interest. If your Property Manager runs the project into the ground and you are forced to sell because the investment failed… they get to purchase or represent the property when you sell. Please… this is a recipe for disaster.
* Clauses that limit the Manager’s Liability: The Property Manager is at ground level, performing the day-to-day actions of management and maintenance of the Property. They are fully responsible. Your Contract needs to make sure they hold the liability… NOT You.
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What to Always Put Into Your Property Manager Contract:
* 30 Day notice to terminate the Contract: If you want to change Management Companies, you only need to give your current manager a 30 day notice.
* Specific Performance Clauses: If you need to have the 10 fire damaged units in your Apartment Complex rehabbed and ready to rent in 90 days… put that in your Contract with your Property Manager. If they fail to meet this specific performance goal this becomes grounds to get out of your Contract. Ideally you and your Manager jointly developed this Asset Management Plan, so getting them to agree to be held accountable should be relatively easy.
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NOTE: Even if you have one Property Management Company for your entire portfolio of Properties, make sure you have individual contracts for each property with Property specific performance clauses.
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Remember, negotiations occur in all phases of your Commercial Property Investment… not just with the Seller. Make sure you negotiate a Property Management Contract that protects you and your Investors and makes it relatively easy to change Managers if they do not perform.
Here’s to your investing success.