To ensure a property management company is the perfect fit, you need to know how to read a property management agreement (PMA) so you’re prepared for fees, owner obligations, and more.
What Should a Property Management Agreement Include?
Property management contracts should include multiple key sections. Each section should be broken down into different subsections or clauses that cleanly lay out specific responsibilities and fees.
As you read a property management contract, you should look for sections including:
- Expected services
- Authority to spend
- Collection and disbursement of income
- Owner obligations
- Fees
- Compensation for special services
- Term/duration of agreement
- Cancellation/termination policy
- Ownership interests/affiliates
- Insurance
- The Fair Housing Act
- Ancillary
Expected Services Section
Property management companies usually offer a standard range of services, such as:
- Walking the grounds of your property and picking up trash
- Maintaining property facilities, grounds, and tenant appliances
- Finding and placing tenants for your property
- Collecting rent from tenants
- Evicting problematic tenants
- Marketing the property to attract prospective tenants
- Upgrading the property if needed
The property management contract highlights the business relationship between you and a property management company. The services section is arguably the most important because it outlines exactly what the property manager will do if you hire them.
If, for example, you hire a property management company but the services section does not include duties for finding and placing tenants, that responsibility will fall on your shoulders instead.
The services section, in combination with the owner obligations section (see more below), minimizes miscommunications. It ensures that both parties know the responsibilities and requirements of the business relationship.
Authority to Spend Section
The authority to spend section gives the property management company the ability to spend money on your behalf to maintain the property.
A PMA may include a section stating that you permit them:
- To use authorized funds for repairing property or placing tenants.
- To apply for more funds if needed.
- To spend money if needed and invoice you for repayment if the funds were needed for work outside their expected duties.
Imagine that you take a vacation and your property manager is left in charge of your rental apartment complex. While you are away, a tree falls on one of your rental units. The cost of the damage goes above what your repair reserve fund has in its account. The property management company foots the bill and repairs the unit.
The authority to spend section is important since it ensures that both you and the property management company know:
- What the property management company is allowed to spend.
- How and when you will provide them with money to do the necessary work
Collection & Disbursement of Income Section
This section covers how the property manager will collect rental income and how and when they will provide you with your due rent. Be sure to include:
- Date the rent is due
- How tenants pay the rent (cash, check, online service)
- How the property manager should get the money to the landlord
Owner Obligations Section
These are listed tasks or responsibilities that the property manager will not take care of unless contract modifications are made in the future.
For instance, a property management company may offer a variety of management services, like maintenance and tenant placement but the same management company may not explicitly say that it handles tenant evictions.
In that case, you need to read the owner obligations section to see if that shows up here instead. If so, you’ll be responsible for evicting problematic tenants, not the management company, if you sign the contract.
Potential owner obligations include:
- Placing and evicting tenants
- Marketing your property to draw prospective tenants
- Holding tenant interviews
The owner obligations section may also describe what you cannot do as the property owner including things like communicating with tenants or leaving personal property in a unit.
Fees Section
All of the fees the property management company charges you, as well as potential fees that may be charged if certain requirements are met, should be listed.
Be on the lookout for red flag fees or unnecessary fees that a reasonable company should not charge.
If your PMA lists a charge for tenant placement but you find the tenant, the fee should be waived.
If necessary, tally up all of the fees to make sure that they add up to the expected property management fee you’ll be on the hook to pay each month.
If you have a question about what a fee covers or whether it’s necessary, don’t hesitate to ask or consult with your attorney. Any property manager should be able to offer you clear reasoning behind each charge.
If a property management company doesn’t have a good explanation for a fee, it’s a red flag and potentially a sign that you should look elsewhere.
Compensation for Special Services Section
This section covers ancillary charges or compensation policies for extra duties or services that may not be listed under the “Services” section in the contract.
Special services can include things like:
- Representing a property owner at a homeowners association meeting
- Delivering eviction paperwork to a local judge or sheriff’s office
However, if there is no special services section or it’s vague, keep in mind that this also leaves you open to being charged extra for services that the property management company claims it needs to do. You need to be sure to ask some clarifying questions of the manager before hiring them.
Term/Duration of Agreement Section
Check for clear dates for the start and end of property management responsibilities in this section as it will describe the length of your business arrangement.
If the contract is a yearly one (like most property management contracts), it will include the date upon which the management company ceases its services or the date upon which the contract must be renewed for it to continue.
Keep the term or duration of your contract to a one-year arrangement until you and the property management company have worked together and know it’s a good fit. If you choose to renew your lease with the same company, you can consider extending the term.
Cancellation/Termination Policy Section
In this section, the property manager will stipulate:
- The termination or cancellation policy
- Whether you have to pay a termination fee for canceling the contract ahead of the term’s natural expiration date
You should find a property management company that does not have any exorbitant termination fees. Do not sign a property management contract if:
- The termination fee applies to you no matter what when you cancel the contract (even if it’s just a month ahead of the contract ending, for example)
- The termination fee is expensive, such as well into the thousands of dollars
Note that this section should also include the policies or behaviors that may cause a management company to cancel its contract with you. For instance, if you fail to provide or replenish the repair fund for multiple months in a row, this section may stipulate that the property management company can cancel its business arrangement with you at any time.
Ownership Interests/Affiliates Section
The property management company will describe any ownership interests they may have in third parties, such as marketers or contractors in this section.
A property management company uses a marketing firm or advertising company to display or sell properties they manage.
If the contract doesn’t have an ownership interests section at all, ask whether the management company has any known affiliates.
Why does this matter? Simply put, if you’ve done business with another company, like an advertising firm, in the past and had a bad experience, the last thing you want is to sign on with a property management company that uses the same business.
Insurance Section
Depending on your state or metro area, regulations may require property management companies and property owners to maintain certain amounts of insurance. For instance, most property managers require property owners they work with to have several hundred thousand dollars in liability coverage.
The insurance section will display:
- What insurance policies you must have and maintain
- The amount of those insurance policies
- What insurance policies the property management company has
If this section is nonexistent, or if the property management company doesn’t appear to have insurance, ask them. You should not work with a property management company that doesn’t have insurance.
Property managers are sometimes legally required to have insurance. Working with a manager who doesn’t have legally mandated insurance could get you into legal trouble! Be sure you know the policy requirements in your area.
Fair Housing Act Section
Both the landlord and the property management company must follow state and federal fair housing laws. The Fair Housing Act prevents landlords and property managers from discriminating based on protected classes, like race or sex.
This basic section should simply state that both you and the property management company agree to abide by these standards. It’s an important legal protection to keep you safe if a tenant ever accuses you of discrimination or tries to sue you.
Contract Amendments Section
The processes and agreements between both the homeowner and property manager to change or amend the contract should be explained in this section. It’s states who can modify the contract under what conditions and when the changes go into effect.
Make sure that the contract can only be amended by you or the property manager. Any contract should be flexible and open to adjustment if the right circumstances arise, but only by the right people.
Ancillary Sections
Alongside the major sections described above, a thorough property management contract may include ancillary sections for things such as attorney fees and payments, mediation terms, and indemnification clauses.
Attorney Fees
The contract might state that if a property owner hires an attorney, it’s an operating expense. In this case, you would pay all of the attorney fees for the meeting and future contract inspections, not the property management company.
However, some management contracts may indicate that attorney fees can be split between the owner and the property manager, as the document concerns both parties, not just one.
Tax Withholding
Depending on your state, some property managers are legally required to remit a certain amount of all taxable income to the local franchise tax board. This information should be listed in a tax withholding section of your property management contract.
In California, property managers have to remit 7% of their taxable income, and property managers have to remit 30% of gross rental income for any non-US resident tenants.
This section may not appear on your property management contract if it does not apply. Be sure to check your local laws to be sure. If it does appear, it will include:
- The percentage of rental income the property manager sends to the tax board each month
- Whether there are any specific circumstances or collection requirements for US or non-US residents
Indemnification Clause(s)
An indemnification clause specifies that rental property owners must “hold harmless” their property managers for liabilities or damages, provided that those liabilities or damages arose from reasonable work/circumstances.
In simpler terms, the indemnification clause means that you can’t sue your property manager if they cause damages or liabilities unless they act irresponsibly.
Typically there are two exceptions to the indemnification clause:
- If the property manager behaves with gross negligence (e.g., they lose rental money because they did not keep track of rental payments and lost the cash somehow)
- If the property manager behaved outside the scope of the contract (e.g., they hired a contracting company to completely redo a rental unit without your approval)
An indemnification clause section is important both to protect you and a property management company, so make sure your contract has one before continuing.
Mediation Terms
Mediation is a legal process where two parties resolve the dispute with a neutral third party called a mediator. Mediation is frequently used as an alternative to litigation, which is costly and time-consuming.
Your property management contract may have a mediation terms section dictating things like:
- Both parties agree to mediate before progressing to legal action, like suing the other party
- How mediation costs are paid (these are usually split between both parties)
It’s a good idea to sign a contract with a mediation clause to prevent potential litigation fees from catching up with you later.
Marketing Methods/Strategies
A property management contract may have a small section detailing marketing methods or strategies the property manager will use to fill vacant units. This is a rare section in general and is only important if you care how your property manager fills those units.
The section could detail:
- What marketing channels may be used
- How the marketing materials will be paid for
- Whether the owner is responsible for assisting with marketing or providing input (or, conversely, if the owner is forbidden from providing input on marketing)
Expected Fees in Property Management Agreements
You should already expect to pay your property management company a fee every month, and those should be outlined in the agreement.
Some of the most common fees to look for in a property management contract include:
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- Property management fees
- Maintenance fees or reserve fund fees
- Vacant property fees
- Tenant placement fees
- Inspection fees
- Lease renewal fees
- Property update fees
- Any fees for extra duties not covered under the property management fee
Red Flags in a Property Management Contract
As you read through a property management contract, you should watch out for certain red flags. These red flags can indicate that a property manager isn’t worth your time and money or that you should have an attorney read through the contract to catch anything worrying you may have missed.
Common red flags to watch out for in a property management contract include:
- Inappropriate fees
- Cancellation locks
- Unclear language
- Bad attitudes
- Refusal to meet with an attorney
- Unclear language in the contract
Inappropriate Fees
While it’s a good idea to check for expected or common property management fees, you should also be on the lookout for inappropriate fees as you scan your contract. Inappropriate fees are overly expensive or unnecessary fees that you shouldn’t have to pay but which bad property managers may try to convince you to pay anyway.
Examples of inappropriate fees include:
- Expensive onboarding fees – These are one-time fees meant to cover the paperwork or labor associated with taking on a new client. In reality, this is likely only a few minutes of work, so consider walking away from a property manager who insists on charging an onboarding fee, especially if it is more than $50 or so.
- Expensive cancellation fees – Cancellation fees, if applied to your business agreement, should be minimal at worst.
- Any fees incurred because of repeated bad tenant behavior.
Here’s a deeper example of the last fee type. Imagine that your property management company charges an extra flat fee for vacant units it oversees in addition to a monthly vacant property fee. This incentivizes them to rotate through tenants so they can collect extra fees for vacancies/placing new tenants.
Edgy behavior or an inability to give you straight answers about their fees is a red flag from a property management company.
Cancellation Locks
Cancellation locks are any terms or conditions that prevent you from canceling your contract or charge you a cancellation fee.
Watch for cancellation locks very carefully. Certain language and terminology can make it very difficult to know whether a company is trying to trap you into a contract.
The owner will pay a termination fee ($5,000) upon canceling the contract early or upon terminating business arrangements with the contractor.
This states that you have to pay the property manager $5,000 whenever the contract expires, even if you simply let the contract run its course and decide to go with a different property management company in a year.
Unclear Language
As you read through a property management contract or speak to a manager, beware of unclear language. Some property management companies, in an attempt to take advantage of property owners, may intentionally draw up their contracts to be as vague or confusing as possible.
They may switch the terms used to refer to the property owner and the contractor throughout the document, or they may keep things general without referring to specifics.
Of course, this isn’t always intentional. When in doubt, ask questions. If a property management company has difficulty explaining its document, it’s probably time for you to move on to another company.
If you do notice any unclear or confusing language in the contract, do not let it stay there if you want to work with the company. Ask your your attorney to work with the property management company to rewrite the contract so it is more easily understandable and clearer for everyone involved.
Can You Negotiate a Property Management Agreement?
Some property management companies may be willing to negotiate. However, it’s important to keep in mind that you get what you pay for. Trying to widdle down the price may also mean you are cutting into the services the company offers.
Property management companies may also be willing to negotiate if landlords:
- Are returning clients
- Have multiple properties
- Own a multi-family unit
- Have a property with (an) existing tenant(s)
