A Property Management Agreement is a binding contract between a property owner and the property manager (agent) hired to manage the piece of real estate.
This contract covers all the responsibilities the property management company or person takes for the owner.
Good property management agreements do more than explain the responsibilities each party will maintain. They also cover legal liabilities.
IMPORTANT
Often, property managers and property owners have a verbal conversation about duties and responsibilities, but a property management agreement supersedes anything that was agreed to verbally.
What to Include in a Property Management Agreement
A property management agreement is a legally binding document that outlines the responsibilities of the property manager, including, but not limited to:
- Marketing rental properties
- Screening prospective tenants (rental applications, rental fees, and background checks, including credit and criminal)
- Handling rental and lease agreements
- Property maintenance and repairs in rental units and common areas
- Exterior and lawn care
- Responding to tenant concerns and complaints
- Paying property bills
- Collecting rent payments
- When necessary, evicting tenants
It is essential to put these responsibilities in writing to have legal recourse if necessary.
Each agreement with a property manager or company should include customized language and clauses to fit the two parties involved and the property.
For instance, an agreement for commercial real estate with multiple businesses needs specific considerations for the companies located in the building. A residential property might have different considerations.
Commercial property management agreements state that the owner of the building must purchase Commercial General Liability Insurance.
It is also a standard practice that the property manager is an additional insured under the owner’s CGL policy for commercial real estate.
When Do You Need a Property Management Agreement?
Since hiring a third party to manage your properties cuts into your rental revenue, consider if doing so makes sense for your particular situation.
However, the benefits of hiring a property manager might outweigh the cost in these scenarios.
Owning Multiple Rental Properties
If you’ve accumulated so many properties that you can’t stay current with their upkeep, it is time to consider hiring a property manager to take over for you.
For most landlords, more than three to five properties are too much to handle alone.
Living Far Away From Your Rentals
It is challenging to respond to emergency maintenance calls, keep tabs on the condition of your property, or screen tenants when you live miles away from your investment properties.
If this is the case, hiring someone local to oversee operations and address concerns immediately makes sense.
Limited Time
Working another job, traveling, or caring for your home and family members can leave you strapped for time.
If your other responsibilities prohibit you from being able to efficiently manage your properties yourself, hire a property manager.
Lack of Enjoyment or Necessary Skills
Owning investment properties does not necessarily mean that you enjoy the tasks that come with maintaining your rentals or that you have the necessary skills required to do so.
If you would rather leave the emergency plumbing issues to someone else, consider property management.
Owning Affordable Housing Properties
Suppose your property qualifies under an affordable housing program. In that case, there are many rules and guidelines that you will need to follow to stay in compliance and continue to receive financial subsidies.
A professional property management company will be well-versed in the parameters you must follow to maintain status in the program.
It Makes Financial Sense
If you can afford to hire a property management company while still enjoying some revenue from your investment properties, consider doing so.
If you decide that property management is the best route for your situation, you will need to learn more about what to include in a property management agreement.
Types of Property Management Agreements
The type of property management agreement you need depends on the type of real estate you own, your preferences as the property owner, and the services the manager will provide.
Here are some property management agreements:
Residential Property Management Agreement
A property management agreement for residential properties should include details regarding rent, collecting rent, and making remittances to the owner.
It could also include liability clauses to allocate responsibility to either party in certain circumstances.
Commercial Property Management Agreement
This agreement applies to managing commercial properties, such as hotels, malls, restaurants, and office spaces.
The agreement should include the types of businesses the landlord allows on the property and who is responsible for repairs and maintenance.
Standard practice is for the agreement to state that the owner must purchase commercial general liability insurance and add the property manager as an additional insured.
Industrial Property Management Agreement
This agreement applies to the real estate management used for manufacturing processes and storage.
For example, an industrial property management agreement would include spaces leased to automotive plants and warehouses. Insurance is a fundamental part of this agreement.
The agreement should also specify who is responsible for any damages to the fixed structures.
Special-Purpose Property Management Agreement
This agreement manages structures that do not fall into the other categories. Examples include resorts, sports arenas, and schools.
An agreement in this category might include provisions that specify the party responsible for paying advertising costs related to the properties.