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A Boston Property Management Guide for Owners and Trustess – Part III.
Some of the most dreaded words a property owner can see on an invoice:
“SURCHARGE” “MARKUP” “UPCHARGE”
If you’re a building or condo owner seeing an
invoice that says, “$120 drain snaking + $12 service surcharge,” you might feel your stomach turn as you cut the check. Who are these con-men to charge you a full 10% ON TOP of the cost of repairs? You hired a property management company
to coordinate maintenance and repairs, and that’s what the monthly fee is
for…right?
That would be WRONG. Sort of.
Let’s say your property manager charges a baseline of 7% of the monthly rent to manage your property. What that 7% covers is generally rent collection, leasing, tenant screening, accounting, and fielding maintenance requests. The operative term there is fielding requests, not coordinating repairs.
Receiving a request or complaint from a tenant is only one side of any repair, the other is dispatching the appropriate repairman or subcontractor to address the problem. The latter part often involves multiple points of contact, assessment and triage, and even negotiation with subcontractors. All of this takes considerably more work than picking up the phone for a tenant reporting a clogged drain.
Some repairs are one-and-done quickies. Others are chronic issues that require repeated attempts to remedy. It makes sense to compensate your property manager for this, so why do we think it’s crazy for any property manager to markup maintenance?
Simple: perverse incentives.
Every property management company has to strike a balance between maximizing a property’s income and minimizing expenditures. This is the manager’s unofficial fiduciary duty to the owner. By linking compensation directly to the cost of repairs, the property manager has a financial incentive to hire subcontractors and repairmen who charge more.
Some companies (like EDGE) do not markup for maintenance and repairs for exactly this reason. As a building or condo owner, you need to have supreme confidence that your manager is doing what’s best for you and your property. This doesn’t just benefit the owner, but the property manager, as well.
Property managers get better rates than homeowners due to contractor discounts and the “economies of scale” factor; a plumber that gets fed work consistently from one source wants to keep that source happy, and that is achieved through price and performance. When owners benefit from that, they refer other owners to their property manager, the portfolio grows, and the subcontractors get fed more work. This creates a virtuous cycle that helps the property manager grow their business rapidly while providing value to their clients.
This is one way we grew our property management division 300% in eight months. We will soon publish a full breakdown of exactly how we achieved exponential growth while delivering a great product to our clients – and how it almost broke our business model entirely.