What exactly do you pay your Austin Property Manager to do?

I remember the day clearly, Wed April 14th, 1999. I received a call from one of my property owner clients. He was working on his income taxes and he was angry, not at the IRS but at me! Even though he received a monthly statement showing all income and expenses on his property, adding it all up at tax time caused him to question the $1,200 in management fees for that year.

“Why am I paying you $100/mo to sit on your butt and do nothing?”, he wanted to know. There had only been two service call repair events that year at his home. Both were minor and less than $100 each. The largest expense for the year was management fees, and he wanted to know what I had done to earn that $1,200.

I responded by asking if his house (the one he lived in, in Nevada) had burned down that year? He said, “no” and “what’s that got to do with anything”. I asked if he’d called his insurance agent and yelled at him because, after all, that insurance agent had been paid all year for doing nothing, and in fact had done even less work than than me, the property manager. I went on to explain that property managers are paid not only for what we do, but for what we stand ready to do 24/7, 365 days a year. We are compensated for the peace of mind we provide by being on call so the owner doesn’t have to. From an owner’s perspective, we manage only that one house, but from a property manager’s perspective, we earn a living managing a portfolio of rental homes.

In order to understand why it’s a good thing if your property manager didn’t have to work hard on your property for an entire year, you have to understand the economics of owning and operating a property management company in Austin TX.

The easiest way to sum it up is to say that we are in fact working hard. Very hard, every day. But in any given month, it’s 10% of the portfolio that generates 90% of the work and effort. And the 10% changes every month. We never know which tenant is going to stop paying rent, which water heater will stop working and start leaking, which tenant will provide a notice to vacate, which home will cause a violation letter to arrive from an HOA (Home Owners Association), which A/C will break down, etc.

A particular rental home may run smooth with no trouble for 3 years, then suddenly, in an instant, it becomes a nightmare property that starts consuming very large chunks of our time. And there really is no way to predict this. The best way to understand the unpredictability is to know that a duplex, with two identical units, can have very different operating expenses and troubles over a 5 year period.

These are two units, under one roof, same age, condition, management – everything the same. Yet, one unit might stay rented the entire 5 years with the same tenant who keeps it impeccably clean and perfect, and the unit next door might experience 4 turnovers in 5 years, continuous repair problems, an eviction, a roof leak (in that unit only), and two major makeready turnovers including new paint and carpet. And none of this difference in performance can be attributed to controllable factors, or the management of the property.

Do we charge less for the unit that ran smoothly and more for the unit with all the work? No. Likewise, do we charge the owner of a home that runs smoothly less, and charge owners who experienced a year of bad luck more? No. Because, we’re managing a portfolio, or a pool of homes, and it’s normal and expected that the portfolio creates an irregular distribution of work and hassle. Every property is as likely as the next, in any given month, to cause an enormous amount of work and effort.

Sometimes a new owner will want a discount on the management fee, saying “it’s only a three year old home, so there won’t be any maintenance or repair issue”. Wrong. A three year old home in Circle C or Meridian is no less likely to generate property management efforts, at any time, than a 1970s rancher Cherry Creek in South Austin. In fact, if I had to bet on which home will generate less hassle, I’ll actually put my money on the older home before I would a modern production-built home.

The components and fixtures used in the newer homes are cheap and break down often. Meanwhile, our 18 year old oven/range in the older south Austin home has no computer control cards or complicated circuitry, is extremely durable, and is easy to repair and maintain if it does break. We just replaced a bad element in the oven of one today for $112 total, including service call. That range will probably last another 10+ years. Newer range repairs often cost over $250 when a computer or electronic component has to be replaced.

But older homes do in fact have different sets of problems that we don’t experience with newer homes. The bottom line still remains, it’s hard to predict which specific homes will have a bad year and which ones won’t. The age really doesn’t determine that as much as one would think.

Finally, since nobody makes a living charging 8% management fee for one house ($100/mo. for a $1250/mo. rental), property managers have to manage a lot of houses – a portfolio – in order to make a living. Some, like us, also have a sales Brokerage, which allows us to manage a smaller portfolio since that portfolio doesn’t have to provide our full income. And it’s a tough business fraught with legal land-mines and relationship friction.

The Property manager acts as a fiduciary for the property owner, but also as a service provider to tenants. The property manager is also a customer to the vendors used to complete repairs at properties. Owners and tenants have naturally conflicting interests, so it’s the job of a professional property manager to balance those conflicts of interest in such a way as to create happy parties on both sides, and to make sure both parties are operating in accordance with Texas Property Code and the terms and conditions of the lease agreement. This is more difficult that one might imagine, and owners are often as hard to deal with as are the tenants.

Vendors are in business to make money to, but the property manager, by fostering good relations with vendors, making quick repair decisions and paying fast, seeks to keep prices down as much as possible to limit owner expenses on properties and provide quicker response to tenant repair requests.

Thus, every day we talk to and communicate with owners, vendors and tenants. We’re always coordinating repairs, following up on completed repairs, paying bills and dealing with everything else that pops up in this crazy business. And if you are an owner who in a given calendar year luckily avoids major disruption to your cash flow or unexpected events at your rental home, it’s a year to celebrate, not one to call and complain about how lazy you think your property manager must be.

Steve Crossland

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

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Rob - 9 years ago

It seems like property management is bundling together two separate services: management (the owner pays you to manage the property instead of managing it himself) and insurance (the owner pays a flat fee per year, regardless of how much work is actually needed in a given year). Why are those always bundled together? Why can’t I hire a property manager by the hour? To use your homeowner’s insurance analogy, even if I don’t have insurance, I can still hire someone to rebuild my house and pay them by the hour. But I haven’t found any property managers who will work that way.

Also, why is the price always based on the monthly rent? I own and rent out a condo with a great view. The condo across the hall is identical (built at the same time, same appliances, same floorplan, etc.), so there’s no reason to think it should be any more or less trouble to manage, but it has no view. Because of the difference in the view, my condo rents for about 25% more. Every property manager I know charges based on the rent — which effectively means that they would charge more to manage my condo than to manage the condo across the hall. To use the homeowner’s insurance analogy again, the cost of homeowner’s insurance is based on what it would cost to rebuild a house, not based on what it cost to buy — so a house with a great view may cost more to buy than an identical house with no view, but it doesn’t cost any more to insure. So why are property management fees always based on rent?

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Robert - 9 years ago

Steve, I have worked with 2 property management companies so far in the last 4 yrs and by far, far, far you are surperior in ALL aspects of property management.
Your great!!

I just hope I won’t have any more darn repairs to pay for awhile. :-))

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Steve Crossland - 9 years ago

Hi Rob,

> why is the price always based on the monthly rent?

There would be no feasible way to bill out by the hour. When hiring a property management company, the owner hiring the entire setup or “system” that property management company employs. This includes the overhead of being in business, such as dues, fees, licences, software, forms, E&O Insurance, legal knowledge and experience. From a logistics standpoint there would be no way to track and assign the fractional components of daily efforts to various owners.

Also, higher priced homes generate more relative effort, in general. An $1,800/mo 2500 sqft home will have 2 HVAC systems, 2 to 4 commodes, garage opener, sprinkler system, etc. and is therefore a more expensive property to manage. Tenants paying higher rent are also more demanding.

Likewise, a basic 3/2 home that rents for $995 in Austin and has only one HVAC system, 2 commodes, and no sprinkler system has a smaller universe of potential breakdown points, a less demanding tenant and thus the lower rent produces a lower management fee. There are exceptions to these rules, but in general, the percentage of rent is actually the fairest manner of pricing.

Robert, Thanks for your kind words. Likewise, our efforts are made so much easier with good owners who understand the ups and downs of the expenses and are able to trust the decisions made.

Steve

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