5 Property Management Tests for Commercial Property Owners and Asset Managers

Owners & Asset Managers

With current depressed real estate values and rents, capable property management is more important than it has ever been. It is the main contributor to value in stagnant real estate markets, because while there are prospects for rent growth on the horizon, rent increases could be two to five years off – depending on the market. Management focuses on conserving and building value NOW.

Most commercial real estate owners outsource the property management functions to a general brokerage firm that offers property management services or to a specialized property management company. Unfortunately, selection of the property management firm is often made with very little due diligence on the qualifications of a firm, the person who will actually be doing the managing, and the knowledge of the specific market where properties reside. Picture standing on a busy sidewalk and handing a stranger a suitcase stuffed with cash. In essence, that is the same as selecting a manager without due diligence, because you are handing the equity in the property to a mere passerby for care and custody.

How do you measure the job a management company is doing? This article attempts to help you figure that out, because it makes even less sense to settle for poor service from a sub-par management company then it does to blame all properties’ problems on th e management company.

Below are five tell-tale tests to check the performance level of your management (if your management service is in-house, this test can also apply).

Test #1 Few, if any, ideas for improvement come from the property manager for ways to improve the physical property or the leasing situation.

You hired a caretaker, not a manager. Managers understand the word “proactive”.

Test #2 Property management reports are irregular and hard to decipher.

There is no excuse for this and the situation is easy to fix. Have an Excel spreadsheet designed to supply only the information you want, or select one of several comprehensive and off the shelf software programs available. Examples of the latter are the MRI, Yardi, Quicken or Property Solutions software programs.

I prefer real-time, online file-sharing between the owner or asset manager and the property manager. This setup does double duty – you can access the information anytime you need it for a lender, partners, upper management, etc. Plus, real-time reporting will insure that the property manager won’t wait until the day before a property report is due to actually do something related to your real estate. A simple, inexpensive service like Go to My PC can set up a multiple user system and share management reports.

Test #3 The person you’d hired to manage the property seems to have disappeared and someone else is managing the asset.

You have experienced “bait and switch”, a situation where the well-rounded resume of an experienced manager lands the business for the firm but then it is it goes to an underling or trainee for handling. This happens in both very large national firms and in small local management firms. Protect yourself by putting a “Key Man” clause in the agreement that gives you an ‘out’ if the person you thought you’d hired isn’t actually on the job, or quits.

Test #4 The management firm location is some distance from the managed property and you are not certain how often the property is physically visited by a property manager.

Nothing, absolutely nothing, takes the place of property site visits. A property manager’s responsibility includes ongoing routine contact with tenants. That way, when lease renewal time comes up, there is no unnecessary re-negotiation or delay. Personally, I prefer hiring property managers who live and work in the same market as the property over a big- name firm in a nearby city. If there is not a qualified property manager in the local market and you must use someone in a nearby city, be very specific about requiring periodic on-site visits and what you want to know after each visit. Your manager needs to talk to the tenants face to face before problems arise, and emails, tweets or phone calls are no substitutes!

Test #5 You receive regular reports about the property, but no information about the real estate market where the property sits.

Your manager is doing half the job. To make educated decisions about assets, an owner or asset manager must understand how their property compares to others in the market and what factors are impacting the local scene. A market condition report is not a canned demographic service report from a subscription service – it is a first- hand, feet on the street report analysis.

A good property manager is invaluable and should receive incentives for peak performance. If the above tests indicate that your current management doesn’t measure up, it is time to have a heart-to-heart discussion. Incorporate the above requirements in to the management agreement. That way, if there is no improvement, you are free to look for other options among the competitive firms vying for business.

Finally, as property management services are not always licensed or regulated by

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Getting The Most From Your Investment: GO Zone Property Management Options

INTRODUCTION

In Part 1 of this series, we went over some of the basics for getting a tenant into your newly purchased GO Zone property. In this article, we will go into more details on the options you have for getting that tenant and, more importantly, starting that cash flow as soon as possible.

As you may remember, there is a lot involved with getting to that first rent check. All the marketing, potential tenant due diligence, and then management of the tenant after they get into the property can be very taxing on an individual.

RENTING FROM LONG DISTANCE

All the previous discussions are further complicated depending on how far you live from the property. Take it from me, trying to do all the lease-up work and property management yourself from a long distance is an all consuming task; one which I do not recommend to anyone who has other obligations (i.e. a life). More on this shortly.

PROFESSIONAL PROPERTY MANAGERS

Enter the professional Property Manager. Typically, a property manager gets paid for both the lease up of a property, and also on the management of the tenant once in the property. During the lease up, property managers spend very real dollars advertising the property and thus they typically can command a lease up fee. In many locations (both inside and outside of the GO Zone), this typically equates to a charge of 1/2 of the first month’s rent.

In addition, a management fee is also received by the property manager on a monthly basis and is a percentage of the monthly rent amount. For long term leases, this averages in the 10-12% range. Note that the actual management fee can vary widely depending upon the area where the property is located, the type of property, etc.

OPTION 1: DOING IT YOURSELF

If you are like the overwhelming majority of GO Zone investors, you most likely do not live near your GO Zone property. In this situation, as a property owner and a real estate investor you need to think hard about taking on the property management task yourself.

With the Internet, you may be tempted to do some of the marketing on your own. However, there still is the need for the local presence on the ground for showing the property to potential tenants, getting contracts and agreements in hands, reviewed and executed, and for knocking on the door when rent is late.

In addition, if you are new to real estate investing and new to rental properties, it is probably not a good idea to try this on your own from a distance. It is usually recommended that you try your hand at self property management in your own back yard first before even considering the task of doing this long distance.

OPTION 2: COMBO PLATTER 1

Here is the case where you would pay someone else to lease up your property, and then you manage the property yourself. For this, you may get a property manager, licensed professional or other lease-up specialist to go out and market your property, find a tenant, do the tenant screening, etc.

Unfortunately, not many professionals, rental managers, etc., want to do all this work and only get some of the front end funds. IF you can find someone to take on this portion of the front end business, you should really also consider the additional lease up time that may be required; especially if they are managing other similar properties where they also get a portion of the monthly rent that comes in.

The only time that this situation works well for all parties is if you know of a real estate professional (or other person) that already knows of a tenant and does not have an available property to put them in.

OPTION 3: COMBO PLATTER 2

In this case, you try your hand at doing the front end marketing and obtaining the tenant yourself. Similar to the above situation, You figure that you may be able to save on some front end marketing costs (i.e. 1/2 of the first month’s rent as the front end cost) if you can do it on your own.

However as previously mentioned, you not only need the local presence on the ground for the showing of the property and getting the tenant into contract, but there is still something to be said about meeting the (potential) tenant face to face as part of the screening and having someone who is geared up to do this on a day in and day out basis do this for you. The old expression of “Penny-Wise, Pound-Foolish” comes into play here.

OPTION 4: PAYING SOMEONE ELSE

As implied by the above, this is where you let someone else completely to the front end work, get the tenant into your property, and completely manage the tenant and the property for you. As someone who is and out of state real estate investor, this is the most common path you will likely go down.

From the GO Zone property point of view, you do want to have your hands in the pot some to make sure that you are involved in the management process. This may be as simple as working closely with your property manager on screening criteria, final approval of tenants (if outside of your normal criteria for screening), etc. Make sure, however, that you are very responsive in this situation as time is critical with getting someone into a property.

When you hire someone else to completely manage your property for you, you are typically signing an agreement with them (usually for at least 12-months) that spells out all the terms, fee schedule, services offered, payment/rent collection and the transfer of funds to you (after expenses, etc.).

OPTION 5: LEASEBACK WITH BUILDER (SEE NOTE)

Remember that this article series is about getting your GO Zone property rented as soon as possible and getting cash flowing into your pockets quickly. While this option is not really a property management solution in the traditional sense, it definitely solves the issue of rent-up times.

I will point out again (as I did in the first part of this series), that you should not run out and start getting properties that are offering lease back just on that merit alone. Remember that as an investor, the property still needs to stand on its own and “make sense” before a leaseback offer is even thrown on the table.

Some property owners and builders may throw a long-term leaseback into the deal to sweeten things up and make the overall sale attractive. You need to ask yourself, how will the property rent out without the leaseback? Is this a situation where a developer may have excess inventory on hand and is offering a leaseback on everything to make the sale (and adding it to the pricing as well)? So as an example, condos on the beach in the Mississippi Gulf Coast. Without the leaseback these do not seem like a very sound investment based on the strong competition from the casinos for short term rentals and given the fact that the Mississippi Gulf Coast is really not a hot beach destination. In this case a leaseback does not make sense.

In the case where a builder of single family homes has 1 or 2 model homes that they would like to build, use as a model home, and would also like to keep that off their builder’s line, then offering a 12-month (with additional options typically) leaseback while building out that phase of the community makes perfect sense. Here you would only need to convince yourself that the community is where you would like to invest in.

Advantages of this option, other than the obvious cash flow from day 1, is that you do not have to spend any funds on marketing fees or even on property management fees since you are dealing with the builder directly.

Another advantage of this option is that if your tenant (i.e. the builder) is

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