Property Manager Fees

Why do most property managers charge a fee based on a percentage of the rent? I have issues with percentage based fees in most industries but for property management it just doesn't make sense to me.

Generally, a cheaper property would have more repair and maintenance issues and more likely to have difficult tenants than a more expensive property. So more work would be required for the cheaper property yet they accept a lower fee. What am I missing?

 

The asset is worth approx 3 x their annual income from the property - at least from a Sydney agency owner who mentioned this.

So if a property is rented for $300 per week and your agency fee is 5.5%, this is $858 per annum. The asset is worth roughly $2,574 to them - should they sell their rent roll.

And the income is exponential with the CPI increases, the rent will go up overtime anyway.

 

It's a valid point. Takes the same amount of effort to collect $300/week as it does $1,000/week. Maybe a fixed fee is more suitable for this.

Maybe fees for inspecting/organising repairs.

Anyone brave enough to be radical and start up a fixed fee property management service?

 

This is an old question and one which would take a long time to explain properly. I can definitely understand the premise of both sides (being an investor myself) but the reality is that the business modelling works on what are essentially average cash flows. On a fixed fee model, the margins are either extremely tight and the service suffers (which is basically all of the ones I know on a fixed fee model) or the price has to be so high that the lower rent properties are paying a much higher percentage of rent than the higher rent properties and the business must attract much higher rent properties, cutting out a lot of business in the process and the whole thing implodes.

Either way on the fixed fee, someone is subsidising someone whether the fee is low or high. I guess percentage is really a fairer way of doing as investors feel that they are always paying the same proportion regardless of the rental amount. The market has moved that way and the fixed fee model isn't as popular so obviously investors prefer that.

 

I would completely agree MyPropertyPro. The other thing to also consider Daniel is that when agents take on a property they take on a measure of risk. Be this for their own personal actions or those of staff, sometimes there is not a mistake but simply a concession that leads mutually agreeable outcome- often at the business owner's expense . In the same boots would you carry increased risk at no additional reward. I do agree with you though Daniel that there are some investors who properties take more of a PM time than others, and some who allow PM to work autonomously with their best interests in mind. If you are the later I would suggest asking to negotiate your fees as these types of relationships the most emotionally rewarding for property managers where they feel trusted, appreciated and in my experience a good pm under these conditions works much harder for the landlord that empowers them to help their client.

 

It's a really interesting point and you are, in many cases, correct. e.g. the properties I managed in Ipswich at $250.00wk tended to be a lot more work to let and manage than the properties I manage on the Gold Coast at $500.00wk.

A friend of mine in Wellington New Zealand uses a fixed fee set up for that exact reason and its working beautifully for her- though the average rent over there is quite high. My experiences are that the fixed fee set up tends to be associated with a "discount" agency, which is never a good look. They also tend to be set towards the lower end, which makes it difficult to turn a profit (as if it wasn't hard enough at 'industry standard' fees).

Personally, our agency is more likely to negotiate on our fee for a high rent high quality property than we are on a difficult low rent propert. That's about as far as we can compensate on the percentage model for the points you've made.

 

A few on the way apparently.

 

The PM can also drop their standard % fee if they feel inclined as part of negotiating and/or remove additional costs - we have had this happen.

It is the same as REA selling fees are based off a % yet a 300k and a 3M house doesn't take 10x the effort to sell.

However they might charge 3% for the 300k and 1% for the 3M or 9k vs 30k compared to 90k at 3%.