As seen in Real Estate Finance & Investment
By: Ron Badke & Brooke Myones
Congratulations on your recent building purchase! After the exciting purchasing process, you might be considering hiring a third-party property manager. A third-party property manager can help improve cash flow, attract and retain tenants, and increase the value of your investment. But the difficult question is – which third-party property manager is right for you?
One way to get a sense of the property manager is through an interview. Some important questions to ask are: what their experience is, how long they have been established, the chain of command, the policies and controls they have in place regarding accounting and government regulations, and what software systems they use. These questions can help narrow down who has the right qualifications and resources to assist you.
Through an interview, it is easier to get a sense of the personal attention that a managing agent offers its clients. Given that a management agent services multiple properties, it is important to know if they have individuals available, or even teams in place, devoted to your property, who can address the performance of routine cleaning and maintenance, timely repairs, monitoring of upgrades and replacements, and HVAC operations. They also need the resources to be timely with their financial responsibilities, such as collections, monthly accounting period closings, and leasing.
A major cash flows concern is a management agent’s ability to collect rent and other payments from tenants. A good managing agent should help collect payments and decrease your receivables. In the case that receivables are high, it might be advantageous to seek why, or to search for an alternate third-party management agent.
You should determine if a third-party property manager will be able to assist in the preparation of budgets and forecasts with the flexibility for updates throughout the year based on new information and comparative analysis. You will need to draw on the managing agent’s building operations experience and be able to interact with them in producing budgets and forecasts that maximize positive cash flows and meet your investment goals. Make sure that the most up-to date software tools are utilized that include sound methodologies, expected pricing trends, current lease information, anticipated lease ups, and any necessary capital projects.
It is equally as important to find out the third party property manager’s reputation throughout the real estate community. It is good sign if a property manager has clients similar to you that have been happy with management’s services.
You need to have an understanding of the services the managing agent will provide with respect to financial reporting. Many managing agents are strictly operational and only account for cash receipts and disbursements that agree to cash account statements. Transactions are typically recorded for tenant billings and related receipts, and for accounts payable and related payments. Lenders and investors may require financial statements subject to accounting standards and rules governing the reporting of financial information. You need to know if the managing agent will agree to go further and maintain records in accordance with Generally Accepted Accounting Principles or any other comprehensive basis of accounting to satisfy financial statement user requirements.
An excellent resource for references is your CPA. It is a good idea to involve them in the selection as they understand your business and have experience with many different management agents. They will be able to tell you best practices, what to look for, and what to avoid.
It is also important to ensure that, as a property owner and manager, you will be involved up to the extent you would like to be. Some management agents will send all decisions to investors for approval, while others will make adjustments and show investors final results. Some managing agents will visit a site regularly, while others might only see the property a few times. Some will perform tenant screenings and background checks, while others will allow you to decide who is approved. Make sure to select the level of involvement that is appropriate for the situation.
Since a management agent is involved in the financial aspect of the property, it is important to set boundaries as to what they can and cannot do, and who specifically has the authority to sign checks and wire transfers. Discuss with the management agent the extent to which they are involved in operating and disbursing payments within the parameters set forth by the budget, and in accordance with the operating agreement.There are different options as every property has different needs. Not ensuring that you get the say and involvement you require will lead to disagreements down the line.
Finally, make sure that the third-party managing agent that you select does the level of monitoring and communication required to be in compliance with health, safety, and environmental regulations to maintain your property and minimize your exposure to any risks.
In addition, the managing agent should be able to produce monthly operating report packages for their internal review, as well as for distribution to property investors for their review and monitoring. Monthly reporting packages include, but are not limited to, monthly operating statements, budget to actual variance analysis, accounts receivable and accounts payable, aging reports, move in and move out analysis, capital project analysis, and bank reconciliations. Make sure that they are willing to not only prepare this information, but to communicate with you throughout the process.
In order to fully account for and to help ensure compliance with all services the managing agent is willing to provide for you, it is a good idea to ask for a contract outlining the managing agents terms and services, as well as pricing and fees.
In addition to services mentioned above, a managing agent typically charges a percentage of tenant collections for normal operations services provided usually ranging from 3%-5% for residential and commercial properties. Note that additional charges may exist for additional services, such as construction management or leasing commissions. However, the contract is about
more than just money. You want to make sure that both parties agree with all services that will be provided. A resulting management agreement should be agreed to and signed by both parties.
If you are still unsure about how to tell if a third-party manager is right for you, there are accreditations for both individual and real estate management firms that you can look for, such as:
- Real Property Administrator from Building Owners and Manager Association (BOMA)
- Certified Property Manager from the Institute of Real Estate Management (IREM)
- Accredited Commercial Management from IREM
- Accredited Management Organizations from IREM
Ultimately, the key to choosing the right third party property management is communication – the needs and requirements of each property must be adequately discussed before the proper managing agent can be found. Once you find the perfect third-party manager for your property, you can sit back and enjoy owning your new building.
Ron Badke, CPA, and Brooke Myones are members of Citrin Cooperman’s New York office, both specializing in real estate.