Understanding a property management agreement can be challenging, especially if you're encountering one for the first time. This article highlights the essential elements to look for in a property management contract.
When preparing to sign a contract with a property management firm, it's crucial to know what to pay attention to. This document outlines the expectations from the company and defines your responsibilities while collaborating with them.
It's easy to overlook important details during the contract-signing process. You might focus so much on certain clauses that you miss others entirely. At Andren Homes, we take the time to review the contract with you and emphasize the importance of reading it thoroughly. We recognize that signing a contract can be overwhelming, particularly if you're hiring a property manager for the first time.
To assist you, we've put together a list of typical components and key aspects to consider in a property management agreement.
Disclaimer: The following tips are intended for educational purposes. We always recommend consulting your attorney regarding any legal matters.
Services
This section should clearly define the services the management company will provide, such as leasing, property management, maintenance, and repairs. Sometimes, these services are categorized into separate sections for clarity.
The leasing section should outline how tenants are screened, advertised, and how leases are modified. It typically provides a brief overview of the marketing strategies used, including signage and online platforms.
Additionally, the agreement should clarify that the manager has the authority to enforce the lease, limiting direct interaction between the owner and tenant to avoid unnecessary complications.
The document should specify the company's maintenance threshold. Some firms will inform you of every repair needed, while others may only notify you if a repair exceeds a specified amount. It should also detail the procedures for emergency repairs.
Fees
This section should detail the fees charged by the management company for each service provided. Property management firms generally charge a percentage of the monthly rent as their fee (standard in Santa Cruz typically ranges from 7% to 10%). It should specify when these fees are collected.
Additionally, any extra charges associated with their management services should be outlined. For instance, many firms impose a leasing fee when a tenant is placed, which should cover marketing and tenant placement efforts.
This section might also highlight other costs, such as extensive repairs or upgrades, inspection fees, and more.
Don't assume that a higher management fee is automatically a red flag. Some companies prefer to charge an all-inclusive management rate that may be above average but offers more value for your money. Pay attention to the overall fee structure; a company may advertise a 6% monthly management fee but also impose charges for vacancies and other miscellaneous expenses.
Cancellation
Every contract must include a section outlining the cancellation process and what occurs if the property management company terminates the agreement prematurely. This section should also explain how remaining funds will be distributed.
Duration/Term of Agreement
Many property owners are unaware they are bound by a year-long contract until it's too late, especially if they wish to switch companies or return to self-management. Be mindful of the contract length; some firms offer yearly agreements, while others operate on a month-to-month basis. Confirm whether the agreement automatically renews (a common practice for monthly agreements).
Compensation for Special Services
Certain services fall outside the typical management contract, such as representing an owner at a Homeowners Association meeting. Some managers may require additional compensation for these tasks.
Collection & Disbursement of Income
This section outlines when you, the owner, will receive payment. It should also clarify how property-related expenses will be paid and how accounting records and reports will be provided.
Check if your property manager performs mid-month or full-month accounting. This can impact your owner statement, record-keeping, and the timing of fund releases to you.
Affiliates
Here, your property management firm should disclose any ownership interests in affiliated companies or organizations. For example, if they also own a maintenance company that services your property, it should be stated in this section.
Owner Obligations
In this section, the property manager will outline your responsibilities as the owner under the agreement. This could include refraining from direct communication with tenants, leaving personal belongings in the property, or ensuring the property remains habitable.
This section is crucial as it delineates your obligations once the contract is signed. Property management companies function most effectively when owners comply with the outlined responsibilities.
Insurance
This section should specify the type and amount of insurance you are required to maintain throughout the partnership. Most property managers require around $500,000 in liability coverage. If the management company does not mandate insurance, it raises a red flag.
Most managers will also request to be named as “additionally insured” on the liability portion of your insurance policy. This ensures they have equal representation in the event of a liability claim.
Owner Indemnity Obligations
Indemnification clauses are designed to provide compensation for harm or loss, typically in monetary terms. This section states that the owner cannot initiate legal action against the property management company unless the company is found to be grossly negligent. It will outline specific instances in which the manager could be considered in violation of the contract.
Attorney Fees
This section indicates that if an owner hires an attorney, those costs will be considered an operating expense and are the responsibility of the owner. In some cases, it may be reasonable for both parties to share these costs.
Tax Withholding
This section reviews California law stipulating that property managers must remit 7% of taxable income to the Franchise Tax Board. It should detail the amounts the property manager will send to the tax board for out-of-state or non-U.S. residents. For non-U.S. residents, property managers must remit 30% of gross rents.
Mediation
Mediation involves both parties agreeing to resolve disputes through a third-party mediator. This section states that both parties commit to mediation before pursuing legal action, helping to avoid unnecessary legal expenses.
In Conclusion
Each of these sections is vital to include in a property management agreement. While there may be additional sections unique to individual property management firms, the ones listed above represent the essential stipulations.
Need assistance in hiring a property manager? Check out these four steps to simplify the process!
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Logan Andren
Logan Andren is the founder and CEO of Andren Homes Property Management. Since launching the company, Logan and his dedicated team have simplified the rental property experience for numerous Santa Cruz homeowners. Their mission is to enhance the lives of their clients and community, focusing on providing exceptional service and fostering lasting relationships. DRE #02002055
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✆ : (831) 291-5043
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