Austin Property Managers and Repair Kickbacks

I met yesterday with a remodeling contractor at a listing I’m preparing for sale. As often happens in Austin, he and I got to jawing in the front yard under a shady tree, talking about business, remodeling homes, Austin traffic, etc. More specifically, we ended up discussing property managers and what it’s like to work for us – the good, the bad and the ugly.

During this conversation, the contractor mentioned that he was shorted 10% on the first invoice payment from a property manager for whom he had just started doing jobs. When he called to ask about the shortage, he was told “didn’t we talk about this when we first met to discuss working together?”

Turns out the Property Manager takes 10% off the top of all invoices paid out, as compensation for “making the phone calls, arranging the appointments, etc” related to property repairs. The contractor was further instructed to “add 10% to the top” of future invoices if he wants to net out full payment.

What this means, if your property manager in Austin does this, is that you’ll get billed (in this instance) a 10% premium on work performed on your home. That $500 make-ready will be billed at $550 to your account, with the vendor being paid $495 and the property manager “earning” $55. The property manager’s take may or may not be evident on your monthly statement, depending on the kind of property management accounting software being used.

If this practice is disclosed in your Property Management Agreement, and you’ve had the policy explained to you, then it’s legal. If not, you’re paying higher maintenance and repair costs without knowing it, and your property manager is earning undisclosed income from your account, which is not legal.

Real Estate Brokers in Texas have a legal requirement to disclose all sources of revenue that result from the business relationship. This is why our standard Property Management Agreements in Texas disclose that property managers will keep late fees, application fees, collection fees, etc. that result from managing your property. A property manager must inform you up front of all sources of income that result from the Broker/Client relationship.

Secretly skimming money off the repairs generated from your property is illegal and could cause the property manager legal problems as well as possibly losing his real estate license. In short, it’s a really stupid thing to do if not fully and completely disclosed.

The other way Property Managers might profit from repairs done to your home is by “marking up” the invoices (versus keeping a portion of the inflated invoice total, as described above). That is, a percentage is added to the invoice total. This is more readily apparent to a property owner because you can compare the invoice you receive to the monthly statement and see the difference, and it should be disclosed in your property management agreement.

In some parts of the country, a repair markup is common. Justification for this is that owners with more troublesome properties pay a higher total management fee than owners with homes in good condition that require less maintenance and repairs. I know only a few property managers in Austin who mark up invoices. Again, there is nothing “wrong” or illegal about doing this as long as it’s fully disclosed up front in your property management agreement.

Finally, some property management companies run an in-house maintenance operation. This can be a win/win for the property manager and the owner provided that the property management company has good maintenance personnel, and that the work can be completed as well and at the same cost or less than it would be if outsourced.

I know a few property managers in Austin who successfully run very good in-house property maintenance operations, but they will admit it’s tough to do. I eventually gave up on it because it was to hard for me to hire and retain good maintenance personnel.

Whether taking residuals (kickbacks), using mark-ups, or running maintenance in-house, property managers should always disclose this to you, and you should understand how the program benefits you and what it’s costing you. The majority of property managers in Austin, including me, do not profit in any way from repairs and maintenance on your rental property.

Posted by Steve
9 years ago

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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Bill - 9 years ago

One more reason not to be a real estate investor who practices it as a sideline. Much like the investment industry, there are too many parties whose interests are not properly aligned with the client forking over the cash. Where are the Vanguards of real estate? A well run REIT perhaps?

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