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.
- What is a Property Management Agreement?
- Property Management Agreement Example
- What to Include in a Property Management Agreement
- When Do You Need a Property Management Agreement?
- Types of Property Management Agreements
- Benefits of Using a Property Management Company
- Hiring a Property Manager
- Hiring a Property Management Company
- How to Write a Property Management Agreement
- Property Management Agreement Sample
What is a Property Management Agreement?
Property management services consist of renting to tenants, collecting rent, filing property taxes, complying with local, state, and federal landlord-tenant laws, and maintaining the rental property.
You may need a property manager — an individual or company — to maintain and run your properties.
A property management agreement will help you establish the terms of the relationship between you and the person or company taking charge of your management duties.
A property management contract helps make all property owner and management company responsibilities clear since not all property managers perform the same services.
For instance, some management companies take responsibility for marketing rental properties and drafting rental agreements. Others leave that duty solely to the owners.
A good contract should reflect precisely what duties the management company will provide throughout the agreement.
For example, a well-drafted property management agreement will include a clause about the kinds of insurance coverage the building owner will carry for the building.
Property owners and management companies must be clear on what the contract covers.
Property Management Agreement Example
The example property management agreement below details an agreement between the owner, ‘Dallas S Phillips’, and the agent, ‘Donald M Sammons.’
Dallas S Phillips appoints Donald M Sammons to provide building management services to his property.
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.
The following are fundamental aspects to include in a property management agreement:
The services section of your contract with a property manager or company discusses all services included in the agreement.
For example, the property management company may agree to run credit checks on renters, fill vacancies, maintain hallways and landscaping, provide timely repairs, collect rent payments, and complete other tasks.
This contract area explains what the management company’s responsibilities are. All duties fall under the fees agreed to within the contract.
Services Not Covered
Often, a property management services contract documents services not covered, such as making significant repairs to the building.
The fees section discusses the cost of services covered under the contract. Fees may differ depending on the area.
In some instances, property managers may charge a flat fee per month. Some property managers or companies charge a percentage of total rental income each month, typically up to 12%, but you could see this fee for as little as 4%.
When researching fees against the current market, property owners should pay attention to the services the management company covers – higher fees sometimes indicate more complete services.
Good contracts should also explain the cost of additional services.
There may also be a section for extra fees related to any duties an owner wishes the property manager or company to take on, such as additional responsibilities not in a standard contract.
Responsibilities & Limitations
Property Owner Responsibilities
The service section (see above) includes the responsibilities the management company will complete. There should also be a section discussing the duties of the owner. This contract area often consists of a clause stating the type of insurance the property owner needs to carry.
Fund allocation is another topic in this section (a stipulation that the property owner maintains a fund available to the management company to cover repairs and emergencies in the building.
This would also explain the protocol for using funds and accounting/purchasing).
Property Owner Limitations
Many agreements also include a section that governs what a property owner cannot do.
For instance, most contracts will include a clause stipulating that the owner cannot place tenants in the building because those residents might not adhere to the management company’s guidelines.
There may be limitations so that the management company can handle all aspects of the day-to-day running of the building.
Length of Contract
A standard contract is often one year. Even in cases where the partnership lasts many years, property owners and property managers must review their agreements annually to ensure all critical issues are still relevant.
Standard fees may increase over time and either party may want to consider new services.
There should always be a termination clause in your contract. This clause protects both parties if the relationship is not mutually beneficial. It is essential to study this clause before entering into the contract.
There may be fees for early termination of the contract.
There will also be a set time of notice for termination. Either party can inform the other in advance of an intent to sever the relationship.
The contract might specify a 30-day notice for termination, but the notice could be different. Some contracts include specific requirements that a party needs to meet to terminate.
You should always carefully review the fees associated with the termination clause.
Liability & Compliance
The liability and indemnification section covers legal liability related to a property.
This clause should stipulate the management company’s liability when dealing with an injury or personal claims against the building.
In cases where the management company was aware of a hazard and did not act to fix it, they might be found liable.
This contract section stipulates which entity is liable in each situation dealing with the property.
It also includes clauses about liability, should tenants break their lease and cause financial distress to the building owner.
There are often legal compliance issues in renting property to residents and commercial enterprises.
This section of the agreement determines the property management company’s responsibility as related to compliance.
In this section, you will find the vocabulary about equal opportunity housing and may discuss specific local codes and laws.
Funding / Advances
Property management contracts often have a section discussing the owner’s responsibility for funding the day-to-day running of the real estate investment and any emergencies that may come up.
This section might also include a section on advances.
Property management companies sometimes advance money to cover building costs at the owner’s behest.
In that case, fees may be associated with the repayment of funds and a timeline noting when the landlord must return full payment to the management company.
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.
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 real estate type, 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. A fundamental part of this agreement is insurance.
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.
Benefits of Using a Property Management Company
A good property management agreement lays out the responsibilities for renting and managing real estate per local regulations related to the property and tenants.
It is possible to enter into a verbal agreement for a partnership with a property manager. Oral contracts can be enforceable by law but are challenging to prove without any written record.
It is always better to have a clear and concise written agreement.
Whether you own property or are considering becoming a property manager, you need a well-written property management agreement.
The following are the benefits of using a property management agreement:
- Clearly outlines the property manager’s duties and responsibilities
- Lays out the reasons for when the property manager or owner can terminate the agreement and the notice and method of termination
- Addresses questions that might arise from liability issues, such as personal injury on the premises
A property management agreement is essential to protect you from liability. It also provides a structure for a beneficial partnership between the owner and the property manager management company.
Hiring a Property Manager
A property manager can either be an individual or a company. Before you hire an individual, you should know if the manager has a license.
Most states require property managers to have a real estate broker license or a property management license.
Hiring a Property Management Company
If you have several properties in various states or have high-value properties, hiring a property management company may be more efficient than hiring an individual property manager.
Before you hire a property management company, research their practices and standard property management forms.
Some companies’ approaches regarding insurance and other details are more strict than others, an example of something to look out for.
Some take the responsibility of advertising the property and negotiating the deals for its lease.
How to Write a Property Management Agreement
Before you fill out your property management agreement, write your state at the top of the form.
Step 1 – Write Effective Date
1. Date of Agreement. Provide the effective date of the property management agreement.
Step 2 – Fill in Owner and Agent Details
2. Owner. Write the property owner’s full name
3. Agent. Write the agent or property manager’s full name. This is the person responsible for renting and maintaining the property.
Step 3 – Enter the Property Address
4. Street Address. Fill in the street (physical) address of the property being managed. Include any unit or apartment number, if applicable.
Step 4 – Identify the Term
5. Term Length. Provide the term or length of the agreement. Write the start and end dates for when the agent will be responsible for the property.
Step 5 – Confirm Agent Responsibilities
6. Monthly Accounting. Specify the day of the month (i.e., the 1st day of the current month). The agent needs to send a monthly accounting to the owner.
7. Approval for Improvements or Repairs. State whether or not the agent needs the owner’s approval for improvements, maintenance, repairs, or decoration costs. If yes, specify the minimum amount of money that requires the owner’s approval.
Step 6 – Fill In Compensation Details
8. Percentage of Full Month of Rent. State whether or not the owner will pay the agent a percentage of the first full month of rent for acquiring a tenant as part of the agent’s compensation. If yes, specify the percentage.
9. Percentage of Collected Rents and Fees. State whether or not the owner will pay the agent a percentage of the collected rents and fees as part of the agent’s compensation. If yes, specify the percentage.
10. Monthly Management Fee. State whether or not the owner will pay the agent a monthly management fee as part of the agent’s compensation. If yes, specify the monthly amount.
11. Other Payments. State whether or not the owner will pay the agent for any other reasons as part of the agent’s compensation. If yes, specify the purpose and the amount (on a monthly basis).
Step 7 – Explain When Parties May Terminate the Agreement
12. Number of Days to Terminate. Specify the days in which the agent must rent the property (calculated from the date the owner and agent sign the agreement) before the owner may declare the agreement void.
Step 8 – Identify the Governing Law
13. State Law. Choose the state’s laws that will govern the construction of the property management agreement.
14. Dispute Resolution. Provide the county and state where the parties will resolve any disputes.
Property Management Agreement Sample
Below you can find what a Property Management Agreement typically looks like: