Letting Fees

[suggo]

This has been bothering me for some time now. How can property managers justify taking the first weeks rent as a letting fee and not have set rates?

I mean I have two houses with a property manager, rents of $225 and $190, and I can not see, nor will/can they tell me the extra work they do to earn that extra $35 each time! Has anyone got a reasonable explaination of this?

 

[lawsjs]

In the UK for example, they charge normal (Aust) letting fees, but 15% for standard management, and 10% just to find a tenant. We don't have it so bad....

 

[suggo]

I understand what your saying, but just because we have it better than someone else doesn't make it right!!!

 

[JoannaK]

the letting fees and document prep fees cover the costs of advertising for the tenants (newspapers, signboards, internet, etc), conducting the inspections, doing the ingoing and outgoing condition reports, processing the bonds, taking photographs if necessary, arranging repairs if necessary, finding the tenant, screening the tenant and a whole myriad of other things involved.

How much is your time worth? The $190 as your letting fee doesn't even cover half of what my time is worth for what is involved in finding and placing a tenant!

And just before you say that all that other stuff is included in your weekly management fee - no....your weekly management fee is just that a management fee to manage the tenant, collect rents, chase arrears, arrange periodic inspections, arrange insurances blah blah blah blah!

 

[asy]

Originally posted by suggo
This has been bothering me for some time now. How can property managers justify taking the first weeks rent as a letting fee and not have set rates?

I mean I have two houses with a property manager, rents of $225 and $190, and I can not see, nor will/can they tell me the extra work they do to earn that extra $35 each time! Has anyone got a reasonable explaination of this?

What is your $35 for?

This is for the property manager:
to manage your funds,
to distribute cheques,
to organise maintenance and tenants,
to get prices for your new stove if required,
to do periodic inspections,
to ensure the tenant are up to date with rent and chase them if they aren't
to give tenants notice for any breaches
to attend tribunal and any evictions if necessary
to discuss with you any matters pertaining to your property, tenants or leases
to organise any insurance or rates payments as required


What is the Letting fee for?

for letting the property,
for reading through lease applications and checking all their references and details
for advertising the property
for doing the condition report (including photos if req)
for assessing the property when the previous tenants moved out
for calling them back to clean the stove
for retaining part of the bond when they don't
for arranging the lease
for sitting with the new tenants to sign the lease
for organising the bond payment goes where it should
for checking with the new tenants to make sure everything is OK
for making sure the new tenants return their condition report

I guess you can say that, hey, the property manager doesn't ALWAYS have to send notices, and doesn't ALWAYS go to tribunal, and doesn't ALWAYS have to re-call tenants and argue about bond retention...

I guess it's a little like insurance, you pay to know that these things will be taken care of, easilly, cleanly and professionally when they DO occur.

And trust me, they DO occur.

However, having said that, lets look at the time taken to do things:

30 mins for letting the property
30 mins for reading through lease applications and checking all their references and details
10 mins for advertising the property
2 hours (std 3 bed home) for doing the condition report (including photos if req)
20 mins for assessing the property when the previous tenants moved out
15 mins for calling them back to clean the stove
15 mins for retaining part of the bond when they don't
30 mins for arranging the lease
30 mins for sitting with the new tenants to sign the lease
5 mins for organising the bond payment goes where it should
5 mins for checking with the new tenants to make sure everything is OK
10 mins (can be several hours if there are problems) for making sure the new tenants return their condition report

Ok, this adds up to: 320 mins (5 hours, 20 mins).

And for this you are paying the princely sum of $207.50 (averaged over your two properties).

hope this helps,

asy

 

[Kevmeister]

I guess the point being made is that the amount of work should be the same in both cases.

If you took your 85 Corolla to a hand car wash and they said it would cost $10 to wash, then took your 2002 Jaguar and they said it would cost $35 to wash, how impressed would you be?

Keep in mind that a lot of Managed Funds Advisers have now resorted to a "fee for service" billing model rather than a commission-based one, to be fairer for consumers.

If I go to a Fund Adviser and take up 4 hours of their time they are entitled to compensation for their four hours. If I deposited $5,000 after their advice they might get a leading commission of $100-150 - not much for 4 hours work.

But if I instead invest $250,000, they get a whopping $5000-7500 commission. Have they done any extra work? No.

I think it is more a case of "it is, because it is".

Interestingly, I _would_ have thought that cheaper properties would cost _more_ to manage, for example, low income renters might (I don't know) be more likely to damage properties; older houses might require more regular repairs (due to age and condition of the fixtures, etc)?

 

[Sim]

Originally posted by Kevmeister
I guess the point being made is that the amount of work should be the same in both cases.

Yes, but then it becomes a question of "how long is a piece of string" or "how much is enough to cover the costs" ?

Would you prefer that your property manager charged you by the hour for performing the tasks they do ? That's the only really fair and equitable way of doing it - a fixed fee is never going to work because there are always going to be the occasional things that take so much more time to do.

I think the "percentage of a weeks rent" figure is a reasonable way of charging - so that you are paying essentially a fixed percentage of your property's value to a large degree. It makes it more affordable for cheaper properties to be managed - but of course you would expect there to be more of them under management - because more of them are bought !

Originally posted by Kevmeister
If you took your 85 Corolla to a hand car wash and they said it would cost $10 to wash, then took your 2002 Jaguar and they said it would cost $35 to wash, how impressed would you be?

People who take their 2002 Jaguars to be washed generally expect some pretty good and careful service. People who take their Jag into a cheap carwash and expect expensive service are being unrealistic. People who expect the same treatment for their corolla at bargain basement prices as what you would get for a Jag are unrealistic too. Sure there are expectations that need to be managed - I know some people who are pretty darn proud of their Corolla, but I don't think it is unreasonable to expect to pay more for a car which is EXPECTED to be better looked after.

Originally posted by Kevmeister
Keep in mind that a lot of Managed Funds Advisers have now resorted to a "fee for service" billing model rather than a commission-based one, to be fairer for consumers.

Well, this is really the only completely "fair and equitable" way to charge for a service. If you would prefer your property manager to charge you by the hour, go ahead and ask ! But I would be surprised if your actual costs came out less than if you paid a percentage of a weeks rent.

Originally posted by Kevmeister
Interestingly, I _would_ have thought that cheaper properties would cost _more_ to manage

Not so in my experience... more expensive properties need much more maintenance and care to maintain their ability to attract higher rents. If you were paying $2000 per week for a house in Sydney, you'd expect it to be in pretty good condition right ?

I'd be interested to hear what people think would be a reasonable rate to pay for a property manager - if they charged on a hourly basis for actual work performed ?

Personally, I don't think it would work very well - charging by the hour.

 

[Kevmeister]

People who take their 2002 Jaguars to be washed generally expect some pretty good and careful service. People who take their Jag into a cheap carwash and expect expensive service are being unrealistic. People who expect the same treatment for their corolla at bargain basement prices as what you would get for a Jag are unrealistic too. Sure there are expectations that need to be managed - I know some people who are pretty darn proud of their Corolla, but I don't think it is unreasonable to expect to pay more for a car which is EXPECTED to be better looked after.

Sim, you've missed the point. We are talking about the same car wash. The same level of "care" is implied. What I am talking about is that the amount of labour is the same, yet it costs more.

Both the Corolla owner and the Jaguar owner have a reasonable expectation to believe that their cars will be clean, will not incur damage, etc.

If there is more labour, you pay more; if there is not, you shouldn't have to pay more.

It seems like you are talking about getting "a better wash". Fair enough, if you want your car washed "better" then pay more. But don't charge someone different rates for the same amount of work.

If a more expensive property does demand more labour in its management then the property managers are entitled to earn more. But I sure don't believe there is any linearity to that argument. Certainly the rental amount itself does not necessarily have any bearing on the potential maintenance.

You can have dog-boxes with breathtaking views of Sydney Harbour that might cost 10 times more than a palatial home in the middle of nowhere. Based on your argument the palatial home needs more maintenance and hence should be charged a higher property mgmt fee, but the Sydney dog-box commands the higher rent because of the location and views.

Weatherboards are cheaper than brick veneers (hence usually rent for less) but have higher maintenance, etc.


Doesn't really stack up to me.

 

[Sim]

Originally posted by Kevmeister
We are talking about the same car wash. The same level of "care" is implied. What I am talking about is that the amount of labour is the same, yet it costs more.

Does it ? I haven't seen any carwashes that charge based on the type of car - only on the level of service expected. Maybe I don't go to the right carwashes !

Another example of disparity of the sort that you are referring to is with womens hair dressing. I remember on of the current affairs programs doing a test by sending in two people two the same salon, one male, one female. Both had similar length and amount and style of hair. Both asked for exactly the same things to be done. The female was charged significantly more.

Originally posted by Kevmeister
Doesn't really stack up to me.

So do you have another suggestion as to how it could work ? Charge per hour ? If so, what rate ? Fixed fee ? If so, how much ?

 

[paulzag]

People who take their 2002 Jaguars to be washed generally expect some pretty good and careful service. People who take their Jag into a cheap carwash and expect expensive service are being unrealistic. People who expect the same treatment for their corolla at bargain basement prices as what you would get for a Jag are unrealistic too. Sure there are expectations that need to be managed - I know some people who are pretty darn proud of their Corolla, but I don't think it is unreasonable to expect to pay more for a car which is EXPECTED to be better looked after.
[/B]

Point of Order :: Technical correction :: Moderator hat on.
People with 1982 Jaguars are told by the Jaguar Drivers Club (if they ever expect to attend another event) when, how and with what product to hand wash each panel of their cars .

Now on to the business at hand.

If I was a letting agent and worked flat fee I would not take on the cheaper property. Why would I offer my normal level of service for a substandard reward?

Why aren't you wondering what you did to earn the discount on the cheaper property?

Why do the prices apparently change? Because there is more work in letting a $1800 per week executive rental than in a $180 Kings Cross garret.

Is there 10 times the work? Who knows? It's a different skill set --comparing apples with persimmons.

Why isn't charging a week as a letting fee fair? What would make a flat fee fair? I'm not saying I think 1 week is good just look at your assumptions.

Now if you owned the only $225 place in a $190 world would you want $190 service?

As for the example of the financial advisor. There is a lot more work in putting a plan together for $50K vs $250K. Mainly because all things being equal people with $250K to invest have different needs because they've managed to scrape $250K together. Diversification strategy and insurance takes more time.

 

[JoannaK]

Originally posted by paulzag

If I was a letting agent and worked flat fee I would not take on the cheaper property. Why would I offer my normal level of service for a substandard reward?

Thank you Paul,

When I was running The Rental Specialists, I never ever took on a property less than $300 per week in rent (most of my properties were around the $400 to $600 mark) simply because generally they were a less quality accomodation that required much more work, and quite simply, my time was worth more than that.

Originally posted by paulzag
Is there 10 times the work? Who knows? It's a different skill set --comparing apples with persimmons.

Thank you again.

Managing an $1800/week property does require a different skill set to those required to manage a $180/week property, however, the work is the same. The time involved will most likely be similar, but it will be time involved in doing different tasks for each property. I'd much rather spend 2 hours doing a detailed condition report for a $1800 property than spend 2 hours arranging repairs on a run down $180 property.

Originally posted by kevmeister
Certainly the rental amount itself does not necessarily have any bearing on the potential maintenance.

Of course it does - but it also depends on the market that you're operating in, and a property manager needs to be aware of that.

$200 per week may not seem expensive to me in a Sydney market, but it may be Executive Level in a Hobart market.

$200/week property in a Sydney market, where I am, will be a very run down property, and the level of maintenance required and inspections required would be astronomical. I wouldn't touch it with a ten foot barge pole!

A $200/week property in an executive hobart market for example, would, one would assume, have much less maintenance requirements. However, you are not just paying a property manager to arrange maintenance...there is so much more involved than just arranging maintenance and collecting rents.

 

[Sim]

Joanna - do you think there could be a better way of having property managers being paid for their time - at least for the initial letting anyway ? Do you prefer percentage of a weeks rent, flat fee, time and materials ? And why ?

 

[JoannaK]

Originally posted by Sim
Joanna - do you think there could be a better way of having property managers being paid for their time - at least for the initial letting anyway ? Do you prefer percentage of a weeks rent, flat fee, time and materials ? And why ?

Sim, I've never really thought about it, but I do feel that it would be quite difficult to charge any other way.

Being paid a letting fee based on the rental of the property is the easiest way of charging. The landlord knows exactly what the charges are, and it gives the property manager a little more incentive to achieve that extra rent. And, it's a comprehensive fee - it covers everything.

If one is to charge by the hour, how is the hourly rate to be determined? Who will set the worth of the property manager? I'm sure that if you feel you're worth, for example, $200 per hour, will you work for $100 per hour? I wouldn't. How is one to justify the hours spent on each task? That will require alot of trust between the landlord and property manager, something that takes an extremely long time to develop, sometimes years.

While I think about it there is one advantage to the landlord that I can see from charging by the hour, and that is that the landlord will see exactly how much time the property manager spends on his/her property. The disadvantage that comes to mind is that if the property manager spends a total amount of 5 hours in procuring the tenant and doing all the other things involved, it will end up being much more expensive for the landlord.

What if one spends 5 hours on a property and charges for 7 hours - who is to know? This isn't fair.

Then, does the hourly rate include everything? What if I take a video condition report? Will the hourly rate include the cost of this time and tapes? I know one agency that charges two weeks rent as letting fee, and asks the landlord if they'd like a video report.....at an extra cost of $70.

A flat fee would work quite easily, but, if I set my flat fee at $500 per letting, that would disadvantage the landlords with a $300 property....but then again, it's up to the landlord to accept this or not. I would be happy with this, as it would only increase the value of my business. I haven't seen initial letting fees as a flat fee, but I have seen management fees as a flat fee. The only downside of this is that the landlord still has to pay, vacant property or not.

I guess that an itemised billing system may work, where each individual task were given a dollar value. An experienced property manager should be able to set up a fair itemised billing system setting the fees based on previous experience on how much each task may be worth....but then what happens if a fee for a condition report is set at $100 and it takes me 3 hours to do. Thats $33 an hour...

The problem I see with this is that less time would be devoted to each task in order to increase the hourly rate....one may skimp and do the 3 hour condition report in 1 and a half hours instead and not do the job properly.

The other problem with the itemised billing is that the landlord may request that the property manager doesn't do certain tasks. Obviously it would be the property managers responsibility to inform the landlord as to why each task must be done, but ultimately the landlord is the client and we should do as they request...but the landlord may be so concerned with the end cost that they may insist on cutting corners, impeding the property managers ability to do their task and possibly leaving the property manager exposed to legal action.

and i've lost the rest of my train of thought..so I hope this answers your question.

 

[suggo]

Interesting! Thanks for all responses, can't say I agree on a few but hey that's always going to happen!

I'd like to get back to the $225 and $190 question though as I think the $1800 and $180 is completly different!

I would like to ask asy how the $35 is for the things you listed when they do the same list of things for the $190 house!

I don't know whether or not they should change to an hourly system or flat rates but, what I do know is that there is NO EXTRA work done for the $225 house compared to the $190!!

It is only the difference in price for the same service that is annoying! And trust me when I say it IS the SAME!
I'd be happy with a flat rate...maybe a rental range even.
eg Rents between 180 - 250 pay a letting fee of 215
it depends when the skills change and the amount of work is increased.

Just read JoannaK's post above and it sounds like I might have a bit of a dodgy property manager. I'm aslo wondering if the prices of these houses sound very cheap compared to Sydney and Melbourne. As far as rentals go in Brisbane they are quite a way behind those in Sydney and Melbourne, the two houses I speak of are both within ten km's of the cbd (right on ten km) and are in good suburbs and would rent for significantly more in similar positions in these two cities.

JoannaK, do you have any contact in Brisbane I could talk to?
(although you sound a bit expensive )

 

[JoannaK]

Suggo,

unfortunately I don't have a contact in Brisbane. The only suggestion I can offer is to seek out a firm that specialises in property management or find a firm where one of the owners of the business is active in the property management department rather than the sales department.

hope this helps you.

 

[Sim]

Originally posted by JoannaK
Being paid a letting fee based on the rental of the property is the easiest way of charging. The landlord knows exactly what the charges are, and it gives the property manager a little more incentive to achieve that extra rent. And, it's a comprehensive fee - it covers everything.

Good point about the incentive. The cynics will say that the difference between $190 and $200 is not much of an incentive. But every little bit counts !

Originally posted by JoannaK
If one is to charge by the hour, how is the hourly rate to be determined? Who will set the worth of the property manager? I'm sure that if you feel you're worth, for example, $200 per hour, will you work for $100 per hour? I wouldn't. How is one to justify the hours spent on each task? That will require alot of trust between the landlord and property manager, something that takes an extremely long time to develop, sometimes years.

Funny you should mention trust. We all trust our trades people to go into our properties and do the right work - and charge us for only the time they are there. We let them do it even though we don't trust them.

If charged by the hour, property management would become like most other services industries - you would (or should) receive a detailed breakdown of the time spent and on what tasks. Of course, this is (from personal experience !) very time consuming to do accurately - especially to the level that many people would expect. Solicitors are great at this - billing you in 15 min increments (some even less !) for everything from instructing their assistant to get their coffee to blowing their noses. The IT industry is good at billing at lawyer rates and giving a vague indication of what we were pretending to do, while actually playing hackey-sack out the back (shhh !). Tradespeople seem to be the experts. We came.... we tapped a couple of pipes and made tut-tutting sounds... we billed you for $160 for the privellage with no indication as to what actually happened. *sigh*

As for the rate. In the IT industry, we used to have a (very) rough rule-of-thumb that said the amount you charge the customer is divided into 3. One third goes to the employee for their salary, one third to cover administrative expenses, and one third to the company as profit. So charging someone out at $150ph for their time would mean you want to be paying no more than $73Kpa for that employee (assuming a 70% utilisation rate).

Working backwards. Assuming your local property manager is paid $25Kpa (sucks don't it ?), you would not want to charge them out at more than $36ph (assuming 100% utilisation on a 40 hour week - which would not be that difficult to do if you also work weekends - but let's be nice to the property manager and use the same 70% utilisation that we allow the IT guys - which ups it to just over $50ph)

Of course, these rules of thumb never work - I used to be charged out at $300ph or more, and was on a measly $70Kpa. You charge what the market will bear - and there's no real formula to work it out any other way.

As for a company operating as a "rental specialist"... well - I'm sure your services would be worth every cent of the $200ph you would like to charge

Originally posted by JoannaK
While I think about it there is one advantage to the landlord that I can see from charging by the hour, and that is that the landlord will see exactly how much time the property manager spends on his/her property. The disadvantage that comes to mind is that if the property manager spends a total amount of 5 hours in procuring the tenant and doing all the other things involved, it will end up being much more expensive for the landlord.

This I do agree with. Charging by the hour would not end up benefitting the landlord - it would benefit the property manager !

Originally posted by JoannaK
What if one spends 5 hours on a property and charges for 7 hours - who is to know? This isn't fair.

But this is what we let our trades people do !

Originally posted by JoannaK
Then, does the hourly rate include everything? What if I take a video condition report? Will the hourly rate include the cost of this time and tapes? I know one agency that charges two weeks rent as letting fee, and asks the landlord if they'd like a video report.....at an extra cost of $70.

Actually, the correct term we use is "time and materials" (T&M) - meaning an hourly rate for my time plus the cost of any materials I needed or expenses I incurred in completing the work.

Originally posted by JoannaK
The problem I see with this is that less time would be devoted to each task in order to increase the hourly rate....one may skimp and do the 3 hour condition report in 1 and a half hours instead and not do the job properly.

This is a common problem with fixed price items - once you have agreed to a price, your next task is to see how quickly you can do the work to maximise your profits. This is not conducive to quality work. But then, T&M is not conducive to controlled costs !

Something that was explained to me a long time ago... there is a triangular relationship between cost, speed and quality. It looks better if you draw it, but I'll try and tabulate it for you. Basically, you can only ever choose two of the three attributes:

You can have it fast and cheap, but it will be crap quality.
You can have it cheap and good quality, but it will take a long time.
You can have it fast and good quality, but it will cost you a lot of money.

In the world of services, there is always a conflict betwen these three items that must be resolved. Managing the customers expectations is the biggest - and by far the most important challenge. I've seen too many projects go down the gurgler because of over promising - agreeing to what the customer expects (to win the business) when the reality is never going to be that way.

Of course, I'm mainly referring to things like IT services for a corporate environment, and things are quite a lot different for small businesses and especially for services to individuals.

Individuals are extremely price sensitive. So having a known cost up front is very important. This is why I think charging by the hour will not work. With other professional services there is usually a defined end point - you know how long it's likely to take. When finding a tenant - it could be a long drawn out process ! It can get very very expensive for the landlord. In situations of increased rental vacancies - property managers really earn their money - losing both income from the rent as well as working much harder for their letting fee !

My conclusion on which is the best way of charging ? mmm... dunno

 

[JoannaK]

Sim,

excellent response as always!

 

[GoAnna!]

Hi Suggo

If you are not happy then renegotiate )

I have negotiated a standard lettinging fee for apartments I have with a one agent and so regardless of which one is let I pay the same amount. Both I and the agent were happy with the arrangement.

 

[handyandy]

Hi All

My deal is 1 weeks rent for initial placement, 1/2 week on changeover, with a 5% management fee plus the standard "sundry fee".

These are the same fees from 5 different agents.

Cheers

 

[asy]

Where are the properties, handy?

what state/city

Thanks

asy