Handling Tenant and Owner Funds
The most important indicator of a property management company and a reflection of the systems they have in place are its accounting and handling of tenant and owner funds. It is an area of management with the most enforcement actions and loss of licenses. It also one of the areas of property management that present the most liability to the owner.
Here are a few questions that you should ask the property manager.
Payment to Owner
As mentioned earlier in the article one of the most frequent reasons real estate licenses are lost in almost any state is the handling or misuse of security deposits.
As a company we occasionally see scenarios when picking up new clients where a previous property manager hired by an owner has spent, or disappeared with the security deposit. Unfortunately for the owner the security deposit still remains the responsibility of the owner and the owner ends up spending their own funds to replenish the security deposit account.
Remember laws on handling security deposits vary from state to state so check with your legal counsel or State Real Estate Authority. Here are just a few questions you should ask.
Unfurnished rental unit: The total amount that the landlord requires as security cannot be more than the amount of two months' rent. If you have a waterbed, the total amount allowed as security can be up to two and-a-half times the monthly rent.
Furnished rental unit: The total amount that the landlord requires as security cannot be more than the amount of three months' rent. If you have a waterbed, the total amount allowed as security can be up to three-and-a-half times the monthly rent.
Plus first month's rent: The landlord can require you to pay the first month's rent in addition to the security deposit.
How quickly can complete the security deposit distribution?
The goal is to provide a clear audit trail for all funds for each property. Look for a company that keeps and is happy to provide you with copies of all invoices. This will also help with tax and liability issues.
This will give you an indication of how informed staff will be on the financial condition of the property.
Monthly is the standard and in some states the legally required minimum.
All owners deserve transparency and it reduces the possibility of fraud.
Property Management is almost no different than a professional bookkeeping service in this regard and the property manager should be using software that reflects that commitment and investment into the business. Excel will definitely NOT be suitable software for property management.
Reports should be easy to read and show collected rent, deducted property management fees, maintenance, net dollar amount, etc.
Do they have vendors perform work and then not pay them until rent is collected or the unit is rented? Keeping vendors waiting for long periods of time strains the relationship and forces the vendor to raise their prices to compensate for the delay’s negative impact on their cash flow. A properly funded reserve should prevent this from being a problem.
Given the potential liability and responsibility to maintain accurate records, it is always a good idea to raise these questions during the interview process and to make sure you understand the company’s approach to accounting. Next, we'll look at the management company's policies and practices regarding rental market analysis, setting and collecting rent.