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Between rental advertising, accepting tenant applications, handling maintenance requests, and much more, running a rental property business calls for a significant amount of time and effort. You can cover all the necessary bases with property management software, but if you decide to hire a dedicated property manager, you’ll need to utilize a property management agreement.
This legally binding contract sets the stage for good property management practices. Property management agreements define expectations, define the scope of a manager’s responsibilities, and break down the payment structure. As such, these agreements are crucial for both property owners and managers to maintain a professional relationship without any speed bumps.
Emphasis on crucial—if you want to avoid the stressors of a legally binding contract, you’ll have to manage your properties yourself.
At TurboTenant, we’ve put together a guide to explore exactly why property management agreements are so important, the different kinds of agreements available, and some of the key components of a solid contract between managers and landlords. Keep reading to find out how to use a successful property management agreement and some tools that will help you avoid one altogether.
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What is a property management agreement, and why is it essential?
At its core, a property management agreement outlines the responsibilities of property managers and landlords, minimizing the likelihood of issues in the daily operations of rental properties. Additionally, a legally binding contract formalizes the relationship between the landlord and the property manager, potentially preventing disputes in the future.
What does a legally binding contract include?
The specifics of a property management agreement may differ depending on the type of contract, which we’ll discuss shortly. However, the contracts should generally outline the terms and conditions of the property management relationship. Conditions include essential information like the contract length, the services the manager commits to providing, and the payment amount due.
Finally, these agreements should be signed and/or notarized. Doing so creates a legally binding contract and ensures that both the landlord and property manager remain committed to upholding their agreed-upon responsibilities.
Responsibilities and Compensation
Perhaps the most important aspect of any property management agreement is defining the property manager’s required duties and the owner’s compensation. It’s worth emphasizing that “compensation” should include all relevant payments and timelines so unpleasant surprises don’t occur later.
Adding these terms to the agreement should provide much-needed clarity for landlords and managers and, ideally, prevent either side from overstepping boundaries.
Exploring Different Types of Agreements
Every rental property and property management agreement is different. Landlords and managers should thoroughly research the types of agreements available to determine the best contract for the situation, considering the property’s use and the amount of work the manager will need to do.
Leasing-Only
Under these agreements, property managers only need to assist in securing tenants rather than providing ongoing property oversight. A leasing-only property management agreement typically requires the manager to handle tenant applications, screening, and lease agreements. In contrast, the landlord is responsible for all other aspects of the rental operation.
Though you might have some initial hesitations, managing your own properties offers numerous benefits: saving money and time, having more control over your rental units, and improving relationships with tenants, to name just a few. So, don’t overlook the upsides of a more DIY approach.
Full-Service
As the name implies, full-service property management agreements are the most comprehensive contracts. Managers must cover just about every aspect of the rental property, from tenant placement to collecting rent and fulfilling maintenance requests.
A full-service agreement gives the owner greater freedom. They won’t have to run to the rental to replace a faulty showerhead or broken window. Naturally, these contracts will prove more costly for landlords than others. Typically, owners can expect to pay around 10% of their monthly rent on these agreements, which can eliminate profit.
Residential
Residential agreements are tailored to the unique needs of operating rental units as dwellings. They apply to all kinds of residential spaces, including single-family homes, apartments, multi-family units, etc.
Commercial
Similar to residential property management agreements, commercial property management agreements cover the specifics of renting industrial units, offices, retail spaces, and others. As additional laws typically apply to commercial rentals, having the right property manager agreement is especially important for commercial landlords.
Maintenance and Repair Agreements for Property Owners
Maintenance and repair agreements put property managers in charge of any required upkeep, including coordinating repairs. However, these contracts usually do not cover other property management duties, such as rent collection, aren’t usually covered by these contracts.
Consulting Agreements for Property Owners
In these agreements, property managers serve solely as consultants. They offer valuable advice and guidance to property owners without assuming active management responsibilities. These contracts are suitable for landlords who require minimal hands-on property management.
Key Components of an Effective Agreement
As mentioned, every property management agreement should include specific elements. Spelling out these components in the contract ensures clarity regarding the property owner’s and the property manager’s standings, ultimately protecting both parties.
Scope of Services
The property management agreement should thoroughly explain the services the property manager is expected to provide. This understanding will ensure that the owner and manager are on the same page and no duties can be unfairly added (or removed) later.
Fee Structure and Payment Terms
The property manager’s contract should include details about the payment structure, including the payment schedule and any additional fees or costs that could arise. Most managers charge a percentage of landlords’ monthly rent, though some may prefer a flat rate or a combination of the two.
Duration, Termination, and Renewal Clauses
This part of the agreement covers some crucial nuts and bolts of the contract itself. Regardless of scope or type, all property management agreements should clearly state the length of the contract term and address protocols (such as required notice periods and the provision of monetary compensation) that would allow either party to terminate the agreement early.
Additionally, the property management agreement should address the possibility of contract renewals. It should specify whether the contract renews automatically or if both parties must review it later. Clarifying renewal factors offers flexibility and protection for both the landlord and the property manager.
Roles and Responsibilities
The property management contract should clearly define the respective roles of the property manager and the property owner. While these roles may seem self-evident, addressing this detail will help prevent confusion and ensure accountability.
Legal Compliance
Last but not least, all property manager agreements must comply with local, state, and federal laws regarding property management. Property owners and managers must thoroughly research relevant regulations when creating property management contracts to avoid any headache-inducing legal quandaries.
Remember that these ordinances may change often — staying current on rental law is essential for good property management practices. Or, you could manage the property yourself and sidestep these legal challenges altogether.
Best Practices for Creating and Managing Property Management Agreements
As the property management agreement comes together, both property managers and owners will want to maximize the contract’s efficiency while minimizing potential issues. Here, we’ll explore some best practices for writing, reviewing, negotiating, and maintaining an effective agreement.
Regular Property Inspections and Maintenance Requirements
Unless the agreement excludes property inspection and/or maintenance, property management contracts should clearly outline the manager’s responsibility to conduct regular inspections. Doing so will help maintain the property’s value. After all, nobody wants to discover that their property manager overlooked a squatter encampment or a mold situation for weeks on end.
With that said, the property management agreement should also cover how the manager may address necessary property maintenance, whether that entails simply reporting issues to the property owner or taking direct action to resolve the problem.
Clear and Transparent Communication
No matter what role a property manager plays in day-to-day rental operations, the manager and the landlord should always strive for clear and prompt communication. Mutual understanding will prevent disputes and keep everyone up to date on necessary information.
Thorough Tenant Screening and Selection
Reliable and trustworthy tenants reduce risks for managers and landlords, alleviating significant stress in property management. Therefore, tenant screening in the property management agreement is key. The contract should outline the proper procedures for screening and selecting renters, including whether the manager is responsible for handling lease agreements and collecting application fees.
If you’re searching for a reliable background check tool free from complicated agreements, try TurboTenant’s tenant screening software.
Financial Transparency and Reporting
Any rental accounting—the process of rent collection, handling expenses, and charging management fees—performed by the property manager should be thoroughly documented for the property owner’s review. This transparency will help foster trust between the landlord and the property manager.
In many cases, dedicated accounting software can help with this part of the process.
Emergency Procedures
Since rental emergencies are bound to happen at some point, a well-constructed management agreement should detail the steps to be taken if any urgent issues arise and the property owner can’t be reached. This detail will promote quick, effective action in the case of a potentially serious emergency.
Legal Compliance and Risk Management
Property management agreements are only as strong as their legal standing. So, these contracts must incorporate certain legal protections, such as liability insurance and compliance with all applicable property management laws. Including these protections reduces risks for both parties and keeps the property management contract above board.
Crafting a Property Management Agreement That Works for You
A successful property management agreement will lead to seamless rental operations, protect the interests of both parties, and help the landlord maintain a good relationship with tenants. Though agreement can take many forms, these contracts are crucial for landlords considering hiring a third party to help run their rental units.
On the other hand, maybe you’ve decided that working with a property manager is more trouble than it’s worth. Forget about that stressful contract-drafting process—you can use TurboTenant to oversee your rental properties without needing a legally binding agreement. Our free property management software covers rent payment, maintenance tracking, lease management, and more.
Sign up for a free account today to get started.
Property Management Agreement FAQs
What essential terms should be included in a property management agreement?
No matter what kind, every property management agreement should address a handful of key issues. These factors will clarify the relationship between the property manager and owner and protect both parties in case of disputes.
At a minimum, those clauses and provisions should cover…
- The scope of services
- All payment terms
- Duration, termination, and renewal clauses
- The roles and responsibilities of each party
How do I choose the right type of property management agreement for my property?
To choose the right type of property management agreement, consider the property’s unique needs. Is it commercial or residential? Does the property require a significant amount of daily management or just a little bit of upkeep now and then?
Answering these questions will help landlords and property managers find and implement the most suitable contract.
Can a property management agreement be terminated early?
Whether or not you can terminate the contract early depends on the exact nature of the contract. Ideally, all agreements should include language addressing the possibility of early termination, covering the procedure and potential consequences of ending the contract before its expiration date.
However, the process becomes more complicated without clauses directly addressing early termination. Legal action may be required to terminate the contract, and the party that ends the agreement could be subject to fines and other civil penalties.
What happens if a property manager fails to meet their responsibilities?
If a property manager fails to perform their duties as required in the property management agreement, the property owner should first attempt to communicate directly with the manager to resolve the issue. However, if the problem persists, the property owner may be entitled to terminate the contract early (though, again, this will depend on the terms of the property manager’s contract). In some cases, the landlord may have to take the property manager to court.
How can I ensure my property management agreement protects my interests?
Review all details and fine print of the contract, and be ready to renegotiate terms as necessary to ensure the agreement benefits both parties.
If landlords are unsure about the property management agreement, they can seek assistance from legal experts who can explain the contract’s terms in greater detail.
