My Property Manager Robbed and Ghosted Me ($40K Stolen!)

by NEW YORK DIGITAL NEWS


If you get your property management wrong, you could lose tens of thousands of dollars. A sketchy property manager could take all your rent and run, leaving you with the bills and no hope of recovering your long-lost rent checks. That’s precisely what happened to today’s guest, a seasoned real estate investor who’s even looked up to as an expert in the industry. Even he made a sizable property management mistake, and in this episode, we’re trying to help you avoid the same fate.

The BiggerPockets Podcast Network is bringing you a crossover episode with the Real Estate Rookie podcast’s Ashley Kehr and the BiggerPockets Money podcast’s Scott Trench. Scott is not only the host of BiggerPockets Money but also the CEO of BiggerPockets. And today, he’s sharing every painful detail about how he lost over $40,000 by hiring a bad property manager. This IS an avoidable mistake, but some easily overlooked red flags could put you in the same position as Scott unless you’re very careful.

Scott shares the entire story and gives the top red flags to look out for. He’ll explain why he DOESN’T give his whole portfolio to one property manager, why you MUST set communication standards from the start, the questions EVERY investor should ask before hiring a property manager, and the fees you should refuse to pay the next time you outsource your property management. Need a property manager? We’ll share the best tool ANYONE can use to find a property manager TODAY!

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. Welcome to the BiggerPockets Money podcast, where we at BiggerPockets have a goal to help 1 million people achieve financial freedom and specifically become millionaires. We truly believe here at BiggerPockets 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. 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 lifecycle. 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.

Ashley:
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 sharing a little bit of an embarrassing person and costly loss that I had in my real estate portfolio in the last couple of years,

Ashley:
Well, I’m sure this is an easy to open up about, but we definitely appreciate you being vulnerable in this situation. So 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 with a company called Shift Property Management in 2021, actually, I think we hired him in 2020 to manage a portion of our portfolio and we gave him one property that really needed a significant amount of repair work. We just had 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, zeroscape the yard, redid the roof, lots of different improvements to the property, got a good tenant in place, that tenant is still in place and still paying rent, and we were really pleased to the point where I gave him the rest of the portfolio. So here’s 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’ve liked, but generally speaking, collected some good cash flow and we’re feeling really confident about in real estate investing.

Ashley:
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, and my partner had self-managed the portfolio for all of the time. I’d been in 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.

Ashley:
I think that actually makes the transition harder because 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 similar circumstance where I did things one way and 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 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:
And this has happened with other professionals I’ve hired where things go really well for the first project the first year or whatever, but by mid 2022, communication noticeably started to slow. This was about two years after we’d hired at Jeremy and one year after he’d assumed 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, 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. And then in Q4 of 2022, communication stopped altogether.
We just didn’t hear from Jeremy on a project despite multiple different follow-ups, and by that point 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 didn’t even know how much we were owed from previous ones because of those weird accounting statements and the random distributions to the bank account, and so this 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 May, 2022, I should have known something was wrong and going the wrong direction, but I didn’t really take action until about November, 2022 when we had missed two rent collections.

Ashley:
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 onboard to a new one or let alone find a new one. So it is understandable that you’re going through this period of I’m 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. Okay, we’re back from our short break. Thank you everyone for taking the time to check out our show sponsors. They’re 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 ghosted him. 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 at this point. 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 from each of the tenants. So I estimate that to be around 40 to $60,000 somewhere in that range. And here’s some more kind of stuff on that, right? So in November 1st, 2022, we made the decision like 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 month’s 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 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. Jeremy has never made himself available for us to interview him or to understand those numbers, so perhaps that will change one day if he ever reaches out.

Ashley:
Did you ever consider contacting the police or did you contact the police, contact an attorney, try to take some legal action? Yeah,

Scott:
So this was an interesting discussion where we were not the only ones that this happened to. Many other investors in the area who 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? And we talked to a lawyer. The lawyer basically was like, I mean you can sue him and you’ll win, but would you get any money out of this? The money’s gone in this situation. And for some context here, when I did see Jeremy between large chunks of ghosting or lack of response, slower and lack of response, I saw him with $2,002 pair of shoes or really fancy car. Here I am showing up in my Costco outfit 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 situations.
I have reason to believe based on police statements and an arrest record from out in western Colorado that drugs were being abused during this period, so checks were bouncing. So I actually went and collected a physical check from him at one point in Q3 of 2022 before all communications ceased and it bounced, so I had to get another form of payment. So when a check bounces, that’s not a good sign that there’s a lot of money left in the rest of the accounts there. So who knows about this, but we ultimately made the call as a group not to pursue a joint legal action there. 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.

Ashley:
I think you mentioned a couple red flags in there such as this was actually 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:
I think that’s a great question and one that I ask myself a lot is what did I do wrong to end up in this situation? Because going back to how I found Jeremy, he was referred to me by someone that I respected 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 cashflowing nicely, and then his behavior began to change. Should I have done a full on background check to see if there was 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 you’d been in business, but again, I thought that my referral was adequate in this particular scenario. And then there were other things that I think led to my lack of action in midyear 2022.
I probably should have acted sooner, but the contract had all these things about like, Hey, if you cancel, you owe me all 8% of the remaining rents on all of the units in your portfolio per the terms of this contract. There were rights of first refusal to help sell the property and those types of things, stuff that probably I should have known and I was aware I did know and I was aware of, but I should have negotiated out of there. So all of those things are of looming into why I picked Jeremy and his company here in 2021.

Ashley:
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 a referral, dating the person, just giving them 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 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 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 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 partners. So okay, 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 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 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 and there around termination and all those kinds of things, these were in our very similar, the reporting is completely different and we looked into that before the first month there to make sure that 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 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 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 this 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 really it. I didn’t have things like, Hey, 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 designed now. And then I 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 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,

Ashley:
That is a really great point. Instead of just diversifying your rental income streams or your portfolio, you are 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? The

Scott:
First question that I ask is occupancy. So what is the property manager’s current occupancy? And I believe that on a portfolio of a hundred plus units, hopefully it’s in a couple hundred, if you have 95% occupancy across that portfolio, something’s going 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 who are beating you up over low ball on the price to keep all the properties occupied. So again, unit terms are there, marketing is tight. We’re not having huge problems with tenants not paying or being evicted if occupancy is that high. And so 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 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 for your rentals and what would you have them be for this one? That just saves everybody a lot of trouble and I like 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. I know the rents on my properties pretty well. That’s a job I think I have to be able to do as a landlord if I want to be in this business for a long time. So I ask 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 my estimate for rent, then I begin to worry because in my experience what that’s tended to happen with property managers, 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.
They’re 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 stop there. I have more that I can go into, but are those helpful so far?

Ashley:
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’ll be right back after this break. 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 and you can also reach out to those investors for references and referrals. Okay, so we are back here with Scott. Scott, we talked about different ways and different things you should be doing to vet a property manager. 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. Some of the questions that are verifiable are what’s your current occupancy? Can you show me a statement that shows that I like to ask? Can you provide me an example of an owner’s statement? 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 and I usually operate on trust on this particular one. 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 to add that competency and vertically integrate to some degree with my own portfolio and because there are advantages of scale, I’m also taking on additional clients. Those are things that I like to hear in addition to the questions that we talked about before the break and 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 the lessons learned from my experience here are property managers. It’s different of a relationship than an agent or a lender or a tax professional because a property manager unlike those other folks, can steal from you and that’s really what rattled me in this situation. They’re actually handling my money and so despite all of 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 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 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 in the first glance or anything that’s unusual every single month with both of my property managers.
I watch the new property manager like a hawk and I communicate with them weekly about various projects that are in flight and I think that that is really 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 is super highly rated and comes with an 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 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 BiggerPockets 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. 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 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. I think that’s a big component. One thing we haven’t talked about is fees.

Ashley:
Before you do that, 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 are 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 the repairs and maintenance you’re doing are absolutely necessary on some things 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 next bootcamp that BiggerPockets 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

Scott:
It. Well now I’m going to go back and analyze the water bills and 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 this call today. That’s awesome.

Ashley:
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:
So 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 there’s a whole bunch of theories here, so I’ll just monologue about this for a few seconds here. If the property manager keeps my portfolio occupied at 95% instead of 90%, then that’s worth way more than the 2% savings I get from a property manager who charges 8% of rents versus 10% of rents and there’s different levels of reasonableness. When it comes to my portfolio in particular, I have one property that is a quadplex where each unit rents for a thousand dollars 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 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, I should be on the higher end of paying those fees for my thousand dollars a month fourplex at times four a fourplex. Then I should be paying for the two much higher income earning higher credit score tenants that will occupy the five bed and four bed property with a fenced in yard and garage and all those kinds of things. So 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 was looking at talking to other property managers, I said, look, I’m not even going to continue the conversation past this point unless you totally eliminate all of fees. I’ll increase your percentage of rents from eight 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 incented to do all this extra work or blow me off or 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 it charges a fee to the tenants. Those types of things. 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, then 8% to somebody who had two point a half pages of fees.
And the balance that I think is reasonably healthy sometimes can be like a 10% 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 a thousand dollars. 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% of those things assuming that they do a good job and get a bunch of quotes from that. I do not like fees that allow them rights of first refusal to sell the property. I do not like fees, like breakup fees that are like we’re going to get eight or 10% of rents for the next 12 months on every property that has outstanding lease. So I usually negotiate a fair one-time breakup fee, like 500 or a thousand 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 has still have six to eight months left on that for a quick discussion on property management fees.

Ashley:
Yeah, I think the first part is really understanding the fees, getting a list of all the fees. When I heard my first property management company, I did not ask that question upfront and it was all just, we met maybe three times we talked and there was never any kind of anything written down that was handed to me that said, here is our fee schedule, here is how our pricing goes. Some of it was in the contract, but a year into the actual property management, they said across the board, we are instilling 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 great idea. First of all, tenants didn’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 $70 worth for them to walk right next door 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 wasn’t 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 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, is 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 company was used to was single family, very, very small. And we threw two 40 unit apartment complexes at them where they had no experience with this 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:
Yeah, so my first property manager had the experience, sorry, my first property manager robbed me. My second property manager was like, I also got robbed alongside me and has a very similar type of portfolio. Then I gave two excellent units upon moving out of that property I just described to a property manager. I met with the BiggerPockets property manager finder. I knew a guy, so I had an early access to that program privilege of working here and wanted to make sure I eat my own cooking on that front. Actually, both my property managers are named Jim and Jim number two, my newest property manager. He has 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 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.
That helps make sure that you know how to price the unit and treat the tenants and those types of tenants expect I think a little bit different level of maintenance and responsiveness to the property. So just differences there. I will say though that it’s important to understand all of this in context when talking to a property manager because 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 trained to, or the salesperson or the owner 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 novice investors on the BiggerPockets forum saying fees are the first thing. If they have charged fees over this front, I’m out. Well, again, that’s why I didn’t start there. And the screening criteria, it starts with can you keep my portfolio occupied? And if you can do that, I’m going to make money, I’m going to 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. It doesn’t mean low that the low fee property manager you’re signed with is going to rob you like what happened to me.
But those are things to consider. I think there’s a saying on BiggerPockets where if you think that the a hundred dollars an hour electrician is expensive, try hiring the $25 an hour electrician and you’ll see what a really expensive electrician looks like. And so that’s I think part of the lesson learned there is it’s not all about fees. Can you assess quality and then shop the fees after you’ve been able to do that? And I think that’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.

Ashley:
I wanted to ask you about your opinion on hiring a third party property management company versus hiring someone to be your property manager. So BiggerPockets recently came out with the self-managing landlord book. We had Grace 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. And the reason for that is because the overall fees for my gross rent in my portfolio, it would not make sense. I don’t at enough scale in the local Denver area and certain parts of my investing are done with a partner and certain are done for myself. So I don’t have the scale to be able to do that right now, 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 have to figure those things out. So I think there’s pros and cons, but I have not considered that personally yet.

Ashley:
Yeah, I agree. 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 ghosted you and then even before that there was lack of communication. What are the expectations of a property manager to 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 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 if it’s a small company in the property management space. So those are the things that I generally expect. My typical cadence with gym number one is a monthly report that is handled and we’ve kind of aligned on an approach to handling renewals and upcoming vacancies that I think is really effective where we get out ahead of those in the 75 to 90 days before the lease expires and get clarity on that.

Ashley:
I think the really important thing that you’ve said is that you need to let them know your expectation. So if you would’ve just let it go, like, oh, you know what? They didn’t follow up in a day next time they will or something, but you set that expectation right away that this is what I expect, and I think that the company, the property management company can’t know that you are upset about it or what you want if you aren’t letting them know. And I think that was part of how I let it get so far with my property management company I used is because I wasn’t setting expectations. I was just hoping it would get better instead of trying to be proactive about it and saying, these are my concerns upfront, instead of just letting it go on and on and on forever with vetting the property management company. I just have a couple more questions to ask about this, but what about if the property manager has ever been sued by an owner or a tenant? Is that something you can actually vet and research or you have to ask them about that?

Scott:
Great question. And that’s one that I need to add to my screening list here because I have not asked that of my two property managers that I work with. Maybe I’ll follow up with that. I don’t know how to vet or answer that question, so that would be a great question for another person to help us out with. And maybe a good question for the BiggerPockets forums.

Ashley:
Yeah, I don’t know the answer to that either. Just off the top of my head. I think maybe you could go to your county records and search the owner’s name to see if any legal documents come up. You could search deeds and things like that. So you could go to the county clerk online records and search their name, search their business name I guess, and see if anything comes up that there may be something 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 receive from my property manager, that they’re in good standing with the state and they’re licensed to conduct that activity. So that I think probably is why I haven’t really thought about that one as much, but you can tell you’re catching me off guard with that question. It’s a good one. So I need to think of that through my guy, Jeremy. I don’t think that would’ve caught him because I think that the problems developed after I met him, and to a large degree, I think many, I would’ve referred ’em in 2021 or 2022.

Ashley:
Yeah, I think my concern with asking that question is to, even if they won and it didn’t 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 maybe the tenant says, this happened in the property and they’re suing the property manager, is the property manager automatically and say, oh, well that’s the owner’s fault as the owner, what is going to be my responsibility? And I think that’s also part of getting 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 I live in Buffalo, most of my investments are here. Say 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 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 just thinking through this, because I’m thinking, would this have helped me avoid the situation? Would Jeremy, and I’m wondering halfway through the relationship he rebranded his company, new LLC, all those different types of things. So I’m wondering, 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, it’s because someone lied to you from the very beginning about stuff. On the BiggerPockets Money podcast a while back, we interviewed this guy who ran a Ponzi scheme for eight years. And that’s what I think makes this 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 a Ponzi 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, my clients would have their CPAs come look at the fraudulent financial statements that I produced and they’d sign off on ’em because I fooled ’em with it. I remember getting close a few times, but I just think that 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 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? 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 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 five to 10% more than I would be able to do in my spare time on nights and weekends with this. And so that’s profitable, but I think it’s a skillset that goes along with that. You have to develop alongside all of this stuff. And I think, 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 have a wonderful playbook in front of it. And know that again, just have that skepticism and watch your portfolio. Be an asset manager. I love that. On a go forward basis.

Ashley:
Well, Scott, I think you just wrapped up the show for me. I don’t even think there’s anything to say except the biggest takeaway I think is to diversify with different property managers to kind of navigate that risk a little bit. And also you kind of set it here at the end as to instead of waiting two months, be proactive at one month or take care of the situation head on. And that’s where maybe now as you are 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 and your business, have an exit strategy. So if things do go sour, you have plan B. Okay, I haven’t gotten my rent this month from the property manager there. Goes to 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 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 lists of questions, look at your options out there in case you two want to diversify in the managers that you use.

Scott:
Thanks for listening, everybody. That was my story. Terrible experience with the property manager. That’s one of the reasons I’m so passionate about the new Property Manager finder we’ve built here at BiggerPockets. You can find that at biggerpockets.com/manage me. And I think that that’s going to be a great resource for folks that are looking to find high quality property managers. Interview several, watch ’em 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 ’em and grateful that I had this experience early in my career and not much later.

Outro:
BiggerPockets Money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Knutson, copywriting by Calico Content, post-production by Exodus Media and Chris McKen. Thanks for listening.

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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