Property Management: Flat-Fee vs Percentage
In the property management business, there are two common fees the investment-minded landlord should be aware of. One is a monthly management fee and the other is a tenant placement fee, sometimes also referred to as a leasing fee or simply placement fee. For the most part, the majority of companies apply a percentage method to these fees, but at Management 1 Tri-Cities, we opt for flat fees. In this article, I’ll discuss some advantages and disadvantages of both and hopefully you’ll agree that our method is the more attractive one.
What is a Management Fee?
A Management Fee is the monthly fee your property manager charges for the service of property management. As many companies are “full service”, the management fee usually pays for such similar things as monthly accounting and reporting, receiving and depositing of rents, owner payments, handling of routine property repairs, ongoing dealings with the tenant(s), and regular communication with the owner. This model is slightly different than the discount real estate brokerage model that refers to listing and sales of real estate such as 1 Percent Lists.
In the Tri-Cities WA area of Pasco, Richland, and Kennewick, most (if not all) of our competitors operate on a Percentage based system, charging a management fee equal to between 8 to 10 percent of the monthly rental income.
As an example, for a house renting for $1500 per month, the percentage-based fee will range between $120 and $150 – more for a higher priced home and less for a lower priced home. At M1TC, we charge a “Flat Fee” of $99 per month per residence, the same cost for each and every property we manage (except for commercial properties, which you’ll find in a separate, upcoming blog article).
What is a Placement Fee?
A Placement Fee is what your manager charges for the service of advertising, tenant screening, and leasing of the property. Generally a placement fee is charged for each new signed lease upon a property, but not for renewals in the event your tenant stays in the home past the initial lease term. Nearly all Tri-Cities property management companies charge a placement fee equal to one-half (50%) of one month’s rent. So if your home rents for $1500 per month, the placement fee would be $750.00. At M1TC, we charge a flat-fee placement fee of $500 per lease.
Which is better?
The answer to this question depends entirely which side of the “bill” you’re on. If you’re the owner of the property, the lower cost flat-fee may be better for you. If you’re the property management company, obviously they prefer the higher priced percentage fee. I’ve always felt that percentages were unfair and potentially confusing, so as the business owner, I prefer flat fees for over percentages for a variety of reasons, including some for my company and others for my clients.
Why Flat Fee?
Flat fees are more fair to each owner. They are simple to understand, with no confusion. If you meet with a property manager who charges percentage fees, he or she may give you a price estimate on how much your home will rent for, but if that price changes, your fee will change. It also opens the door to motivation for the property manager to over-promise a higher rent price in order to justify their higher fees.
Since rents are determined by the market, your property manager is only giving you his or her “best guess” when giving you a rent price quote. Furthermore, when a home-owner does not have a clear understanding of what the cost of management is going to be, it makes it difficult to predict and prepare their budget. To go a step further, I have always held the belief that percentages create a bias for the property manager to work harder for a higher priced home than for a lower priced one.
If a property manager has two homes for rent and one is priced twice as much as the other, for a percentage based company, simple economics suggest the manager has a greater financial incentive to work harder on the higher priced property to earn the higher fees. For the homeowner, I believe it is important to know their property manager is working just as hard on their property as the manager would for each and every other home they have for rent. After all, the work associated with getting a home rented is pretty much the same from one to another. Why, then, should your property manager be financially incentivized to profit more on one property than he or she does on another?
Well, I think the answer lies somewhere in the company’s desire for profits… but profits aren’t everything. Having satisfied customers who all feel like they’re getting fair and equal treatment is just as, if not more, important than profits. If done right, a flat-fee company can be just as profitable as a percentage-based one, particularly if they operate efficiently and effectively.
Is “cheaper” always better?
Well, obviously no. But when a business operates more efficiently, using techniques designed to maximize returns and minimize wasteful effort, being less expensive doesn’t translate to a compromise on quality or service. We at M1TC operate more efficiently than our competitors do. We don’t use outdated, obsolete, or expensive tools, or inefficient and wasteful methods of advertising such as running newspaper or other print ads that no longer justify their high price.
We don’t run newspaper ads. We don’t need expensive “vanity profiles” on advertising websites. We also don’t pay costly, high-dollar commissions to third-party REALTORS for doing the property manager’s job of locating your tenant themselves. We use tools and services that are PROVEN TO WORK. It just so happens, fortunately for our clients, we produce the same or better results from free or low cost tools, products, and advertising websites.
If we save time and money, you save time too, and we considerately pass some of our cost savings back to you. This (hopefully) creates a more satisfied and loyal customer, and makes it easier for us to attract more business.
Who to choose?
We firmly believe, here at Management 1 Tri-Cities Realty & Property Management, that we can outperform our competitors, at a lower overall cost, and return some of those savings back to you. If you are considering hiring a property management company for your Tri-Cities rental home, we strongly encourage you to compare our services and fees to anyone. Interview one or two other companies and invite us to the table too. First, second, or even third. Just don’t make up your mind until you see and hear what we have to offer.
We believe very strongly in our low-cost pricing strategy, the effectiveness of the tools and products we use, and the efficiency of our operations. If money is no option, you probably won’t care either way; but if maximizing your profits is important and you’re looking for the best return on your rental property investment, we’re sure you’ll be enjoy learning what we can offer. Don’t simply take our word for it. Check around, interview more than one company, and invite us to the table for comparison. We’re confident you’ll like your choice.
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