As this quote implies, there are two imperatives in property management. First, the manager must strive to increase income. Second, increased income shall not occur at the expense of compromising the physical integrity of the property.
Property Managers Everywhere!
These dual goals underscore the fiduciary relationship between the client and the manager. This is not a relationship that can be based on the lowest fees or the willingness to take on management as a loss leader for leasing commissions. As Mel Shear points out in Handbook of Building Maintenance Management, (Reston Publishing Co. Inc., 1983), the operating costs of a building account for 75 percent of overall expenditures during its 50-year life cycle. That 75 percent is in the hands of the property manager. Do you want this person to be hired solely on price?
Instead owners must devote the same or greater care to hiring a fee property manager that they devote to hiring any other employee. By following the 20-point checklist below, owners can effectively narrow their choices to two or three top candidates.
- Identify your needs based on property type. The requirements for managing a condominium association, called a strata corporation in Canada, are vastly different from those for a strip center. Owners must focus on firms with a proven track record in the appropriate property type. Do not become a test case for a firm trying to expand into uncharted waters.
- Solicit referrals. Conversations with business associates and other investors should yield you a long list of reputable firms.
- Prepare tender guidelines. Guidelines do not have to be complicated, but they should include items you want the management proposal to address. Creating the guidelines will also help you reflect on your operational and financial requirements.
- Get out of your office. Selecting a management company from your office may save wear and tear on your car, but will do precious little to prolong the life of your property. Property management is done in the field; you need to visit properties managed by the companies you are considering. Talk to tenants, observe the operation, ask about rentals, find out who manages the property next door.
- Visit the management office. This is an excellent way to determine how much importance a company gives to its management activities. Is it operating as a profit center or solely as a function to generate leads for selling? Do the management team and its environment look efficient and cost-effective?
- Is it a national or regional company? Owners need access to the decision maker, for two reasons. If you have a management problem, it will be solved more quickly if management is located near the site. Secondly, real estate dynamics remain very localized and local market knowledge is crucial to the success of your investment.
- Ask to meet the entire management team. You would not hire an employee without interviewing him or her. Regardless of your comfort level with the capabilities of the firm and its principal, you also need to meet the property managers and accounting personnel who will handle the day-to-day, week-to-week responsibilities for your investment. Your man in the field is the property manager, and you must feel a rapport with this individual.
- Ask about the compensation package of the property manager. This is very revealing. Look for a compensation package in which the property manager receives a percentage of the management fee. There should be a direct correlation between the management of your property and the manager's compensation.
- Visit a similar property it manages. Ask for a tour of at least one of the management firm's properties that is similar in size to yours. Quiz the manager about rental rates, vacancies, maintenance programs, and marketing.
- Ask about policies and procedures for your property. This question will help you see how well a manager thinks on his or her feet. Ask how a hypothetical situation will be handled. Watch for evasion. Likewise, if the property manager continually defers to the site manager, he or she may not be on top of the situation.
- Ask about financial reporting. Under no circumstances accept a proposal without reviewing a full set of financial reports from a prospective management firm. These reports could be from a property the firm already manages or from a hypothetical sample used for presentations. The capacity to produce the reports you and your accountant require is vital. The system should be on line and real time.
- Ask about the computer system. Does the company use an off-the-shelf general accounting package or has it invested in a comprehensive system that will enable it to report on and analyze your investment. Software should allow for such operations as maintenance tracking, analysis of occupancy trends, specifying passthroughs of expenses, and other standard management functions. A significant commitment to a computer system also shows a commitment to property management as a business.
- Ask for a corporate proposal. You will want to review the corporate profile, operating philosophy, and management program. The proposal will also help you formulate questions and determine if marketing enthusiasm has exceeded reality.
- Ask for a comprehensive outline of management services provided. Depending upon the property in question, the proposal should address such specific areas as marketing, renovation, energy conservation, tenant relations, financial management, building operations, and reporting. This outline should adhere to the tender guidelines discussed earlier.
- Ask that the proposal be appended to the contract. This is a no brainer. If the management company accepts, it indicates that it will stand behind its proposal when it comes time to deliver the goods. If there are evasive maneuvers at this point, the firm may be asking you to buy a pig in a poke.
- Ask for the contract. Review the firm's formal management contract before making your final selection. In this way, problem areas or concerns can be addressed while you still have options available. Questioning a point in a contract is also a way to judge how flexible the management company will be in responding to your needs.
- Ask for termination notice without cause. Your management agreement should contain a clause that will enable you to end service on one month's notice without cause. Again, this is an indicator of management's faith that it can fulfill your expectations.
- Check the firm's commitment to education. Over the last 70 years, the business of property management has evolved from rent collectors to full-fledged professionals. Identify companies that encourage employees to hold the CPM[R], RPA, or other professional designations and to continue their professional development with graduate-level courses and seminars.
Points 19 and 20 have been deliberately omitted to convey to you that each investor's property and investment requirements are unique and require a great deal of thought. Expand this list by developing additional questions to ensure that your requirements match the management firm's skills.
In using these guidelines, please remember that, in essence, real estate management is an activity dedicated to the process of problem interpretation and problem solving. During the selection process, you need to assess the ability and willingness of a fee-management firm to respond to the financial and operational problems unique to your investment property.