Insurance & Real Estate Law, Investors, Property Management

Stick with the Specialists

We’ve been preaching that property management is a specialization to be taken seriously.  Unfortunately, all that’s required in Texas to manage property is a broker to be responsible for the function.  More should be required in order to be a property manager due to the complexity of the job and the liabilities associated with doing it badly.

We recently had an experience with a client that really hits this topic out of the ballpark.  It’s rather disturbing that this client was not only a real estate professional but was also a Texas real estate broker.  While this experience lasted nearly four weeks and caused a lot of stress, it was an experience for more than just what’s covered here. Property management is a specialization because doing it right requires proper training and knowledge in several areas: not just knowing your market, but also understanding rent rates; understanding the legal documents that dictate scope, responsibilities, and requirements; and finally understanding the laws and statutes that govern the business.


We Understand the Rental Market

It all started when discussing the rent rate to market that property at, due to an upcoming vacancy.  The client wanted a much higher amount than the comps (comparables) were showing.  Now, this happens a lot, so we didn’t think too much of it.  Oftentimes clients have a higher price in mind than we show them.  This happens for three reasons: (1) they’re too emotionally attached to the home, (2) their mortgage is higher than the rent, or (3) they’ve been looking online at misleading estimates.  Two out of the three of these can be addressed with proper education.

Emotional attachment is the biggest of these challenges.  Unfortunately, there’s just not that much we can do with this particular challenge.  Investment property owners should not view the property as something personal—something to be emotionally attached to.  Instead, they should be viewing it as an asset—it’s a business, after all.  This was one of the underlying problems with our recent situation.  This client was too attached to the property to see the situation clearly.

If the mortgage is higher than the market rent rate, there are options.  One that we recommend for new clients—when the property doesn’t yet have the first tenant—is to refinance.  If there’s enough equity and there’s an opportunity for a lower interest rate, it’s a great option.  We’ve been able to help several clients refinance before the property became a rental.  If refinancing isn’t an option, you might have to come out of pocket a little each month.   A tax professional with a specialized understanding of real estate (see, another specialization)  can help make this advantageous at year’s end.

The latter is one that everyone in real estate understands, automated valuations.  Suffice to say, at least in Texas, they are horribly inaccurate.  This is true for both sales and rentals.  Anyone relying on these for business should take a hard look.  We’ll just leave this one at that.

There’s another aspect that too many real estate professionals don’t understand, the actual rental market.  At least twice a month we receive a call from a prospective client, their new investment property at the title company, closing next week, and they need to hire a property manager.  When we get to the rent rate part of the discussion, more times than I really want to admit, the agent that helped them purchase the house told them it would rent for notably more than the actual market rent.  And, to make things worse, the mortgage was going to be higher than the market rent.  We like to partner with agents so we can help them properly evaluate properties for their clients.


Lease Agreements

The next issue we ran into with this client was regarding the utilities at the property.  The tenant had moved out and, as usual between tenants, we had put the utilities in our company’s name.  This is done by many property management companies in order to streamline tenant turnovers.  The client was upset that we had the utilities in our name because the tenant should have had them in their name according to the lease (attaching a screenshot of the relevant paragraph from the lease).  We had to explain to this client that when the lease terminates, and the tenant vacates, the tenant is no longer required to maintain the utilities.

I’ll be the first to admit that I don’t know my way around the Texas 1-4 family purchase contract very well.  Sure, I’ve been through countless classes that covered it, but I don’t use it on a daily basis.  I know what’s in it and I know how to read it, but the last time I used it, I absolutely made sure to have someone review mine whose living revolves around the use of that form.  Those who don’t use residential leases on a daily basis aren’t expected to know their way around them, but a real estate broker should be able to understand them.  Moreover, they should be able to understand that when the lease terminates, the responsibilities of the parties end. (Yes, I know security deposits, etc., still have to be accounted for, but that’s another paragraph.)


Property Management Agreements

Just like leases, there are several different flavors of property management agreements (PMAs). Some companies opt to take the easy way and use the free one available to all members of Texas REALTORS®. Other companies hire counsel to draft their own to better fit their business. Regardless of the PMA used, they all share a similarly written scope. From one single-family residential property management company to another, we all generally perform the same scope of services: market the property, lease the property, collect the rent, handle maintenance issues, etc. This client so clearly misunderstood the scope that the PMA authorized us to do, that it would fill an entire article alone.


Property Code & Security Deposits

The Texas Property Code is crucial to what we do, as it dictates many of the requirements and procedures in our world.  One of the key sections has to do with security deposits.  These are such a hotly contested part of managing rental property that many property managers are leveraging alternatives to security deposits to get around the related rules and avoid the conflicts they create.  This particular client (again, a Texas broker) specifically gave instructions to charge items against the former tenant’s deposit that we legally couldn’t.  This client instructed us to break the law, then got really upset when we refused.

There are penalties for getting a security deposit wrong.  Everyone makes mistakes at some point, which is why we have a formal appeal and review process for former tenants if they think we got their deposit wrong.  We are very, very careful with deposits—it’s not our money or our clients’.  A client asking us to go as far as this one did to violate this tenant’s deposit was not only illegal, but phenomenally unethical for a real estate broker to do.


In Closing…

This was an incredible experience.  Every once in a while, we all need a reminder why we do what we do.  In this situation, the reminder is that property management can’t be done by just anyone.  It shouldn’t be done without the proper training, mentorship, and experience.  This is a serious specialization and should be treated as such.

The most disappointing aspect of this situation was the fact that this client was a Texas real estate broker.  The unprofessional behavior we witnessed, the lack of professional ethics we witnessed, it just makes me sick to know that this person is out there and able to inflict that poison onto others.