If this is your first time getting involved with a property manager you might feel anxious about signing a residential property management contract. It’s a big commitment to make, and you don’t want there to be any hidden catches that could come back to bite you in the future!
It’s important to carefully examine the property management agreement to understand precisely what you’re getting into, but it can be hard to know just what to look for in a property management contract.
With the help of our property expert Wayde Hildrew, we’ll tell you the basics of what is included in a property management agreement and why you need one. You’ll also learn what to look out for in different parts of your contract. That way, you can sign an agreement with confidence, knowing all the intricacies of your relationship with your property manager.
The property management contract and why you need one
Before we dive into it, it’s useful to note that there are various names for property management contracts. You’ll often hear people referring to them as:
- property management agreements
- real estate management agreements
- management agency agreements
Although this might be confusing at first, they all refer to the same thing.
So, what exactly is the definition of a property management agreement?
To put it simply, the property management agreement is a legal agreement between a property manager and owner which outlines the terms and conditions in the relationship. You can think of it as your property manager’s employment agreement. It’s important to note that you’re required to sign one by law if you take on a property manager.
Part of the property management contract will be standard with all agencies as defined by the state-level government. The other part will be written by your property manager and formalises areas like price and fees, conditions for termination, property inspection, and so on.
“The big picture is that the contract allows the property manager to start acting in your best interest.”
When you sign the real estate management agreement you’re agreeing to all the terms and conditions presented to you. This gives you and the property manager legal protection if something were to happen, and gives the manager the green light to become the leasing and managing authority of your property!
7 things you should do when reviewing the property management contract
1: Go through the fee structure in detail
The most crucial part of your agreement to understand is what you will be paying.
If you have been advertised a price that seems too good to be true then you might just have gotten a spectacular offer - or, you might be unaware of some additional property management fees that are likely to pop up down the line.
On-top of the usual percentage-based fee, many property managers also charge additional fees for services like tribunal preparation, administration, and lease renewals. You should also find out how many inspections the property manager will conduct each year, and whether or not they’ll charge you any extra for this. Ideally, you’ll want to find a property manager with a detailed and transparent, all-inclusive management fee.
Did you know that 42% of 3000 investment property owners we spoke to quoted “cost/value for money” of property management as their biggest pain point?
That’s why you should vigorously examine the fee structure in your contract. Failing to do so has given many property investors unpleasant surprises when they’re suddenly billed for items and services they thought were included.
The best property managers keep their pricing simple, fair, and transparent.
You should also clarify which of the fees and liabilities apply to either you or the tenant. Wayde explains why:
“What can happen with the fee structure is that they put fees in that are relevant to the tenancy rather than the owner. For example, charging the tenant something if they break the lease. That can make it difficult for the owners to figure out which fees they’re liable for and which ones the tenant is liable for.”
Make sure that everything in the contract is applicable to your agreement. Also, if there’s anything in the section that is handwritten or manually added in by the property manager, you should ask about this straight away.
“If your agent has to add anything manually or tells you not to worry about something in a contract, saying ‘it doesn’t apply', then that’s something you should be querying. If it ‘doesn’t apply’ or is handwritten, then it is easy to have it removed, so I would get the contract redrafted.”
2: Check the termination clause
In case things don’t go to plan and you decide to switch property managers or terminate the agreement early, you need to be aware of what implications they have.
You want to sign a contract that gives you the freedom and authority to terminate the agreement without incurring heavy penalties.
Here are a few questions you should ask yourself while checking the termination clause:
How long is the property management contract?
At :Different we have no minimum duration contract or lock-in period, but most property managers will lock you in for a year or more. This makes it all the more important to know the details of the termination clause, as it’s a long-term commitment.
What is the notice period for terminating the contract?
Usually, the notice period is around 30-90 days, though it varies between agencies. For example, we only have a notice period of 48 hours at :Different.
The notice period will usually be written on page 2 of the property management contract.
Are there any fees for terminating the agreement early?
The cost of terminating some contracts might actually outweigh any benefits you might get from changing! We don’t charge our property investors anything for cancelling their agreement since we don’t lock them in, but some property managers charge a few hundred dollars, and others might even charge you the sum of the fees they would have collected for the rest of the duration of your agreement. We suggest steering far away from the latter.
Do I need a reason to terminate?
You want a property manager who doesn’t require a reason to terminate, as that gives you more flexibility and ease of mind.
We also recommend having a termination clause that allows you to terminate the contract without any penalty if the property manager fails to secure a tenant within a specific period of time.
3: Understand how the property manager will market your property
You want to ensure that you’re entering an agreement with a property manager who will set you up for success, and understands how your investment property should be marketed.
Property managers will normally market your investment property on their website, with for lease sign boards, and with newsletters to potential tenants.
Try to put yourself in the shoes of the target demographic of your investment property, and make a decision whether the marketing is sensible.
4: Check the property manager’s authority to spend
The property manager will typically require you to maintain a fund or account that they can use to manage your properties. You’ll need to make sure the fund is always above a certain amount, which your property manager will specify.
The authority to spend is how much of this fund the property manager can spend on your behalf without seeking approval. This is important to know, as you don’t want to be bothered by minor details and fixes, but you should know about big spending necessities.
5: Take lots of time, and ask clarifying questions!
The best way to properly understand the rental property management contract is simply to take a generous amount of time to read it in a quiet environment.
“Most agreements are between 15-25 pages, so it can be difficult to read through in detail, especially since things are written as per legislation, which can make it hard to understand! You need to take plenty of time to read it through.”
Along the way, you should ask the property manager any questions you have in order to clarify points in the contract. You will find that most property managers aren’t trying to trip you up, and are happy to help!
6: Luckily, you don’t have to read everything in-depth
Since large parts of the contract will be standard as per government legislation, you don’t need to spend too much time on those parts. Verify that they’re properly included, and focus on the parts that are written by your agency.
“The first 6 pages in most property management contracts are the ones that are edited by the agency. They’re the most important ones to read through, as they include the fee structure, what the property manager will be doing on a service level, and so forth. That’s where I would spend most of the time reading.”
7: Check for red flags!
The details provided in the rental property management contract typically include their license number with the expiry date. You can verify the license on government websites.
Obviously, you should ensure that the date is current and not past.
On occasion, the details of the agency in the contract won’t match the company you have sat down to meet with. Wayde explains why below.
“You might be speaking to one business and realise that that’s who they’re trading as, but that they’re actually part of a larger corporation that has several branches. This is important as the agency you’re speaking with might not be an independent one-stop-shop, which makes it less simple for you. You should put the details in the contract into a Google Search, and verify that the company in your contract is the same one you have been speaking to previously.”
The final point is that you should ensure you receive a fully signed copy of the residential property management contract within 30 days.
“This is something I hear a lot of agents fail to do. Then, it’s not until the property investor changes agents or gets charged fees they weren’t aware of, and they’re asking for a copy of the property management agreement, that they actually get one. If the agent can’t provide a copy of a property management contract you’ve already signed, then you’ve got to wonder why that is!”
Signing up with a new property manager
Reading through and examining a residential property management contract might seem like a tedious task, but sometimes, the most tedious tasks are the most important ones. Your contract is no exception!
The contract is where you get the pure facts in your property management agreement. With the tips and tools we have detailed, you'll not only know how to find a good property manager, but also be able to evaluate whether they will set you up for success or give you unpleasant surprises in the months to come.
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