Is Your PM Focused on Managing or Selling Houses?

 

If the choice comes down to taking care of an existing property, or selling you a new one, what is your PM’s priority?

A $100 bill cut into dozens of pieces.There are a lot of property managers out there that also sell properties to investors. The question is, how good of a property manager are they if they’re trying to do both?

 

Worst Case Scenario

This is why it’s an important question: we recently gained a client who came to us from a disreputable company selling “turn-key performing” properties. The client had purchased several properties from this company with the assurance that the properties were great deals, with performing tenants and the broker would also continue to manage them. It was a deal too good to be true…and it was!

 

The truth behind the situation is that the company was purchasing weak properties, giving them the absolute minimal renovation needed to be livable and look decent in a few marketing photos, placing the first tenant that they could find (questionable screening, if any), and then calling it a “performing asset.”  Of course, once the investor had purchased the properties, the tenants would suddenly stop paying or abandon the property. The company would make up an excuse to “fire” the investor and that’s when we were contacted and got involved. Unfortunately, we had to break the bad news to the investor that they way over-paid for their properties (we showed them public records of what the company had paid for them), the repairs they were told had been made were nonexistent or crappy, and the remaining tenants wanted a laundry list of repairs before they’d pay rent – if ever.

 

Not As Bad…But Still Bad

A friendly competitor of ours in a nearby city told us a similar story about a client they were helping out of a bad situation. Another one of these ‘total-package’ brokers sold their client 14 properties over a few months and as part of the deal claimed they would manage them as well. After several months of sporadic payments with no supporting paperwork, the investor finally hired our friendly competitor to take over the management. The new PM found that none of the homes had the required rental registrations, and in fact half didn’t have the required Certificates of Occupancy (CofO)! The investor received several $500 tickets from the city for allowing tenant occupancy without the CofO before the new PM could act. They were able to get the rest of the properties registered and inspected to avoid additional tickets, but the list of repairs the city wants on each property is lengthy and will be expensive to meet.

 

Stunning us most, the broker had this client so convinced that the properties were amazing that they waded through five months of ridiculously inattentive and improper management because they were afraid that if they switched PMs, the broker wouldn’t be willing to sell them any more properties! This kind of practice isn’t commonplace, but let’s be honest: if a deal looks significantly better than the rest of the market and there are no visible downsides, there’s a very good chance it’s because the downsides are invisible…and enormous.

 

 

So what was really going on in both of these situations?

 

In both the above scenarios, the shysters were really making their money off the sale of the properties and were only offering the property management to close those deals. They milked a few months of  PM charges for extra cash out of the investors and when they were fired, they laughed all the way to the next new sucker in line.

 

Avoiding this Scenario

The easiest way to sidestep this colossal crapfest is to get unrelated third parties involved to protect you – other real estate brokers, property inspectors and of course, a good PM.

 

Have them screen your deals thoroughly. If the people selling the properties object – then they probably have good reason NOT to want you to look too closely. Yes, of course there are truly great deals out there where you have to act fast to get them, but unless you’re a VERY experienced investor, can you really afford to take risks on them?

 

You want to be especially leery of companies that both manage AND sell rental properties. The conflict of interest potential is huge. We only know of a few competitors that are doing this ethically, but ran out of fingers and toes counting the companies that are scammers!

Posted in: 1. Property Owner Blog Posts, Hiring Property Manager

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