This is the fifth post in a 6 part series to help those that have ever wanted to own a condo but haven't yet jumped in with both feet.

This post will help you break down a vacation rental management agreement and choose a property manager.

You know just about everything about owning a condo, but now you need to know how to evaluate a rental management agreement to ensure that you feel good about selecting a Perdido Key Property Management Company.

Before I break this down, know that I once was in your chair. As a family we had purchased our first condos in Perdido Key and, because we knew now better, we simply used the property management company which our neighbors had been using. Years later I realize how much revenue we had left on the table in the first years we owned condos and how that revenue would have gone in up our bottom line when we sold the condos.

I initially went with a rental company solely upon the referral from my fellow condo owners. They knew no better than I, but we had a good rapport so I based my faith on their due diligence rather than my own. 

I'm here to tell you that we all have different objectives with regards to generating rental income. It is for that reason that you personally should consider your rental revenue objective, along with the expectations you have of your property manager so that you too are content with your choice. We left a lot of money on the table in the first years of condo ownership. As the adage goes... it was a learning experience and tuition isn't cheap.

You may luck out and decide that the first one you speak with is a good fit. You may not feel that way initially and then speak with three more only to circle back around to the first property manager; that's an OK route too in selecting the right team for you.

Personally, I like the boutique feel of personalized service coupled with the knowledge of someone on top of their profession. I don't like big-box companies which cover large regions thereby watering-down their knowledge of the hyper-local area. Also, once I've made my choice I don't really need much attention. My mentality is that I made a decision I was comfortable with to use a professional and now I'm not going to tell them how to do their job. I'm going to let them do it and then compare the results to the objective in which I provided them with initially.

If the pictures online of my condo aren't perfect, but the property is renting well then there's no reason for me to call or email inquiring about the photographs. If I don't have an ad on a large marketplace website, but the property is renting well then there's no reason for me to call or email asking why my property isn't represented on that site. If the condo was rented for a month when I thought I may have been able to hold out and get 3 week-long rentals (which would've made more rental income), but I'm on track to meet my revenue objective then I'm not going to question the decision to put that month-long stay in my condo. You get the point. If my goal is being met and my property manager is otherwise doing a good job, then I'm going to focus my efforts elsewhere and let the pro do what he/she does. That's why I hired them to begin with, right?

Disclaimer: I'm not an attorney, but I am a vacation rental property manager and real estate broker. I'm not giving you legal advice. Just know that I have to say that :) Read on...

 

When looking at rental management agreements, what you need to ask yourself two questions;

1. Do I like this person? This is paramount, because even if they're making you money hand-over-fist if you dislike the person/people then you'll never be happy. Find another property manager who can meet your revenue objective.

2. What will this cost me? This is important, because there may be many ways in which you could incur an expense in your management agreement. You need to identify those expenses and tally them up in order to compare apples-to-apples.

 

In management agreements money moves through the following labels and phrases; rent, net rent, commission, agent fees/commissions, lodging tax, credit card fee, management fee, housekeeping fee, maintenance fee, blank program, marketing fee, escrow(not a fee), trip insurance, package(s), add-on's, additional rent, the difference in rental rate, out of pocket expense incurred, for promotional use, minimum liability coverage, required notice, and Purchaser will assume this agreement.

 

Rent is part of what the vacationer pays. In most cases, you are paid a percentage of this within 3 weeks following the end of the month in which the rental departs.

Net rent means the rent amount after a travel agent has kept their fee. In most cases, this amount, which may be less than the actual rent, is what the property manager and you split based on the commission amount.

Commission is the percentage in which the property management company keeps for generating the rental.

Agent fees/commissions are typically fees paid from the owner's net proceeds to travel agents.

Lodging Tax is the tax paid to the county, state and sometimes city wherever applicable. Who is responsible for paying this is important - it's usually the renter that pays it to the manager and they pay it to the taxing authority. This it not part of the rent or net rent.

Credit Card fee is a fee charged by some property managers to the property owner and is simply withheld from the owner's net proceeds to cover or help cover, the cost of processing credit cards.

Management fee is usually a fee, not commission, charged to manage the property. This has nothing to do with rent or rental income.

Housekeeping fee is what the owner will pay each time they depart from the condo. The renter typically pays their own cleaning fee which is kept by the property manager to then pay the housekeepers and cover cleaning supplies.

Linen fee is a charge to borrow the property manager's linens. In most cases, this is cheaper than buying your own and the property manager is able to provide faster housekeeping services by not having to wash linens in your condo. They instead have them cleaned in a commercial facility.

Maintenance fee can be a monthly or annual fee to cover predefined maintenance items. These often include batteries, shower liners, light bulbs and other smalls. This fee can often be more expensive than paying for these, along with a labor charge to have someone swap them out, as they are needed.

"_____ program" is something to pay close attention to when you see it as this may obligate you to some varying charge to cover a service/program provided to renters by the management company. Ask questions if you see something about a program.

Marketing fee is a way for a property management company to recoup some of the marketing expenses. This is common with lower-commission models. It's not something I like, because I expect the marketing to be handled entirely by the management company.

Escrow(not a fee) is a sum of your money held in an account to cover repairs which come up through the year. You'll pay this one and later get this back when you roll off the rental program.

Trip insurance is usually paid for by the renter so just be sure you're not being charged to insure their vacation.

Package(s) are extra charges for a program, so ask questions about be sure you're OK with the expense.

Add-on's are also like programs.

The difference in rental rate - If you see this it's likely that the property management company is saying that you will be responsible for any difference in rental rate for a rental that has to be moved for some reason you caused.

Out of pocket expense incurred - Again, if you see this it's likely that the property management company is saying that you will be responsible for any out of pocket expense they incur (higher cleaning fee, resort fees, etc) for a rental that has to be moved for some reason you caused.

For promotional use is a tricky one. This likely means that the property management company can rent out the condo and not pay you for the time used. If they do this is peak season, that's a lot of money you didn't get to earn. Be careful and ask questions when you see this one.

Minimum liability coverage is usually pertaining to the amount of insurance you're required to carry.

Required notice is usually about the minimum notice you must give to terminate the management agreement which is especially important when considering selling. What is the buyer didn't want to rent out the condo? Read on...

Purchaser will assume this agreement - this means that you can ONLY sell the condo to someone who will assume this agreement. It typically only for the duration of the required notice, but what if they have to move future rentals and they incur out of pocket expenses in moving the rentals? This could be expensive.

 

So, how do we come up with an apple-to-apple comparison? Add up the likely expenses and factor in the impact pertaining to each of these terms you see in the rental management agreement! Remember, a 20% commission on $20k worth of rental income is $4000 and an 18% commission on $20k worth of rental income is $3600. If the fees or restrictions between these are more than $400 annually OR the 20% commission company will likely gross you MORE rental income, then you may be better off going with the 20% commission agreement. A common example would be the "credit card fee" charged to you with the 18% agreement. If that credit card fee is 2%, then that means the rental company will charge you 2% of the $20k throughout the year as this fee($400 total) which makes these two contracts equal in terms of net-to-owner revenue.

 

If you have questions, I can help. Email or call me. I'm always willing to help!

 

JD Hallam
JD Hallam

Broker/Owner Perdido Key Resort Realty

GM Perdido Key Resort Management

 

 

JD is the Broker/Owner of Perdido Key Resort Realty which proudly serves all property owners in and around the Greater Perdido Key and SW Pensacola areas. If you have questions about buying, selling or general questions about the market then you should speak with JD at your soonest convenience.
 
If that isn't enough... JD Hallam also currently is a Board Member as the Perdido Key Lodging Representative for the Escambia County Tourism and Destination Marketing Organization, VisitPensacola, and is the organization's FY18 Marketing Chairman after having been the Treasurer for FY17.