Scott: Putting out fires is a property manager’s job for their investors, but a bad property manager can impact your fire journey if you aren’t careful. I’m going to tell you why on today’s show.
Scott: Welcome to the Bigger Pockets Money podcast where we at Bigger Pockets have a goal to help 1 million people achieve financial freedom and specifically become millionaires. We truly believe here at Bigger Pockets Money that financial independence is attainable by anyone, no matter when or where they’re starting, including if a property manager steals a small fortune, like 40, 50 or $60,000 from them.
Scott: Today, I’m joined by Ashley Care of the Real estate rookie podcast to share my story and I’m in the hot seat. This is very much a money story and how I parted ways from my property manager, but turbulent times can be expected for anyone over a portfolio’s life cycle. And in the context of today’s episode, I get a little humbled here realizing I still have a lot of work to do to become an expert at selecting property managers. Hope you enjoy it and learn from it. I certainly learned a lot from Ashley and her great questions.
Guest: Scott, thank you so much for joining us today.
Scott: Thanks so much Ashley. I’m super excited to be here, although in the context of uh sharing a little bit of an embarrassing person and and costly uh loss that I had in my real estate portfolio in the last couple of years.
Guest: Well, I’m sure this isn’t easy to open up about, but we definitely appreciate you being vulnerable in this situation. So, kind of take us back to when this started happening. What did your portfolio look like and what kind of situation were you in?
Scott: Yeah, sure. So by this point, me and my business partner had accumulated about 10 units across a variety of different structures. We hired a property manager named Jeremy, local to Denver, Colorado, um with a company called Shift Property Management in 2021. Actually, I think we hired him in 2020 to manage a a portion of our portfolio, and we gave him one property that really needed a significant amount of repair work. We just had a tenant turnover and felt it was time to begin handing over some of these properties. And Jeremy did a good job with this. He managed a rehab, completely remodeled the unit, zero-scaped the yard, redid the roof, lots of different um improvements to the property, got a good tenant in place. That tenant is still in place um and still paying rent and we were really pleased um to the point where I gave him the rest of the portfolio. So, here’s all all the units in the portfolio and then another property in the following year. And things went smooth for about a year. We collected rents, we had low vacancy, pretty good responsiveness. A couple of bumps here and there, a couple of things that went a little longer than I would have liked, but generally speaking, collected some good cash flow and we’re feeling really confident about our real estate investing.
Guest: Scott, prior to hiring Jeremy, did you self-manage or did your business partner do it? Was this your first experience using a third-party property management company?
Scott: Yeah, I I and my uh partner had had self-managed the portfolio for all of the time I’d been real estate investing prior to this. So, I was very confident in my abilities as a property manager, but didn’t want to commit the time to actually doing that job by this point.
Guest: I think that actually makes the transition harder because you know from experience as to how the job should be done. So when someone isn’t exactly living up to your expectations, it can be a lot more difficult to kind of adjust as to, okay, my properties aren’t necessarily the priority because this property manager is overseeing a lot of other properties. I went through a a similar circumstance where I did things one way and, you know, it took a while to adjust with the new property management company of, okay, this is not always how it has to be done and, you know, maybe some things are wrong. So when did you start to realize that the way the property manager was handling things wasn’t exactly lining up and shouldn’t have been done that way.
Scott: Yeah, so and this has happened with other professionals I’ve hired where things go really well for the first, you know, project, the first year or whatever. But by mid 2022, um communication noticeably started to slow. So this is about two years after we’d hired Jeremy and um one year after he’d assumed um control of the entire portfolio. It’s like vacancies would take unreasonably long to fill. payments were very confusing and the reporting got really confusing after he switched to a new property management software system. Kind of it felt to me at the time, like random numbers that were much less than what I was expecting were appearing in the bank account and not on a consistent cadence. He was using buildium and kept records, but I couldn’t make heads or tails of the financial statements during this period for the life of me and I think I’m reasonably skilled in evaluating financial statements. Um and then in Q4 of 2022, communication stopped all together. Like we just didn’t hear from Jeremy on a project despite multiple different followups. and by that point we had we were coming up on the second missed distribution to our business and starting to be like what is going on? How am I going to figure this out. We we didn’t even know how much we were owed from previous ones because of that those those weird accounting statements and the random distributions to the main account. And so this, you know, was was flashing yellow and then flashing red all of a sudden. Probably was flashing red for a long time and I should have known better several months in advance of this, probably by like May 2022, I should have known something was wrong and going the wrong direction, but I didn’t really, you know, take action until about November 2022 when we had missed two rent collections.
Guest: Well, I think there’s that little bit of hope that things are going to turn around because it is painstakingly difficult and a lot of work involved as the owner of your portfolio to leave one property manager and on board to a new one or let alone find a new one. So it is understandable that you’re going through this period of time and like, okay, maybe there’s a reason this is all happening, maybe there’s some way to turn around and you kind of almost avoid the work of actually firing your property manager because you don’t want to have to go through that whole transition period again. So, we want to find out what happens next to your portfolio and what is the impact of this bad property manager, but first we’re going to take a short break and when we get back, we’ll learn about some of the red flags and lessons you have learned from this ordeal.
Guest: Okay, we’re back from our short break. Thank you everyone for taking the time to check out our show sponsors. They are what make the show happen along with the rookie community. So thank you guys so much. We are here with Scott who just told us about his property manager that basically ghost him. Uh, so Scott, how much money did he actually owe you when he kind of just stopped paying you guys off?
Scott: Yeah, so we will never know the precise calculation of that amount. Um at this point. We we spent a large amount of time trying to figure that out. The estimate that I have is two full months of rent plus all of our security deposits for all of the tenants. So I estimate that to be around $40 to $60,000 somewhere in that range. Um and here’s some more kind of stuff on that, right? So on November 1st, 2022, we made the decision like this is not that we’re this is not normal. We’re not going to receive a communication from this guy. We never received payment for October rent. We never received payment for November rent. We had a difficult time parsing that out for previous months rent, but because we acted on November 1st, we were able to get many of the tenants to pay to a new bank account for that month’s rent. So that’s why I can say we definitely missed the um, you know, October, missed part of November, and then we missed parts of how many more months going back to May if we could make heads or tails of the accounting statements on there. Uh, Jeremy has never made himself available for us to interview him or to understand um, those numbers. So perhaps that will change one day if you ever reaches out.
Guest: Did you ever consider contacting the police or did you contact the police, contact an attorney, try to take some legal action?
Scott: Yeah, so this was an interesting discussion where, you know, he this is we were not the only ones that this happened to. Many other investors in the area, um, who worked worked with Jeremy had the same problem and all of us were in the same boat. We got together and we discussed, hey, should we sue the guy? Um, and we talked to a lawyer. The lawyer basically was like, I mean, you can you can sue him and you’ll win, but would you get any money out of this? Like the money’s gone in this situation. And you know, for for some context here, when I did see Jeremy, you know, between large chunks of of kind of ghosting or lack of response, slow lack of response. You know, I saw him with $2,000 pair of shoes or a really fancy car. Here I am showing up in my Costco outfit, you know, as the owner of the property and the property manager is really, it appeared to me visually, living very high in a lot of these these situations. I have reason to believe based on police statements and an arrest record um from out in Western Colorado that uh drugs were being abused during this period. So, you know, checks were bouncing. So I actually went and collected a physical check from him at one point in Q3 of 2022 before all communication ceased and it bounced. So I had to get another form of payment. So when a check bounces, that’s not that’s not a good sign that there’s a lot of money left in the rest of the accounts there, right? Um so, you know, who knows about this, but we made ultimately made the call as a group not to pursue um a joint joint legal action there. Uh we did report his information to the Colorado Department of Regulatory Agencies and I believe his license has been revoked. I spoke with someone there and related my experience, but yeah, we did not pursue ongoing legal action from there.
Guest: I think you mentioned a couple red flags in there, such as, you know, this was actually a a cheap budget friendly property manager that was a good price, but yet he was able to have the nice watch, the nice shoes, the luxury car. Is that one of the things you would say it could possibly be a red flag as to how are they making so much money to buy all this stuff, but yet they aren’t charging me a lot of money.
Scott: You know, I I think that’s a great like question and one that I asked myself a lot is what what did I do wrong to end up in this situation because, you know, like coming back to how I found Jeremy, he was referred to me by someone that I respected, um, you know, who who had a good experience with him. He was low price. He managed my test case really well and earned my trust with that one. He got all my properties occupied and cash flowing nicely. and then his behavior began to change. Like, should I have done a full-on background check to see if there’s a history of drug abuse or other things. Maybe, but that’s not something that I customarily do for a role like this in the property management space. I didn’t know how long he’d been in business, but again, I thought that my referral was adequate in this particular scenario. And then, you know, there were other things that I think led to my lack of action in mid-year 2022. Probably like I probably should have acted sooner, but like the contract had all these things about like, hey, if you cancel, you owe me all, you know, 8% of the remaining rents on all of the units in your portfolio for the terms of this contract. There were rights um of first refusal to help sell the property in those types of things. Stuff that like probably I should have known and I I I I I was aware I mean I did know and I was aware of, but I should have negotiated out of there. So like all of those things are kind of looming into like why I picked Jeremy and his company here in uh in 2021.
Guest: Yeah, I think those are definitely things to consider and it is so hard as investors because we do lean so much on referrals from other investors and it seems like you took a lot of the right steps as to getting referral, dating the person, just giving them, you know, one property at a time to see how they did and he did fine, but the point there is is that people can change and evolve. and that’s where you have to be, you know, proactive or really, really reactive to being, okay, this is not working out anymore. What are the steps I can take to resolve this or what can I do to exit out of the situation? And that’s where that hesitation is. I had the same property manager for three years and I probably should have exited after two years and not signed on for the third year and it’s like, you know, now that I’m out of that situation it’s like, wow, this is so much better. This is refreshing. Why didn’t I go back and do that but here we are, the lessons learned, the the cost of being an investor. So, after this has happened, what did you do once you found the new property manager? What was that whole transition like because I’m sure the day you decided that November 1st, we’re taking back rents, that was a lot of work put on you and your partner. It’s OK, all of a sudden we’re property managers again. Let’s try and get our tenants to pay us rent. We got to set up a new bank account. Explain that period of time of what are the things you had to do to get your property stabilized again.
Scott: Yeah, so one of the other folks who I think would agree with the statement, got robbed by Jeremy in this process said, okay, I’m just going to like start my own company and begin managing these properties myself. And I’ll help out any of you guys here as well because I think he was just tired of like hiring that out. And in the process of doing that, he started a new company that also hired one of the employees that had previously worked for Jeremy. And that was really important to me because that person had all the contact information with our tenants. and if there was going to be any hope of recovering funds in the future, I thought that being partnered with this company would be an absolutely essential piece to that. We negotiated all the things that I thought I did not like in the previous contract um in there around termination and all those kinds of things. These were um were in our very similar. The reporting is completely different and I looked into that before the first month there to make sure we could get a very clean report that said, here’s what was collected this month. Here’s what was spent, here’s where the management fee is being taken out and here’s how that’s going to then translate to the owner’s distribution, owner’s draw that hits your bank account um every month. Here’s how the tax reporting will work, those types of things. So we talked about that. I felt much better about this particular property manager um for a couple of reasons. One, because he was in it in the same situation as me, two, he owned many properties. and I feel like someone who owns a large number of rental properties and has been around for a long time in the space as an owner is unlikely to run off with my money and do illegal activities in the western part of the state for a repeat experience on that front. And so that was that was really it. I I I didn’t have things like, hey, here’s the, you know, I didn’t have my playbook for interviewing property managers fully defined at that point because I was still going through crisis. and I didn’t ask some of the questions that I’ve uh designed now. and I I am also learned the lesson to split out my portfolio. So this person has some of my properties and other properties now go to another property manager where I have implemented my, you know, my newly formed playbook for interviewing property managers to try to avoid that situation. But I’m going to avoid it both by getting better at evaluating these property managers, hoping that they meet certain criteria and by spreading out the risk across multiple property managers.
Guest: That is a really great point. Instead of just diversifying, you know, your rental income streams or your portfolio, you’re actually diversifying your risk in who’s actually running your portfolio and taking over your rental income. So what are some of the things that you are now doing in your playbook to kind of navigate that risk when hiring a new property manager?
Scott: The first question that I ask is occupancy, right? So what is your what is the property manager’s current occupancy? And I believe that on a portfolio of 100 plus units, hopefully it’s in a couple hundred. Um if you have 95% occupancy across that portfolio, something’s going right, right? You have your unit turns down to a science and an art. You understand how to price appropriately. You’re not too high, otherwise you’d have vacancies or problematic tenants and you’re not too low, otherwise you’d be having conflict with the landlords in your portfolio, um, who are beating you up over low ball on the price to to keep all the properties occupied. So, you know, there your unit again, unit turns are there, marketing is is tight. um, you know, we’re not having huge problems with tenants not paying or being evicted if occupancy is that high. And so, you know, I’ll ask a number of qualifying questions to make sure that that’s not cheated somehow, but that’s what I’m trying to get at uh in the first question. That to me says somebody’s running a tight ship here. I like to ask questions around, do you have written tenant criteria posted um for your rentals? And what would you have them be for this one? That just saves everybody a lot of trouble, um and I like to to make sure that those are written and that will tell me if they’re in compliance with local laws and whether I’m aligned with their philosophy on the type of people who should rent this type of unit. Um I know the rents on my properties pretty well, right? That’s a that’s a job I think I have to be able to do as a landlord. I want to be in this business for a long time. So I asked them to provide an estimate of rent for my property and I want them to be right at or just under my estimate for rent. If they’re over um my estimate for rent, then I begin to to worry because in my experience, um what that’s tended to happen with property managers is they’re eager to impress, and then they post the unit and you get some weird applicants because those are the folks that are applying for overpriced rentals for whatever reason, that are not desirable to folks that are renting at market rates in many cases. And so I’ve experienced problems on that front over the years. I’ll I’ll stop there. I have more that I can go into, but are those helpful so far?
Guest: Yeah, and we’re going to take a short break and I really want to come back and go into more of the specific questions that we can ask when vetting a property manager. So we will be right back after this break.
Guest: Welcome back. If you need help in your own property management education and search, go to biggerpockets.com/manage me. This is a full resource page and if you want to connect with a property manager, you can do so here. It is the only place to see reviews from investors on BP. You can also reach out to those investors for references and referrals. Okay, so we are back here with Scott. So Scott, you talked about different ways and different things you should be doing to kind of vet a property manager. So what are some of the questions because I do believe that on the biggerpockets.com/manage me, there’s over 78 questions available to ask a property manager. What are some more of those questions that we should be inquiring about? And then is there also a way to verify some of these questions that you are asking?
Scott: Those are great questions there. Um some of the questions that are verifiable are what’s your current occupancy? Can you show me a statement that that shows that. I like to ask, can you provide me an example of an owner’s statement, right? What show me, show me how you would report the financials to me on a monthly basis. That’s something that you can verify. It’s possible but a little harder to verify, um, and I usually operate on trust on this particular one. Like, why’d you get into this business and what I’m looking for is I own a few rental properties. I have an interest in real estate. I’m looking I’m looking to um add that competency and vertically integrate to some degree of my own portfolio and because there are advantages of scale, I’m also taking on additional clients. Like those are things that I like to hear in addition to the questions that we talked about before the break. many of those are easy to verify on an overall basis. And then again, my lesson learned here is I’m just going to give portions of my portfolio to property managers over the years. I think that one of the big things is that, you know, that I the lessons learned from my experience here are, you know, property managers, it’s different of relationship than like an agent or a lender or tax professional, right? Because a property manager, unlike those other folks, can steal from you, right? And that that’s really what rattled me in the situation. Like they’re actually handling my money. And so despite all this due diligence, which I’m getting much I think I’m getting much better at. we’ll see how this goes in the next five to to 10 years here. I think that it’s important to maintain a little bit of skepticism and really verify all of the statements each month. Like I am going I I take the time to go through and ask questions about every single charge in my owner’s statement that I don’t understand easily or intuitively on the first glance or anything that’s unusual, every single month with both of my property managers, right? I’m I I watch the new property manager like a hawk and communicate with them weekly about various projects that are in flight. And I think that that that is really the the lesson learned here is that this is not just like a completely passive, hey, property manager, here you go. It’s like you got to watch this and you got to know that even if somebody is highly trusted in the first year, that can change in a few years. Even if somebody’s super highly rated and comes with a excellent referral, that can change in a few years. The benefit of course though, is that when you hire a great property manager, and I believe both of the property managers I work with now are great property managers, they keep the portfolio occupied at a much higher level than I would have with my kind of part-time on the side piece here because look, my job is to run this company, Bigger Pockets, and I need to be able to give my full-time undivided attention to that for at least 50 hours a week. and then maybe handle my portfolio on the side of that. And so to me, that’s a huge benefit of having property management is that I’m able to do that in 30 minutes once a week, go through the financial statements and then um, you know, occasionally, hopefully, very rarely, beat up property managers when there’s something I don’t understand or not being responsive or those types of things. So, that I think that’s a a big component. One thing we haven’t talked about is fees.
Guest: Before you do that, I I want to highlight I think a realization that you had from this whole experience and the same thing happened for me is you realized you had to be an asset manager. That this wasn’t a completely passive thing. You had to learn how to manage your assets. You now take these steps that you go through your financials every month, you’re doing all these different things. So in my situation, I realized my property manager, the person working in their office that actually pays the water bill is not going to notice that out of the hundreds of water bills they pay every month that mine increased a little bit because the toilet has been constantly running. But I will notice that when I go through my financials, I will notice that, you know what, actually why is the water bill higher? They’re not going to go and they’re not going to quote out your insurance every year to make sure you’re getting the best rate. But also they’re not going to make sure that, you know, the repairs and maintenance you’re doing are absolutely necessary and some things that that they’re always getting three bids on something. There’s all these different things that you have to do as an asset manager to oversee that your property is running efficiently and effectively to the best of its ability outside of the day-to-day operations and maybe that’s the the next bootcamp that bigger pockets needs to do is asset management. So you don’t want to be the property manager, you can go on and learn how to actually properly manage your asset and the kind of bigger picture of it.
Scott: Well, now I’m going to go back and analyze the water bills in all of my rental properties for the last five years and see what’s going on there. Wow, I didn’t think of that one. So that’s a great tip. I’m going to go take that one away from away from this call today. That’s awesome.
Guest: Okay, so let’s go into that. What are some other tips that you have for investors of all kinds, not necessarily even rookie investors when they are hiring a property manager.
Scott: Yeah, so look, I think a lot of people get hung up on pricing and I think that’s a mistake. At the end of the day, if the property manager keeps my portfolio occupied at and and like there’s a whole bunch of theories here. So I’ll I’ll just monologue about this for a few seconds here. Um if the proper property manager keeps my my portfolio occupied at 95% instead of 90%, then that’s worth way more than the 2% savings I’d get from a property manager who charges 8% of grants versus 10% of rents. And there’s just like there’s different levels of reasonableness when it comes to my portfolio in particular, right? I have one property that is a quadplex where each unit rents for $1,000 a month in Denver and each unit is one bed, one bath. That is a very low-end property in the Denver, Colorado area. I have another property that I lived in until recently that is a side-by-side duplex and each side is one side is five bed, three bath, and the other side is four bed, three bath, and each side rents for about $3,000 a month, give or take. So that’s a very different property management experience for a property manager and the fees that a property manager charges should be reflective of that, right? Like I should be on the higher end of paying those fees for my $1,000 a month fourplex, uh you know, times four or fourplex than I should be paying for the two much higher income earning, um higher credit score tenants that will occupy the five bed and four four bed, you know, property with a fenced in yard and garage and you know, all those kinds of things. So, like that that needs to be considered in there. What I don’t like to see in a property manager is a page and a half of ticky-tack fees. And in fact, when I hired my um when I was looking at talking to other property managers I just said, look, like, I’m not even going to continue the conversation past this point unless you totally eliminate all of these fees. I’ll increase your percentage of events from 8 to 10% in exchange for that, but I just think it’s a much better alignment of interests. To me, if someone has two and a half pages of ticky-tack fees, that means that they’re incited to do all this extra work or blow me off, right? Um because I or like encourage me to not reach out to them or talk to them because I’m getting charged $25 for my extra call or whatever. or to they dissentive you know, it it charge a fee to the tenants, you know, those types of things. I don’t I don’t like all that stuff. I like a clean fee structure that says you get paid when the property is occupied. Now, I’m willing to tolerate a couple of other fees in that context. One is the lease-up fee. I don’t like it, but I get it. There’s a lot of work that needs to go in there. And so while I’d rather a property manager just charge me a higher, I’d rather pay 12% to a property manager that had no other fees than 8% to somebody who had two and a half pages of fees and the balance that I think is reasonably healthy sometimes can be like a 10% um of rents fee for my portfolio in Denver with a lease up fee that is reasonable, maybe a renewal fee although I hate those too. And then I’m also fine to pay the property manager a general contracting fee for work that is over 500 or preferably $1,000. So they’re going to do a major remodel and they’re going to basically GC that for me, I’m happy to pay them 10% um of those those things, assuming they do a good job and get a bunch of quotes from that. I I do not like fees that allow them right? first refusal to sell the property. I do not like fees, like breakup fees that are like 10, we’re going to get eight or 10% of rents for the next 12 months on every property that has an outstanding lease. So I usually negotiate like a fair one-time breakup fee like 500 or 1,000 bucks so that there is something in there but it’s not going to cost me 10 grand to break up with the property manager if things aren’t going well and I’ve got a bunch of leases that are, you know, still have 68 months left on them. So, how’s that for a quick discussion on property management fees?
Guest: Yeah, I think the first part is really understanding the fees. Getting a list of all the fees. I when I hired my first property management company, I did not ask that question up front and it was all just we met maybe three times, we talked and there was never any kind of written anything written down that was handed to me that said, here is our fee schedule, here is how our pricing goes. You know, some of it was in the contract, but a year into the actual property management, they said, across the board, we are installing that twice a year. We are going to go into every property and do a recurring maintenance check. So this is where we were paying them. It ended up being $70 per unit for them to go in and just make sure there was no outstanding maintenance, which in theory is a a great idea. First of all, ten don’t want them just coming in to check, so that was an issue. The next thing is, that’s now $140 per unit across the board for all these properties. So one of the properties is a 40 unit apartment complex. It’s not taking them, you know, it’s not $70 a worth for them to walk right next to each little apartment. I get it if they have to drive to the property, then drive to another one. but it was just they ended up scratching the whole thing because so many people complained about this one initially in our contract. This is now just another added cost and it was where they were going in and telling us things that had to be fixed and some of the things were things that did not actually need to be taken care of. We we found out later on. but the first thing is figure out what that fee schedule is, what is that pricing point and that’s where it is open to negotiation like Scott said as you can go through and negotiate your contract specifically. you could even do it by property. So Scott, you mentioned you have duplexes and I think single family homes. In my situation, that was what the property management management company was used to with single family, very, very small and we threw two 40 unit apartment complexes at them where they had no experience with us. and this was the management of this was so different. Do you want to talk about the experience your property manager has with your type of property and how important that is too when evaluating?
Scott: Yes, so my first property manager, you know, had a had the experience sorry, my first property manager robbed me. My second property manager, you know, was like, I also got robbed alongside me and has a very similar type of portfolio. And then I gave two excellent units upon moving out of that property I just described to a property manager I met with the bigger pockets property manager finder. Um, you know, I I knew a guy so I had early access to that program. Um Gge of working here and wanted to make sure I eat my own cooking um on that front. And so actually both my property managers are named Jim and Jim number two, um my newest property manager, he he uh has a large a personal portfolio in and around the Denver area that has many properties that are similar. My property is a little larger than the typical rental property because there’s not a lot of um rentals that are four and five bedroom in the area, but he does manage a higher end type of unit there. and I think that’s really important because that helps to make sure that you know how to price the unit and treat the tenants right and again, you know, those types of tenants expect I think a little bit different level of maintenance and responsiveness to the property. So, just just differences there. I will say though that that’s it’s important to understand all of this in context when talking to a property manager because, you know, property managers don’t want, I think the four-unit quadplex at the same price point or the same fee structure as the two- unit high-end duplex. And so that’s something to understand if you’re an investor with multiple units that your whole portfolio or parts of it can be leveraged in a negotiation. They may really want some of the units and some of the units may not even meet their criteria as a property management company and they’re trying to or the salesperson or the owner will will know to reject units of those types. But if you give them the entire portfolio or components of the portfolio, you may begin to meet those criteria. And so again, it’s really hard here and you see a lot of kind of like novice investors on the bigger pockets forums saying fees are the first thing. if they have charge fees over this one, I’m out. Well, again, that’s why I didn’t start there in the screening criteria, right? It starts with can you keep my portfolio occupied? and if you can do that, I’m going to make money. I’m gonna make more money if you charge lower fees than if you charge higher fees. but sometimes there can be an inverse correlation between the fees that a property manager charges and the occupancy levels. and there can be an inverse correlation between likelihood to rob you and fee structures and those types of things, right? Doesn’t mean low that the low fee property manager you’re sign with is going to rob you like what happened to me, but like those are things to consider. You know, I I think there’s a saying on bigger pockets where if you think that the $100 an hour electrician is expensive, try hiring the $25 an hour electrician and you’ll see what a really expensive electrician looks like. Um, and so like that that’s I think part of the lesson learned there is it’s not all about fees. It’s can you assess quality and then shop the fees after you’ve been able to do that? And I think there there’s an art in this world because it’s the wild west. Every property manager I’ve ever talked to has wildly different fee structures.
Guest: I want to ask you about your opinion on hiring a third-party property management company versus hiring someone to be your property manager. So Bigger Pockets recently came out with the self-managing landlord book. We had Grayson and Amelia on the show to kind of talk about this. Did you ever consider that as a route of going as to actually just hiring someone in house to be your personal property manager?
Scott: So, no, I did not. Um, and the reason for that is because the overall fees from my gross rents in my portfolio are not, um, would it would not make sense. I’m not at enough scale in the local Denver area. and, you know, certain parts of my investing are done with a partner and certain are done for myself. So it just doesn’t like I don’t I don’t I I don’t have the scale to be able to do that right now. Um, but that may be something I consider in five to 10 years if I amass a large enough portfolio. Then you’re really managing a business and doing one-on-ones with somebody and, you know, have to figure those things out. So, I think there’s pros and cons, but I have not considered that personally yet.
Guest: Yeah, I agree. like you still are running a business. You’re not only the asset manager but you’re also overseeing an employee now too. So there definitely are some differences along with building out the systems and processes to actually have that person manage your portfolio instead of hiring somebody who hopefully already has that, the company already has those in place. So the next thing I want to ask you about is the communication. So you had mentioned that Jeremy was ghosted you and then, you know, even before that there was a lack of communication. What are the expectations of a property manager to, you know, actually communicate with you? What should they be providing every month, every year? Should they be taking you out to dinner every year to give you a whole pitch about your portfolio and how it’s performing? What is your expectation on communication?
Scott: Yeah, look, I expect ad hoc communication to be returned promptly. If someone’s going on vacation, they should have other people at their business that are there to respond. I think that I should be getting response in basically every scenario within one business day for my property manager. and if that does not happen, I make sure to follow up and make it clear that that cannot continue to happen for the arrangement to continue. I expect a monthly financial report that is very clear and that I can understand and I expect to be able to ask questions. When I have a new relationship or I have some sort of problem going on in the portfolio, like a lot of vacancies or whatever, that are starting to pop up or a lot of renewals and I feel like they’re not being handled perfectly. I like to I like the option to be able to set up a monthly call or even more frequent if necessary with the property manager and ideally the owner, um if it’s a small company um in the property management space. So those are the things that I I generally expect. My typical cadence with Jim number one is a monthly report that is handled and we’ve kind of aligned on an approach to handling renewals and upcoming vacancies and I think it’s really effective where we get out ahead of those in uh 75 to 90 days before the lease expires and get clarity on that.
Guest: I think the really important thing that you said is you need to let them know your expectation. So, if you would have just let it go like, oh, you know what, they didn’t follow up in a day then next time they will or something, but you set that expectation right away that this is what I expect. And I think that, you know, the company, the property management company can’t know that you’re upset about it or what you want if you aren’t letting them know. And I think that was part of uh how I let it get so far with my property management company. I used to because I wasn’t setting expectations. I was just hoping it would get better instead of trying to be proactive about it and, you know, saying these are my concerns up front instead of just letting it go on and on and on forever. So, with vetting the property management company, I just have a a couple more questions to to ask about this, but what about if the property manager has ever been sued or by an owner or a tenant. Is that something you can actually vet and research or you have to to ask them about that?
Scott: Great question, and that’s one that I need to add to my my screening list here because I did not ask that I’ve not asked that of my two uh property managers that I work with. I may follow up with that. Um I don’t know how to vet or answer that question. So that would be a great question for another another person to to help us out with and maybe a good question for the bigger pockets forums.
Guest: Yeah, I don’t know the answer to that either. I just um, off the top of my head, I think maybe you could go to like your county records and search the owner’s name to see if any, you know, legal documents come up like you could search like deeds and things like that. So you could go to the the county clerk online records and search their name, search their business name I guess and see if anything comes up that there maybe some thing in there that you could find and discover on them.
Scott: In Colorado, a property manager must be licensed by the Department of regulatory agencies. So called Dora here. So I know that if someone is licensed, which is part of the contract that I I receive from my property manager, that they’re in good standing with the state and they’re licensed to conduct that activity. So that’s that I think probably is why I haven’t really thought about that one as much, um but you can tell you’re you’re catching me off guard with that question. It’s a good one. So I need to think that through. Like my guy, Jeremy, I don’t think that would have caught him because I think that the problems developed after I met him, um, and to a large degree.
Guest: Yeah, I think my concern with asking that question is to, even if they they won and it isn’t an impact their business where they can still hold their license or whatever have happened with the lawsuit. I think it would be most interested in how they handled the situation and I guess there really is no proof, but you could still ask the question and see what they say because if, you know, maybe the tenant says, you know, like this happened in the property and they’re suing the property manager, is the property manager automatically going to say, oh well, that’s the owner’s fault. Like what is as the owner, what is going to be my responsibility? And I think that’s also part of getting a a copy of their insurance policy. What does the property management company actually cover in the event of a lawsuit? What is their responsibility, what would make them at fault as the operator? So, you know, I live in Buffalo, most of my investments are here. Say, you know, the sidewalk isn’t salted, the driveway isn’t, it’s icy. A tenant falls, but it’s also the property manager is the one that hires the contractor who’s actually supposed to salt and clear the driveway. So is that all of that responsibility on them or does some of that still come on me because I am the owner that actually hired the property manager. So that was where my brain was going with all of that as to knowing with your property manager, what are they actually responsible for and how much protection do you actually have by hiring them?
Scott: I think that’s a great question and I think like and just thinking through this, what this have helped me avoid the situation with Jeremy. And I’m wondering like halfway through the relationship, he rebranded his company, new LLC, all those different types of things. So, you know, I’m wondering I I think the value of asking that question even if you can’t verify it is at least then if there’s a problem downstream, you know it’s because someone lied to you from the very beginning about stuff. Right? And like, you know, we we at the Bigger Pockets money podcast a while back, we interviewed this guy who ran a Ponzi scheme for seven or eight years, right? And and like that’s why I think makes this like so hard and why this is such an inefficient market where there are profits to be realized and problems to solve for investors. is like we interviewed this guy, he ran scheme for seven or eight years, went to prison for it and came on the show after being released from prison and all that. And it was like, yeah, like my clients would have their CPAs come look at the fraudulent financial statements that I produced and they’d sign off on them because I fooled them. Um with it. I remember getting close a few times. But like, you know, I so I I just think that’s a risk you take when you work with anybody that is actually going to handle your money. And so that’s where this huge due diligence process and really being thoughtful about all this stuff, you know, matters greatly, hedging your bets, having a couple of different property managers, knowing what good looks like, watching things closely, making sure distributions come on time, right? Like the consequence of failure in this should be, if you’re good at it, one month of pain, not two months and all security deposits like it was for me, right? And it will be, that will be my risk for this on a go forward basis for the rest of my life. And it’s well worth it because my current guys keep the properties occupied at least 5 to 10% more than I would be able to do in my spare time on nights and weekends um with this. And so that’s profitable. but I think it’s a skill set that goes along with that that you have to develop alongside all of this stuff. And I think at again, at least you should trust but verify whatever you can, be thoughtful about the questions that you feel are important. know that this is an art and that you can still get it wrong even if you um have a wonderful playbook in front of it. um and know that again like like just have that skepticism and watch your portfolio be an asset manager. I love that um on a go forward basis.
Guest: Well, Scott, I think you just wrapped up the show for me. I don’t even think there’s anything left to say. But like the biggest takeaway I think is to diversify with different property managers to kind of, um, you know, navigate that risk a little bit. And also, you kind of said it here at the end as to instead of waiting two months, you know, be proactive at one month or, you know, take care of the situation head-on. And that’s where maybe now as you’re putting together your property management company, bringing them on, that’s where you have an exit strategy, just like you would with your rental property in your business, have an exit strategy. So if things do go sour, you have plan B. Okay, you know, I haven’t gotten my rent this month from the property manager, they’re ghosting me, whatever, here is my plan and I’m putting it into action right now instead of scrambling trying to figure out what to do. So, uh great tips today, Scott. Thank you so much for joining us and everyone, take a minute to check out biggerpockets.com/manage me. Even if you already have a great property manager, go through those list of questions, look at your options out there in case you too want to diversify in the managers that you use.
Scott: Thanks for listening, everybody. Uh that was my story. Terrible experience with a property manager. That’s one of the reasons I’m so passionate about the new property manager finder we’ve built here at Bigger Pockets. You can find that at biggerpockets.com/manage me. Um and I think that that’s going be a great resource for folks who are looking to find high-quality property managers. Interview several, watch them carefully, but we think we’ve got a great tool for investors who are looking to hire property managers. And again, property manager, good property management definitely beats me at least in operating my portfolio at this point in my career. So really enjoy working with my property managers today. grateful for them and grateful that I had this experience early in my career and not much later.
Mindy: Bigger Pockets Money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Knudtsen, copy writing by Calico Content, post-production by Exodus Media and Chris Mckin. Thanks for listening.
