Your Property Manager is Charging You a Percentage of the Monthly Rent? That is so 1990

vector illustration of hand holding money to invest in own house in sketch style

The real estate game is changing quickly. Much like the internet has changed many industries, real estate is undergoing a change to a “new normal” that will leave a great number of property management professionals out of the game.

You are already seeing it in the real estate sales industry.

The internet has provided, previously unavailable, transparency to potential buyers and sellers of homes. In the “olden days” if you were interested in purchasing a home you would be required to find an Agent to find out what was even on the market. Your Agent would disappear and come back with a list of homes that met your criteria and you would spend all day Saturday driving around looking at them. All this, not knowing till you arrived at the home that the kitchen was two kinds of ugly and there is no way you would move to a home built on the side of a cliff.

As you well know that is no longer. We have the ability to peruse thousands of homes for sale at our fingertips and typically we know more about the home before we see it than the Agent does.

My how times have changed.

Today you hand the Agent a list of properties you’ve already prescreened and want to see. The Agent makes the arrangements and you spend less than half a Saturday looking at properties and the rest of the day reliving the two you really liked in pictures and virtual tours on the internet.

The management industry, albeit much smaller and much slower to move, is undergoing a shift that will have as huge of an impact on those of us who manage homes.

In the past, it was standard for the property manager to charge a percentage of the monthly rent as a management fee.

And we did the same thing!

It wasn’t until recently that we took a step back and asked the question, “Why?”.

To better explain it, I want to tell you a story about a newlywed couple who lived out of town from their family who was celebrating Thanksgiving for the first time – just the two of them. The wife was busy making dinner, when before she put the ham in the oven, she cut the end of the ham off.

The newlywed husband thought that was odd, since he had never seen his mother do that and (because he was newlywed and didn’t know any better) decided to ask her, “Why?”.

Truth is the new wife didn’t know the answer to that question, but thought that there must be a plausible reason, because her mother had always done it. So, they decided to get to the bottom of it and call home to find out the answer to their riddle.

Everyone was over at the mother’s house for Thanksgiving, so they were excited the newlywed couple called. After talking with the whole family, the wife got back on the phone with her mother and posed the question which had previously stumped her . . . Why do we cut the end of the ham off before we put it in the oven?

To her amazement, her mother didn’t know the answer either. In fact, she had just always done it and never really thought about it . . . because that is what HER mother had always done.

Since it was Thanksgiving, her mother was also present. So she put down the phone and went and posed the question to her mother.

This time she did get an answer.

What was the reason? The grandmother’s oven was too small to fit the whole ham, so she would cut the end of the ham off to fit it in the oven.

And that is the reason managers charge a percentage of the monthly rent . . . it is because managers have always charged a percentage of the monthly rent. That is the answer.

What most managers will attempt to tell you is that it takes longer to manage a more expensive home.

That has not been our experience after managing almost 1300 homes. In fact we believe that the time spent to manage a home is a little more like a bell shaped curve.

If the home rents for very little or a whole bunch (bottom 10% or top 10%), then it requires more time. But, the other 80% take about the same amount of time, effort and energy to manage.

So, when one of our new team members (who wasn’t affected by the end of the ham being cut off) began asking the question, “Why?”; all of our senseless arguments of things we’d heard and learned over the years fell by the wayside when faced with the actual facts and data.

That is why, we’ve decided to move to a flat fee pricing model.

What’s so interesting is that for most, this will actually improve “the deal” for them. We have owners calling now who would have paid 10% in the past, now paying an effective 4-5% on higher end homes. That saves them hundreds of dollars and . . . this is perhaps the most important point . . . there is no drop in service.

That’s right . . . there is no drop in service.

The question I would ask me in this case is, “How can you afford to discount the price and still offer the same service?”

My answer is very easy, just like in my first example, the market is mispriced. Meaning we’ve been charging the same thing for so long, you, the consumer, don’t know any different.

That’s nothing against you. Heck, we didn’t realize it till someone who didn’t have a long history in the industry pointed it out to us. Sometimes it just takes some fresh eyes.

Think about this . . . Owners were paying the same amount for management services since before there was even computers. Property managers were manually posting a ledger by hand and sending out paper checks with a typewriter written statement.

Are you going to tell me that you should pay the same for management services as you would for something as manual as that?

Today we can click a few buttons, which produce hundreds of owner statements to their email and then pay them by dumping the money directly into their account.

Bottom line . . . don’t overpay for services in the new economy. Managing rental houses is not like it was in 1990, so why are you paying for it like it is?