Managing an apartment property is no easy task, and that’s why many owners hire professional firms to help them do the job.
Assistance doesn’t come cheap, but a manager can lease apartments, collect rents, handle repairs and maintenance, and help contain operating costs. On top of that, a manager can provide reports to help track the property’s performance, make suggestions on how to improve its value and help boost net operating income.
Match the manager to the property
To come up with a list of potential management firms, owners can check telephone directories and Web sites, use personal referrals, and tap trade associations such as the Institute for Real Estate Management (www.irem.org), National Association of Residential Property Managers (www.narpm.org), National Apartment Association (www.naahq.org) and National Multi Housing Council (www.nmhc.org).
IREM, an affiliate of the National Association of Realtors with local chapters in most states, has 17,500 individual members and 525 corporate members involved in property management services. NARPM, which has chapters in 24 states, focuses on management of single-family and small multifamily properties. NAA and NMHC are large national organizations that offer a range of association services for multifamily housing companies. All of these organizations have membership directories. NMHC’s can be searched online for the term “manager” or “management” to produce a list of firms. The search function on NARPM’s Web site typically returns detailed contact information for the group’s members.
Finding a manager who specializes in multifamily housing rather than single-family rental houses or office buildings is key, but in towns with few apartment properties, a generalist manager may be the only option.
Also, small-scale apartment owners may have fewer choices in some areas, since larger, national firms may not be willing to manage a smaller property on which they can’t achieve economies of scale. In such cases, the owner will need to shop around for local property management firms.
In any case, the owner will want to hire a manager who can provide the services the owner can’t or doesn’t want to perform. For example, some owners prefer to do routine maintenance or repairs themselves while others may want to keep control of their own bookkeeping. And managers of small buildings typically don’t need the more sophisticated staff and software required by those who handle large apartment properties, noted Steve Donohue, president of Western National Property Management in Irvine, Calif.
Questions to ask the candidates
The apartment owner should ask plenty of questions before hiring a property management firm. Some things to ask about:
- the manager’s experience, expertise and professional education,
- how vacant units will be readied, marketed and leased to new tenants,
- how late rent payments and evictions will be handled,
- what accounting procedures and software will be used,
- what reports will be provided and how frequently,
- how maintenance and repairs will be handled,
- who will be responsible for depositing rents and signing checks,
- who will be responsible for insurance, risk management and disaster preparedness,
- inspections of the property,
- communication preferences, and
- compliance with federal, state and local laws, including fair housing regulations and the Americans with Disabilities Act.
The owner also should check the manager’s references and tour other properties she oversees, Donohue advised. Ask specific questions: Has the manager stayed within approved budgets, met leasing and occupancy targets, managed delinquent rents, handled repairs and maintenance, and otherwise met or exceeded the owner’s expectations?
Owner is responsible for agent’s actions
It’s important to understand that a management company doesn’t assume the owner’s legal responsibilities for the property. Rather, the manager acts as an agent of the owner, and the owner is responsible for the manager’s actions, except in limited circumstances such as fraud, according to Kim Bernard, co-owner of Bernard/Allison Management Services in Phoenix, Ariz.
“If you don’t understand the law of agency, you should meet with your attorney and make sure you do understand it,” he said. “Then get a good solid agreement that outlines the responsibilities and duties of both parties.”
The agreement should specify the services and reports the manager will provide, the fees the owner will pay, how the agreement itself can be renewed or terminated, and how spending should be handled.
“The contract should limit how much the manager can spend without approval. Usually that’s equal to or slightly more than the budget,” Donohue said. “For any more than that, [the owner] should make the managing agent ask for authorization before they spend it or hold them liable if they spend it without prior approval.”
Apartment owners should have their attorneys review all property management agreements.
Such contracts usually “have indemnifications and responsibilities from both sides for protection,” Donohue said. “Realize that a contract is usually weighted on the side of whoever is giving it to you.”
The management firm should have liability and errors-and-omissions insurance, and typically would be named as an additional insured on the owner’s insurance. Some management firms run background checks on their employees and require them to be state licensed and bonded, according to Rose Thomas, president of Property Management People in Frederick, Md.
Owner must manage the manager
Controllable net operating income (NOI), defined to exclude mortgage payments, capital expenditures, insurance expenses and property taxes, is a key benchmark that an apartment owner can track to assess the property management firm’s performance, according to Jim Weaver, director of asset management at G.H. Palmer Associates, a Los Angeles-based diversified real estate company that owns and manages apartment properties in Southern California.
“One of the reports I look at shows the trailing 12 months on all categories of income and expenses. If your year-over-year NOI is not going up, you have to start [looking at] what’s happening, getting into the details and finding out why,” he said.
Weaver has hired two property management firms, ConAm Management Corp. and Western National, to oversee 7,000 apartment units in Los Angeles County that are owned by a private investor. He selected the firms based on their references; their track record of past success in controllable NOI growth, among other metrics; tours of other properties they manage; and their acceptance of a fee structure and contract terms that he believes are very favorable for the owner.
A final word of advice: No apartment owner should neglect his or her own property even when a manager is on duty.
“Just because you have a manager doesn’t mean you can take your eye off the ball and walk away from the property. You need to review your reports and be an active owner,” Donohue said. “The managing agent alleviates a lot of the work, but it is not their building. It is your building. If you don’t give them direction, they will do what they think is right, but that may not be exactly what you wanted.”