The Vetting Process for a Property Manager

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Tom: Hello. My name is Tom Olson and I’m the host of today’s REI Classroom. Today, I’m going to talk to you about screening a property manager.

Mike: This show was sponsored by PassiveRental.com.

Tom: In my business, I cover five different states and we set up turnkey shops and we buy rentals and I’m sure you’re going to want to buy rentals too in maybe different states or different areas from where you live. But I always want to ask some questions to the property manager. And again, it’s about upfront expectations, wanting to know a little bit about the person to have that personal relationship, but also kind of just understanding what you’re getting when you’re actually paying your money for the property manager.

Plus, in my opinion, a property management position in your portfolio is probably the most important. I would rather you not get the best deal when you buy the property and have a great property manager than get an awesome deal and have a horrible property manager. I promise you the property manager is the key to you making long-term money in your rental portfolio.

So the first question I ask them . . . and I just sat down with a property manager last week and asked them these exact questions. I actually talked to other property managers to actually get these questions. So it was a really good exercise for me and I think it’ll help you today. So the first question I ask them is their name. That’s a good question you want to ask anybody.

I’m asking them this question just to let them talk about their self a little bit and I also ask them their company name. I want to know what kind of thought they put into their company name. Just let them talk and just so you kind of know what you’re going to get as far as the type of person they are, whether they’re an introvert, an extrovert, etc.

So the next question I ask is, “How many doors do you have under management?” This will tell a lot about the person. This particular property manager, she’s an awesome realtor, but she only had 13 doors under management. She might have great systems. And when I found out later by talking to her, she was excellent and I think she’ll be an excellent property manager. But that is something that is a key factor. She also hired somebody and that person was actually there with me that actually managed 1500.

So she was really smart. She knew she didn’t know what she was doing and she hired somebody else that knew what she was doing and she brought them in-house. So I thought that was really good. So she only had 13, but if she wouldn’t have done that. I might have been a little skeptical about how many doors.

Typically, what I’m looking for when I’m vetting a property manager is I want somebody that has at least 100. I’m not going to say that’s a dead fast rule, but I’ll tell you why I like the 100 number. To me, it’s about knowing that they have systems in place to be able to communicate, to be able to make management decisions quickly, to be able to make maintenance decisions quickly, to be able to evict and all that kind of stuff. And if they have more under management, typically, they have those systems in place or they wouldn’t have gotten there. So that’s the first questions I ask is how many doors they have under management.

The next question is how many properties. Now, this kind of goes into the next question after that, is are they single-family or multi-unit? So you might have one property manager that only has two properties that he’s managing, but he’s got 100 units. So maybe there’s a 50-unit building that he manages apartment complexes. So you kind of need to know that about them. Are they used to managing single-family residences or are they used to managing multi units? And there’s a completely different style for both of those. I think they’re both good. I’m not saying that one can’t do the other, but you need to know upfront what they’re used to doing.

How many people do they have on staff? That’s the next question I have. And then that’s for obvious reasons. What are their staff’s responsibilities? So if they have five people on staff, you kind of want to know who you’re going to talk to when it comes to a billing issue, who you’re going to talk to when it comes to a tenant screening or an eviction process. So I just want to know that upfront. And then, to me, it also helps me understand, does this person have a good business mind? Has he already clearly defined different roles in his company?

“What are your tenant screening procedures?” would be my next question. What are your tenant placement procedures? Again, these are a little bit different. The screening just tells me if this person qualifies for the property or not. The next question, tenant placement procedures, is what do you cover in your new tenant interview.

So when you interview with somebody, do they even have a tenant interview where they’re saying, “Okay. I’m going to give you this house, but I want to let you know upfront, this is my expectation of you and this is my expectation of me, the property manager. This is your job. If the roof leaks or something, I need you to tell me”? So things like that need to be upfront.

And then questions like, “How does a tenant request maintenance?” Systems like that that are in place that you have to have in order to be a good property manager kind of all go along with that. The next question I ask is, “What are your rent collection procedures?” You need to kind of know that. It’s just good to know, as an owner, how your manager is collecting rent. Are they going out door to door or are they all-electronic or do they have to be there in the mail by this date? Just helps you to get to know them a little bit.

“What are your delinquent tenant procedures?” This particular person I talked to, if they’re not paid by the third, and I think it’s due late by the fifth, if they’re not due by the third, they actually have a process that they’re actually calling them and they have that personal touch with the people and saying, “Hey, you’re late. I don’t want you to be late. I want to make sure that you’re on time.” So just all these extra little things can help you choose whether you do or don’t want a property manager. So, “What are your delinquent tenant procedures?”

The next question I have is, “Do you ever have a workup plan with people?” For me, I do a lot of rent-to-owns and I really believe in that payment plan or some workout plan. It’s much cheaper to let somebody catch up than it is to turn over. Turnover is the biggest thing that will hurt you in rental properties. But you need to ask them if they have that kind of plan up front.

“What is your eviction procedure? Do you ever offer cash for keys?” I do this quite a bit. I would much rather pay somebody $500 to be out by Friday than go pay the judge $500 and have them be out in two weeks. Again, just something you want to know up front. In my state of Indiana, I can get people out in 15 days. So I do have a leg there, but in other states, you may really want to use that cash for keys program.

“How long does it take, from start to finish, to evict somebody?” That’s something you want to know. Again, different states are going to be really different and even different counties. I’ll tell you in Cook County, Illinois, it can take up to six to nine months to get rid of somebody and you need to know that upfront for the area that you’re buying and the property manager that they know that as well.

“What fees do you have?” Obviously, this is the question everybody wants to have first. I like to keep this in the middle. When talking about money, you want to be a little gentle about that. But this particular property manager had three different programs. They had a 6%, 8% and 10% program. I thought it was pretty thought out. It was really good.

It was kind of like the 6% was the Geo Metro and the 10% was the Cadillac and the 8% was the Impala. I thought it was really good and well thought out there. And fees are not just management, but placement fees when they turn over a tenant. Maintenance, are they charging you in addition to the contract? Most property managers do because they’ve got to manage that process, but you need to know what that is up front.

And then, are there other fees? Screening of houses, etc. So what other fees do they have? Marketing fees, anything else like that, you want to know that upfront in this conversation.

“What are your maintenance procedures? How do you get people out there quickly and effectively and efficiently to be able to take care of maintenance issues? How do you do your owner distributions?” This is very important in making sure they have a system to distribute the money back to their owner. Some property managers take all the money and they’ll actually pay your mortgage for you, they’ll actually pay all your bills and then they’ll just give you the rest. Some people pay you everything and they expect you to pay all the bills. Some people give you the $1200 check and expect you to pay the manager a percent fee back to them. So this is something you really want to know upfront. I’m not going to tell you that there’s any wrong way here. It’s just something you want to know.

“Do you have an example of what that looks like?” That’s my next question. “And how often do you send these?” So those distributions. And also, reports. You’re also asking, “Do you give monthly reports, quarterly reports or yearly reports?”

“What decisions do you make without the owner’s consent?” I think this is a very important thing here. You do not want a property manager to just be able to make any decision. It doesn’t matter how much the cost is without your consent. Typically, from what I’ve seen, most property managers want to have a $300-$500 thing there where they can make these decisions up to this without even consulting with the property manager. But I just want to let you know, you’re going to want to know that upfront when you’re vetting somebody.

“How long does it typically take to get a tenant placed?” This is another great question. And you want to know, again, if they’ve got good systems and that helps you know their market as well.

“How long does it normally take to turn over a place when somebody moves out?” So again, do they have systems on getting the place back up into shape and get carpets cleaned and maybe touch up paint or any little things that might need to get done. Sometimes, I’ve seen property managers take two months to turn over and that’s just not good. You want somebody that can be able to get in there and get the place ready to go within a couple of weeks and get this place rented within a couple of weeks. So more than one months is, to me, in the red. I’d like to see one to two months, for sure, of this place being rented. That’s where you’re going to lose money, I promise you, when you own rentals.

“How long is it usually take to turn over a place? What kind of move-in procedures do you have?” Kind of those back to the question I had before, but move-in and move-out procedures. I typically like to see a property manager that has a checklist and lets the tenant fill out the checklist of, “These things are in good shape. These things may be lacking.” Maybe a little, tiny hole in the carpet or maybe there’s something else like that that you want to make sure is on a checklist upfront. And then, when they move out, the same type of deal. Do you do a walkthrough with them when they move out?

The next question I want to ask is, “What areas do you manage? Counties, cities, etc.?” Because, obviously, if you’re buying properties, you need to know how far they’ll go out. I’ve got a property manager that will cover 10 or 12 counties in Indiana and that’s awesome for me. But your property manager may not be willing to do that. The one I just talked to was only willing to do one or two counties. So again, it’s just something you want to know.

“How long have you been in business?” Now, I’m kind of reeling it all back in here. So back to the top. You want to know, does this person really know what they’re doing or not? I think that’s a good question to ask.

And then, finally, “How long do you plan on staying in business?” In my opinion, this is a very important question because you need to know, is this person going to stick with you for the next 10, 20 years? Or is this person at the end of their life cycle in this business? Property managers come and go and you don’t want somebody to just leave you high and dry there. So please, ask that question. I think that’s something that I hear from investors all the time and they’re very concerned that I’m not going to stay with them in this whole process down the road long-term. I think that the property manager should be asked that question as well.

And then, again, I would wrap this whole thing up with, “If I were to choose you as my property manager, this is what I would expect.” So going through your questions, I like this, I don’t like this. And kind of tell them what you think about them. And kind of set that tone up front just to let them know, “This is what I think. This is how I would like for my properties to be run. Do you think you could handle that? Do you think you can make that happen?”

So thank you so much. Thank you for joining us today in the REI Classroom. This is Tom Olson. I’ll see you next time.

Mike: PassiveRental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit PassiveRental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting PassiveRental.com.

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