When you hire the services of a property management company, you enter into a binding agreement with them evidenced by a property management contract. As their client, you must understand this contract and know what it should contain.
What Is a Property Management Contract?
When you sign a contract with property managers, the document must not be taken lightly. The contract is much more than a formality.
It will act as a determiner of the services you will and will not receive. The contract will give you an overview of your rights and the kind of relationship you will have with the property manager.
Not reading the contract is similar to hiring a random property manager. The contract is meant to eradicate confusion and conflicts. This is so that, in the long run, you will be able to build a strong relationship.
Even when your property manager creates a promising first impression, you must pay close attention to the contract. You should review all the terms and conditions carefully.
Reading contracts is a tedious task, though. You must go through many pages and hundreds of lines. Luckily, property managers prepare organized contracts. Learn to understand the six parts of a property management contract below.
1. Responsibilities of Both Parties
This section focuses on the services you will receive from the property manager. In most cases, the property manager takes care of the following:
- Marketing and screening tenants
- Retaining high-quality tenants
- Fixing and collecting rent from tenants
- Inspecting and maintaining the rental property
- Handling deposits, owner funds, and tenant requirements
At all times, the property management company should give their best effort and maintain your home. When you want them to perform extra duties, you should mention them in the property management agreement.
Many contracts are designed with services that exceed normal duties. Without these clauses, you cannot expect the property manager to perform beyond-normal duties.
Just like the property manager, owners have duties and responsibilities. Common responsibilities of the owner are:
- Transfer security deposits to the property manager
- Set up and maintain a reserve fund
- Make sure contracts are not signed with several property managers
- Never pose restrictions on how and when the property manager enters the property
- Never enter the property themselves without notifying the tenant or obtain the property manager’s approval
- Inform the property manager before making big decisions
- Never rent the property to someone without prior consent from the property manager
- Manage home insurance and its premiums
- Never jeopardize the property manager’s ability to perform his/her tasks
2. Fee Structure
A property management contract should include the company’s fee structure. This portion should cover the company’s management fee as well as any other fees they intend to charge.
Some companies charge a lower initial fee, enticing property owners to sign with them only to discover that there are numerous hidden fees. This is why it is important to review your management contract before signing it.
The contract should indicate in detail what services are included in the price. In that manner, it should also state how much the company will charge you for extra services. Understanding a company’s full fee structure will help you anticipate costs and save you from any unexpected fees.
3. Contract Duration
Most agreements naturally terminate in 1 to 2 years. The actual duration depends on the landlord and the property manager. In many cases, landlords extend their agreement with quality property management companies.
While some property management companies allow landlords to decide the duration, others will not settle for less than a year. This makes it hard for property owners to get out of a contract if they feel the company is not doing a proper job within the first several months.
To protect yourself, you must ensure the contract comes with a termination clause. When considering property management companies, take their cancellation policies into account.
In general, contracts are incomplete without a section on boilerplate items and liabilities. You must stay aware of situations when a management company can be held liable.
Most property management companies offer a comprehensive account of liabilities and boilerplate items.
Property management contracts consist of hold harmless clauses that generally protect the manager unless they acted negligently. This also applies to the actions of third parties.
So, for instance, if a property manager hires a plumber who causes damage to the property, the manager should not be held liable.
However, you must ensure your agreement includes a “reasonable care” clause. This clause will protect you as a property owner. In the case of the plumber, the property manager is not accountable for the damages if they practiced reasonable care, i.e. did their research and hired a plumber without a laundry list of prior complaints.
5. Contract Termination
Contract termination can happen at any time for various reasons. Both the property manager and the landlord can decide to terminate the contract.
Without a proper exit plan, the entire agreement becomes difficult and complicated. As such, it is important for you to make sure your contract comes with a cancellation or termination policy.
Before signing your property management contract, check for the following details:
- Notice to Terminate. Make sure the notice period to end your contract is reasonable, typically 30 to 90 days. For your sake, it is equally important to make sure the property management company gives at least 30 days’ notice before terminating the contract with you.
- Fees. Most property management companies charge a fee for early contract termination. The amount can range from a few hundred dollars to as much as the fees covering the remainder of the contract’s duration.
- Cause. For your protection, see to it that you enter a contract that does not require a reason to end the agreement. It is also imperative that you add a clause letting you cancel the contract without consequences should the company fail to land a tenant for you within a fixed duration.
- Responsibilities. Finally, it is important that the contract’s cancellation policy includes a list of obligations that both parties must accomplish within a specified amount of time. For example, the company must inform the tenant of the change in management when they receive the notice of termination from the property owner.
6. Equal Opportunity Housing
Property management companies must remain compliant with federal, state, and local laws. This protects both the company and yourself as a landlord. Thus, your property management contract should explicitly state that the company supports Equal Opportunity Housing. It should be put in writing that the company follows all related laws, including the Fair Housing Act.
Review Your Contract Prior to Signing
Your property management contract outlines the duties and responsibilities of each party and protects you from liability. It also covers the management fees and other charges as well as how both parties should approach early termination. As such, it is essential that you take the time to sit down and understand your contract before you sign it.
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