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Figuring Management Fees Any Size, Shape or Color

When you buy a used car, you don't just walk into a dealership without doing any research beforehand. You don't just plunk your hard-earned cash down on the counter, tell the salesperson, "Give me that one," and then drive away with no questions asked.

Of course if you did do this, you'd have one happy salesperson on your hands—but you'd hardly be a smart consumer. Without incorporating factors like make and model, special features, mileage, and safety rating into your deliberations, you might end up blowing your budget and overpaying—or worse, driving off the lot with a lemon simply because you didn't do your due diligence.

The same is true of property management companies. How much a property management firm charges an association for their services will depend on a number of factors as well—and not every company is a good fit for every association community. It can be helpful to understand what variables property management companies consider when determining their fees.

Level of Service

One of the first variables to consider, says Diane Dangler of DHD Management Company in Ocean Port, is the level of service your association needs. "For example, is the association looking for someone to work on-site—which would cost more—or offsite which could save money?" she asks. Dangler adds that in addition to whether your HOA requires a full-time manager, the number of ancillary staff members necessary to maintain the property would also be factored into the total.

To help save money during this negotiating process, the first thing a board should do is analyze exactly what tasks need to be done to manage their property. Management professionals advise making a list of things like collecting common charges, cleaning empty units and possibly renting them, and handling repairs, snow removal and landscaping. With that information in hand, you'll be better prepared to discuss your HOA's needs and expectations with a prospective manager—or to renegotiate your current management company's fees.

Age and Maintenance

The older a property is, the more its physical condition may figure into how much the management company charges, says Gary Wilkin, president of Wilkin Management Group in Mahwah, simply because older properties may need more repairs and more replacements of major ticket items. Since property managers often double as project managers on remodels and repairs, the time they'll have to devote to such undertakings must be compensated for.

"If the building is a lot older, we will also have to look at the financials to see what's in their reserve funds," adds Wilkin, "especially if you have a 20- or 30-year-old property and the association has little money in the bank. If that's the case, you know that they aren't property budgeted for dealing with upcoming maintenance issues."

Size, Location, and Amenities

Go back to our car example—a bigger car with more extras or amenities generally means a bigger monthly payment. While a smaller association will usually be charged a lower management fee than a sprawling development, the bottom line depends on the other variables as well.

"You also have to see how the layout of those properties is," says Wilkin. "For example, you could manage 100 units in a one-building high-rise with porters and a super, or you could manage a 100-unit townhouse association that's in four buildings—or 20 buildings."

A high-rise might be more convenient from a management perspective—all the staff, residents, and physical plant elements are under one roof, while in a more spread-out development, each building has its own roof, and staff members might be anywhere on the grounds at any given time. This can increase the amount of legwork a manager has to put into the property, and can thus impact the fees charged.

Location also figures into the fee equation. When you buy a piece of property, the old adage states that location is everything—and that holds true for managing property as well. For example, a building located in the heart of a city might have dissimilar needs than one situated in the suburbs, or by the water—these might include special maintenance issues, or extra preparedness for flood season. Compared to other HOAs in low-lying areas, an association built on a hill it might also require particular attention to drainage in the spring, or have a customized snow removal plan during the wintertime.

What's inside the building—or buildings—counts as well. When a property management company determines its pricing, it doesn't just factor in the actual building structure; they must also take account of any amenities that need looking after, such as swimming pools, a dock, tennis courts, lakes and basketball courts.

"The management company charges for is its time," says Wilkin, "so you need to add those factors in that are going to cost time and that includes each amenity." Features like swimming pools are particularly high-maintenance, and if your manager will be overseeing pool maintenance and administration, that's another line item that may be added to your final bill.

Financial Troubles

If your HOA keeps stellar records and retains the services of a competent financial firm to help sort out your community's money issues, you're a property manager's dream. However, if your association has been operating with its head in the sand and hasn't so much as balanced your checkbook in several years, even a seasoned financial expert may face a serious challenge in fixing your money mistakes - never mind your managing agent.

When an association's books fall into disrepair, it may fall to a new manager to review what's there and evaluate the damage. Sensitive or emergency projects like these also add to the fee a manager charges—a fact that is generally handled early on in talks between HOA leadership and a new management company.

"When we sit down with the association, I interview them too," says Dangler. "I ask them straight out if they have any financial problems, or if they are planning any special assessments. If they are, it might be more of a challenge managing them. I wouldn't necessarily factor this into the fee, but I would keep it in mind. If I felt it was a really serious issue, I would ask the board if they felt they could actually pay our fee. We might also ask for an audit for the prior year and talk to their accountants. But you have to consider than an association who had a problem with money might just need help getting on their feet, that's all. I would then tell them that in a year, we would look at the situation again."

The Competition

In most businesses, it's important to price competitively—not too low and not too high—or you can price yourself right out of a potential project. The property management industry is no different. Chip Hoever, owner and managing partner of Somerset Management Group, LLC in Somerset, explains that pricing competitively for a new association client is fine, but raising rates to meet present competitive pricing for current clients can be tricky.

"A management firm can cautiously raise their fees, but it's tough when you have an existing account. People balk at even modest percentages, even if you raise it three percent, which doesn't seem like a lot. Again, we have to look at the characteristics of the site and the amount of attention they need."

Keep in mind that two developments with the same number of units can actually have two different management fees and needs.

"If I have two sites with the same number of units, but an age difference of 15 years between them, the older one may require significantly more work," says Dangler. "But the newer one may require the maintenance of a pool, so there can be two different fee structures."

Other Considerations

Even if all the variables are aligned properly, a property management firm doesn't sign on the dotted line with every potential client. There can be several reasons why a firm might decline to handle an association, even if the money is right. These reasons might include the size of the job, the location of the community, and whether or not the property or its upcoming projects or challenges fall within the management company's area of specialization.

"I've turned down jobs if the property is too large for what my company can handle," says Dangler. "If I'm not in a position to give excellent service, then I won't bid on it."

Wilkin agrees. "If we can reasonably manage from 10 to 500 units and the development is larger than that, we would respectfully decline, it because we're not structured for that kind of environment. A good company knows its limitations."

When an association is ready to sign on the dotted line with the management firm, it's vital to have a legal representative read the entire contract. Most contracts will include the length of the contract; what general services are provided; insurance indemnification information; termination clauses; the menu of services the property management company will provide to the association and a schedule of fees.

"I use the same contract from association to association, but I can tailor it to fit he special needs of that association," said Dangler.

As far as fee negotiations are concerned, says Hoever, an excellent manager with the references to back up his or her reputation can and should command a better fee.

"Sometimes boards don't always understand that managers are professionals; we go through training and charge money for what we do because we do have a level of expertise," he says. "I don't think that associations are really paying for one of their most valuable assets. Managers can make or break an association."

Lisa Iannucci is a freelance writer living in Poughkeepsie, New York.

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Comments

  • Do on-site property management companies normally get paid for overtime services (i.e. a fire in the building required help after hours)