Don't Get Hooked by Low Fees: What Really Matters in Property Management

When an owner sets out to hire a 3rd party management company, the comparison almost always starts, and often ends, with the management fee. It is the number every firm quotes, the one that fits on a single line, and the one that feels like the lever an owner controls. According to operators who have sat on both sides of the table, it is also close to the least important figure in the decision.

Ron Kutas, Chief Executive Officer of OneWall Communities, an owner-operator that also provides 3rd-party management services, argues that fixating on the fee steers owners away from where the real money moves. He puts the mismatch in plain arithmetic: a 25 basis point cut on the management fee for a property with a $2 million rent roll saves an owner about $5,000 a year, while a 200 basis point difference in bad debt at that same property is roughly $40,000. The questions that actually move the outcome are how quickly a manager turns units and what its bad-debt policy looks like. A manager willing to drop from 3 percent to 2.5 percent has to recover that half point somewhere, often through higher billbacks, more home-office personnel charged to the property, or less attention paid to the asset.

The line owners should press on is chargebacks, the costs billed back to the property on top of the fee. A revenue-driven company tends to be vague about them, while an owner-operator has a schedule ready to send. Reporting itself carries tells: generic parent accounts on the chart of accounts, like a single 'repairs and maintenance' line, are warning signs. Thin reporting hides undifferentiated spending. The industry has no shared standard for chart-of-account structures, bad-debt policies, or expense approval thresholds, leaving the expense side opaque. Kutas advises owners to ask about people, not just price: who is the regional manager assigned to the property, and what backup exists when a community manager goes on leave? A firm's bench strength is crucial. Owners also misdiagnose underperformance; if you're on your third manager in four years, it's probably not the management company. A manager prepared to turn business down is a signal of quality. As owners grow more skeptical of headline fees and more attentive to the expense side, the managers who can answer the harder questions in detail are likely to separate themselves.