best practices
Glossary & Definitions
Are we speaking the same language?
In an industry filled with lingo and buzz-words, let’s make sure that we are on the same page when it comes to discussing real estate, property management, and brokerage. All of the photos shown here were taken by us at properties and projects that we actually manage/d.
Property Management
Not to be confused with ASSET management (see below). Property management is a regulated profession in the State of Michigan, where it can only be practiced legally under the direction of a licensed real estate broker. According to the Michigan Occupational Code, property management means, “leasing or renting, or offering to lease or rent, real property of others for a fee, commission, compensation, or other valuable consideration pursuant to a property management employment contract.” This comes as a surprise to some clients. After an older water heater failed in a rental property, the client said, “How could it have broken? I pay you to prevent that. You should have known it was going to break before it did.” Property management literally means marketing and leasing properties and collecting, documenting, and distributing funds between parties. Anything beyond those activities is either asset management or real estate consulting.
Property Manager
If you own an investment real estate portfolio, you will likely hire a property management COMPANY, and this company will then likely designate a property staff MANAGER to be responsible for day-to-day activities. It is our practice, in most cases, to limit communication between the client and the assigned staff property manager, so they can focus on their daily tasks.
Property Management Expectations
If you pay a property management fee of 10% on rent collected, and you have given your property manager a 10 unit building where each unit rents for $1,000, then you are paying your property manager 10 X $1,000 X .10 = $1,000. If you take into account business overhead, vehicle and fuel expense, insurance, wages, etc., how many hours do you expect your property manager to spend each month on your property for that $1,000? 10 hours? 20 hours? It is important to keep in mind that unless explicitly stated, your employment agreement does not mean that your property manager is going to work FULL TIME on your properties exclusively. Make sure you both have a shared understanding of expectations and that these are reflected in writing.
Property Management Staff
A property management company typically has a Principal Broker who manages and supervises the business, along with a property manager, who is (or should be) a licensed real estate salesperson. This property manager may oversee a maintenance technician, a skilled laborer, a leasing agent, and an assistant property manager. On the other hand, many companies are now contracting out these services, so they are in effect a general contractor. While none of this matters to the client/investor so long as it is a professional, efficient operation, you should definitely ask about the staffing model when hiring a property manager. What percentage of tasks do they sub-contract out vs. in-house staff? How do the costs compare? How do they decide which property to assign to contractors vs. in-house staff, and why?
Asset Management
Asset management in real estate involves analyzing real estate investment assets and then developing and executing measurable strategies to mitigate risk, increase operational efficiency, and improve return on investment. This is traditionally done by: sourcing undervalued real estate investments and reducing operational and maintenance costs. In our experience, when many owner/investors talk about what they think a good “property manager” should do, they are actually describing asset management and property maintenance.
Property Maintenance
Many property owners and investors mistakenly believe that “property management” automatically includes property MAINTENANCE, when in fact, it does not. Property maintenance is an aspect of property management and the employment agreement between the investor and the property manager should clearly state what type of maintenance is included and at what cost.
Employment Agreement
“Property management employment contract” means a written agreement that is entered into between a real estate broker and client concerning the real estate broker’s employment as a property manager for the client; it should describe the real estate broker’s duties, responsibilities, and activities as a property manager; it should describe the handling, management, safekeeping, investment, disbursement, and use of property management money, funds, and accounts.” – Michigan Occupational Code, Act 299 of 1980
Cleaning & Maintenance
In the context of property maintenance, cleaning can mean different things. Rental and commercial properties often have “common areas” that are not the responsibility of tenants. These common areas should be on a regular cleaning schedule with either in-house staff or a licensed, insured cleaning company. Cleaning could also refer to the cleaning that takes place between tenants, which can often be extreme. The other most common example of cleaning takes place after an accident or natural disaster, such as a fire, flood, or wind storm. Unless specifically stated in a quote or estimate, “cleaning” means removing dirt, NOT repairing or restoring to original condition. When hiring somebody to clean an investment property, it is important to be VERY specific about what is covered. Most professional cleaners offer basic and deep cleaning options.
Common Areas
In a multi-family rental property, a common area would be an entryway, laundry room, mail vestibule, or hallway or stairway between units. In a commercial building, a common area would be a lobby, public bathroom, or hallways/staircase between units. Unless otherwise stated in a lease, tenants do NOT clean common areas. Your property manager or asset manager should have a plan for maintaining these areas and should routinely seek competitive bids and personally check the quality and timeliness of the work.
Leasing/Marketing (Property Management)
The role of your property manager in leasing and marketing your vacant units needs to be clearly defined in your employment contract. Are they responsible for marketing and leasing your vacants at THEIR cost or yours? How many open houses should they do? Where and how often should they be posting on social media? What branding standards do you have?
Leasing/Marketing (Real Estate Brokerage)
When you hire a real estate broker to market and fill your vacancies, your “listing agreement” will define the terms (*see MLS below). Any activity beyond what is stated in the listing agreement needs to be agreed upon separately. For instance, open houses, paid marketing, etc. Some brokers work ONLY on commission, others use a hybrid commission/fee model, while others work on an hourly or project-basis. We do whatever works best for our clients.
Quote / Estimate
Any work beyond what is specifically stated in an employment agreement should be preceded by a written quote that outlines terms in detail, along with correspondence from the client stating that the quote and work have been approved and can proceed. For work to be done by an outside contractor, it is ideally important to obtain 3 quotes by licensed/insured companies and to have a qualified person closely review and compare each. The devil is in the details!
Market Rent
This describes an estimate, based on current comparable examples, of rent that can reasonably be expected in a new lease for a particular unit. Ultimately, a unit of real estate is worth what somebody is willing to pay for it, which is why specific rent rates cannot be guaranteed. Top market rents can only be expected when the unit itself is updated and marketed so that it is LITERALLY the nicest unit compared to ALL other similar units for rent at the same time. Another aspect of market rent is timing: the more urgency an owner has to get a unit occupied, the less it will be worth. Look for an upcoming vlog on this topic.
Lawn Maintenance / Snow Removal
Typically, for single family home rentals, the tenant is responsible for all lawn care and snow removal, including downed branches and leaves. For multifamily and commercial properties, the landlord typically provides these services. It is important that all parties have a clear understanding of who is responsible for what. Coordinating and managing lawn care and snow removal for a client portfolio may or may not be included in the management fee.
Debt Collection
The Federal Debt Collection Practices Act (FDCPA) defines “debt collectors,” as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” As a result, except in rare cases, ALL residential property managers who collect back rent or damages from residential tenants are considered debt collectors. Residential tenants are defined as “consumers,” and unpaid rent or damages owed from a residential lease ARE “debt” under the FDCPA. By contrast, debts owed by a business (or by individuals for business purposes) are NOT subject to the FDCPA. There are stiff financial penalties for violating these rules – and, sadly, some property management companies are not aware of these rules, or ignore them, giving our entire industry a bad name.
Payment Plan
We say, “The lease IS the payment plan.” Our recommended policy with collecting past due rent is, “pay as much as you can as soon as you can, and your lease will dictate what happens based on that.” However, in certain cases with certain types of properties, tenants could be given “flex” rent options that allow them to pay late for a pre-determined amounts. * See “Late Fees”
Late Fees
These are fees stated in a lease agreement that specify financial penalties for paying late. There are no statutory limits on late fees in Michigan. However, in our experience, when it comes to evictions, judges look very unfavorably on excessive, arbitrary, or seemingly unclear late fees, or late fees being charged ON late fees.
Due Date
Most leases state that rent is due on the first day of the month. Nonetheless, many urban myths persist that landlords “can’t” charge a late fee until the 5th of the month, or that rent is REALLY not due until the 5th. These myths have arisen because many landlords do not charge a late fee until the 5th day of the month. It is important to reinforce to tenants through repeated communication your actual expectation and practice. It is also important to apply, enforce, and collect late fees EQUALLY to your tenants. Showing favoritism means that you will likely lose a lawsuit for housing discrimination.
Tenant Fines / Fees / Charges
These must be very clearly stated in a lease, and it is a good idea to have tenants initial next to this section of the lease, stating that they have read and understand the terms. Tenants can be charged late fees, of course. But they can also be charged a cleaning fee, for instance, if they left garbage in a common area, or a repair/maintenance fee if they damaged something beyond normal wear and tear. A tenant can also be “fined” or assessed a fee for a specific lease violation, as long as this is clearly stated in the lease.
Lease Violation
A residential or commercial lease should have a section covering lease violations, as well as specific fines and documentation requirements for these violations. For instance, the lease can define examples of lease violations, such as unauthorized occupants or failure to follow trash procedures. It should then state the fines for these, which are typically then applied to the tenant ledger as a debit. Some leases state that “three documented lease violations within X time frame can lead to eviction.” This gives the landlord an option to evict even if an unruly or destructive tenant is current on their rent.
Unauthorized Occupants
Tents must be screened and approved, but sometimes people try to get around this by having a friend or family member “visit” – but NEVER leave. This is an unauthorized occupant. A residential lease should define unauthorized occupants and state the penalties for violation, which can include eviction as well as charging additional rent.
Payment Plan
We say, “The lease IS the payment plan.” Our recommended policy with collecting past due rent is, “pay as much as you can as soon as you can, and your lease will dictate what happens based on that.” However, in certain cases with certain types of properties, tenants could be given “flex” rent options that allow them to pay late for a pre-determined amounts. * See “Late Fees”
Accelerated Rent
This means that, if the rental agreement is breached by the tenant, rental payments may be accelerated by the property manager. For instance, if a tenant abandons the property, they can be charged and will immediately owe all the rent due for the balance of their lease. There are many potential legal guidelines at play here (a landlord can never charge double-rent, or collect rent from two people for the same property, for example), so expert guidance is recommended here!
Vacancy
This means a unit of real estate that is READY to be occupied but is NOT occupied. If a unit is under construction or is not showable, marketable or habitable, it is not vacant. This is important to bear in mind when calculating and reviewing “vacancy rates.”
Multiple Listing Service (MLS)
A multiple listing service (MLS) is a database established by cooperating real estate brokers to provide data about properties for sale. When marketing a property for sale or rent, a broker typically lists it to the “MLS” so that all other area brokers and salespeople can market the listing to their clients. The listing agreement with your real estate broker specifies how long the listing is for, defines the elements needed to constitute a “buyer” (financing, availability, etc)., the commission to be paid to the broker for delivering a qualified buyer or seller, and how that commission will be split. In property management, the commission is typically due once a new lease has been signed. In real estate sales, the commission is typically due at closing.
Tenant Screening & Placement
Industry standard, which we follow, is that a proper screening includes 1) reviewing a current credit report from a major reporting bureau to determine debt to income ratio as well as late or missed payments 2) criminal background check to identify sex or violent offenders 3) collection of supporting documents such as recent pay-stubs, letter of employment, one recent positive landlord reference 4) actually calling or emailing to verify the information presented in supporting documents 5) confirming that verified income is 3X the rent. Fair housing laws must be strictly adhered to regarding discrimination.
Realtor / Broker
In the State of Michigan, a person selling real estate as their main vocation must be licensed as a real estate salesperson. And for a licensed real estate salesperson to work as a property manager, they MUST be working for and under the supervision of, a licensed broker. You should ask your property manager how many of their employees are licensed Realtors or brokers, and for their license numbers, so you can ensure that they are in good standing.
Lease Renewal
This is an opportunity to retain a good tenant and update lease terms such as rent, fees, utility arrangements, etc. When a lease is renewed, the property manager typically receives 25-50% of the first full-month’s rent as commission, since keeping a unit occupied at increased rent benefits the investor.
Leasing Fee/Commission
Most property managers and brokers charge 50-100% of the first full month’s rent of a new lease at a previously vacant unit as their leasing fee or commission. Many brokers also offer services by the hour or for a flat fee. It is important to discuss your expectations with your property manager as far as timelines for filling vacancies, expected rent, marketing costs and activities, and tenant qualifications.
Security Deposit / Damages
Michigan law limits security deposits to 1.5X rent. However, a lease can require that a tenant pay “first, last and deposit,” or some other arrangement. The lease will dictate whether or not the deposit must be paid in advance or in installments. A lease should state that the security deposit CANNOT be used to pay the last month’s rent. The Michigan’s Landlord and Tenant Relationships Act defines a security deposit as any deposit, including any required prepayment of rent, or any other sum required to be paid in excess of the average rent for the term, or any other amount of money returnable to the tenant if the rental unit is returned in the condition provided for in the lease agreement. The security deposit clause in the lease must include the landlord’s name and address as well as the name and address of the bank holding the security deposit and a notice that the tenant MUST notify the landlord/property manager of a forwarding address in writing within 4 days after vacating. There are many more details to this, so your property manager needs to be an EXPERT on security deposit law.
Cleaning Fees
A lease may contain a requirement for a non-refundable cleaning fee, as a way to mitigate turn costs. This is appropriate in many situations.
Eviction
Eviction procedures and norms can vary widely across different states and localities. Pre-covid, in a state like Idaho, a tenant who was one month past due on rent would almost always be evicted and “set out” to the curb within 30 days. Michigan has always tended toward more tenant-friendly eviction laws, and the Covid pandemic ushered in not only eviction MORATORIUMS but also taught an entire new generation of Michigan renters that a) rent is optional and b) eviction takes a year or more. This is a complex topic (look for an upcoming vlog on this from us) and requires both legal and expert real estate broker advice. Investors Consulting Group’s Colleen Kennedy holds a law degree (MSU ‘97) and is a licensed real estate broker.
Pets / Pet Fees / Service Animals
This can be a very hairy issue for property investors! Owners have wide discretion over other limits on pets. Property owners may place reasonable limitations on the number of pets that are allowed in each unit. Owners may limit the number of 4-legged, warm-blooded pets to one per unit or group home. However, tenants may need or claim to need an “reasonable accommodation” requiring a “service animal.” All of this, along with pet fees or pet rents, and should be clearly stated in the lease. Our general recommendation is to be pet-friendly (because enforcement is extremely difficult) and charge reasonable fees for this. More than half the population has a pet, so why limit your potential tenant base?
Accommodation
According to the Department of Housing and Urban Development (HUD), a “reasonable accommodation” is a change, exception, or adjustment to a rule, policy, practice, or service that may be necessary for a person with disabilities. A common example is a tenant who suffers an injury and requests that you install a wheelchair ramp. Many tenants are aware of the concept of accommodation, but most are unaware that in private housing, the tenant will almost always have to pay the COST of making and maintaining changes to a building or property. This is another area where you need really expert, experienced, qualified advisors to guide your policies.
Fair Housing Act
You need to abide by this 100% or find another vocation! Title VIII of the U.S. Civil Rights Act, commonly known as the “Fair Housing Act,” prohibits discrimination in the sale, rental, purchase, leasing, financing and/or advertising of housing based upon race, color, religion, sex (including sexual harassment), national origin, familial status (protects children under the age of 18 living with parent or guardian and pregnant women), and disability. The Fair Housing Act covers most housing. In very limited circumstances, the Act exempts owner-occupied buildings with no more than four units, single-family houses sold or rented by the owner without the use of an agent, and housing operated by religious organizations and private clubs that limit occupancy to members.
Squatters Rights
This is one of the biggest threats to your real estate investments, and it is only going to get MORE challenging as time goes by. The Covid pandemic brought to the fore a new generation of judges and activists, specifically with respect to housing, with much more of a focus on and sympathy toward, squatters rights. If a person manages to physically occupy your property, even without a lease, you will likely have to go through the entire eviction process to remove them. While we aren’t a law firm, we are highly experienced with eviction management from a property management perspective, and have worked closely with leading eviction attorneys in Michigan for years.
Investor Insurance
Landlords absolutely must have the appropriate insurance on their rental properties. This is not the time to hurriedly click through an insurance company website to obtain a policy. Your property or asset manager should be an expert at this and should have relationships with licensed, leading edge, insurance brokers to assist their clients.
Tenant Insurance
We recommend that investors require that tenants have either a renter insurance policy or an insurance WAIVER program that meets YOUR criteria. This will likely save you $10,000s over the next decade. We are highly experienced with this and can provide you with expert guidance.
Contractor/Vendor Insurance
“You paid HOW much to get the toilet fixed? Jeez. I had a guy do it once for $25!”
We’ve heard that many times from clients. However, we only work with or hire licensed AND insured contractors, and we actually verify this and read their insurance policy. Licensed and insured contractors cost more than the handyman in the van! We often insist that they add us as “additionally insured for general liability” on their policy. Why and how? Look for an upcoming vlog on this topic.
Property Manager Insurance
Your property manager, asset manager, and real estate broker should all be adequately insured and should have NO problem sharing their certificate of coverage with you. When they hesitate to do this, it is a major red flag.
Certificate of Occupancy / Rental License
Many (but not all) municipalities have a renal license program, or require a certificate of occupancy, in order for you to legally rent out real estate. This can be an extremely cumbersome process requiring pulling permits, working with licensed and insured contractors, attending and passing multiple inspections, etc. Costs and lost rent can add up FAST. When interviewing asset or property managers, make sure that you ask a few questions out of the blue about how they handle this. Ask them what city they last obtained a rental license or certificate of occupancy in, and ask them to tell you about the process and costs.
Utilities Management & Bill-Backs
This is a complex topic (look for an upcoming vlog covering this) and requires a specific, thoughtful strategy and policy (for each property) that is analyzed and reviewed each year. Should tenants pay all utilities? Some utilities? Should utilities be “free?” Can you charge “utility administration” fees? How does this impact tenant retention or vacancy times? If this isn’t handled thoughtfully and strategically, you will certainly lose hundreds or thousands of dollars every YEAR on every UNIT through inefficiency. We can help!
Portfolio & Tenant Onboarding
When you hire a property or asset manager, they will need to “onboard” your properties, units and tenants into their system or platform. You should ask detailed questions about their onboarding process, and if they don’t have a clearly defined one, you shouldn’t hire them. Onboarding procedures have a HUGE influence on tenant satisfaction, occupancy rates, vacancy times, etc., and all these things eventually translate to delinquency, damages, and evictions.
Disclaimer
The information here is opinion of a general nature and should not be construed or taken as legal advice and is not applicable to any personal circumstance or situation of yours.