Ultimate Guide to Oklahoma Property Management Contracts
Warning! Do NOT search for Oklahoma Property Management Contracts and blindly use the first form you find. Many standard forms contain unfair provisions and lack critical protections. Before turning over control of an asset with hundreds of thousands of dollars, it's worth some time and effort to
IntroductionYour manager may ask you to sign their own property management contract. However, this contract either favors the manager, or it was simply the first form that popped up with a search for Oklahoma Property Management Contracts. Should you sign it and move on? Absolutely not. It is worth some time and effort to ensure that the right contract is in place. If you are evaluating a manager's proposed contract (or if you want to create your own), the Oklahoma Real Estate Commission (OREC) is a good place to start. OREC offers a free form for property management contracts, titled: The Oklahoma Real Estate Commission Residential Exclusive Property Management and Right to Lease Agreement.
Although the OREC form is a wonderful resource, it should not be used blindly by landlords and investors. A detailed review of the OREC form reveals multiple provisions that may favor the manager over the owner. So, do not blindly sign a property manager's contract or the OREC standard form. The only way to ensure a fair agreement is to review it yourself or hire a real estate attorney to do so. Regardless of whether you hire an attorney, I recommend that you educate yourself on the main provisions and legal concepts involved in a property management contract. To save you some time and expense, I have prepared an overview of the key provisions in an Oklahoma property management contract.
COMPENSATION AND FEES: How Much Does a Property Manager Charge?The Management Fee.
Generally, property managers receive a percentage of gross rent, which is often referred to as the "management fee." The percentage can vary widely, ranging between 6% and 12%. However, the rate could be even higher or lower depending on whether the manager will receive other types of compensation (such as fees for coordinating rehab, retention of late fees, or vacancy fees). When reviewing a contract, do not assume that the percentage tells the whole story. If the monthly fee is above 10%, you might want to insist on very favorable provisions in the rest of the agreement. If the monthly fee is below 8%, you might allow for more manager-friendly provisions in the rest of the agreement. [NOTE: some management companies charge a flat fee rather than a percentage of rent.
The Lease Bonus.
On top of the monthly management fee, managers often receive a leasing bonus for signing new tenants. The leasing bonus is usually a high percentage of the first month*s rent (such as 50%). Property managers may also earn a renewal bonus, which is usually less than the initial signing bonus. To determine a fair lease bonus, consider how hard or easy it would be to lease the property. Are you in a landlord's market or a renter's market? What's the average vacancy rate in your area? How much effort is required to find a tenant? The answers to these questions differ by geographical area, so your lease bonus should be adjusted accordingly.
IMPORTANT: Don't Fall for the "Whichever is Greater" Trap.
The OREC property management contract is structured so that a manager will be paid a commission based on the "greater of two numbers." The property manager would receive the greater of: (a) a percentage of gross rent; or (b) a flat fee. For example, you might encounter the following language:
"as the monthly management fee, the manager shall receive 10% of gross rent, or a monthly flat fee of $75.00, whichever is greater."
Do you see the problem? This gives the manager a safety net if he fails to keep the property under lease. It shifts the risk of vacancies from the manager to the owner. The whole point of having a management fee based on a percent of rent is to incentivize your manager to reduce vacancies and increase rent. The "whichever is greater" provision gives the manager a fallback, thereby reducing his incentive to work hard for higher rents. If your manager insists on having this provision in the agreement, make sure the flat fee is low enough that the manager is still incentivized to keep the property leased.
IMPORTANT: Don't Fall for High Vacancy Fees.
Like the "whichever is greater" provision, a vacancy fee can destroy the manager's incentive to work hard for high rents and low vacancies. Admittedly, a very low vacancy fee might be appropriate to compensate the manager for his efforts during necessary vacancies. However, if the fee is too high, the manager can become far too comfortable with vacancies. No tenant, no work, and free money in the form of a vacancy fee!
LIABILITY AND INDEMNIFICATION: When Something Goes Wrong, Who is Responsible?Indemnification provisions are standard in a property management contract. "Indemnify" and "hold harmless" are legal terms which mean that one party will protect or shield the other party from liability. A property manager does not own the property, so he should not be saddled with the full weight of risks and liabilities associated with property ownership. For this reason, the owner typically agrees to indemnify the manager against certain risks and liabilities. For example, if a tenant damages the property through no fault of the manager, the manager would not be held responsible for the damage. This is fair and reasonable.
However, what if the tenant who damaged the property had a long history of damaging rental properties, and that information was easily accessible in public records? In this case, the manager was negligent in his selection of a tenant. An owner should not be forced to indemnify the manager against liabilities caused by the manager's own negligence. Therefore, your property management contract should include a provision that shifts responsibility back to the manager for damage caused by the manager's negligence or willful misconduct.
TERMINATION PROVISIONS: What Happens When the Owner and Manager Part Ways?A typical property management contract remains in force for a certain term (e.g. 1 year). Be sure that your contract does not lock you into an unreasonably long term. Relatedly, be sure that the contract does not include an unreasonably long notice provision. Most contracts require 30-90 days' notice prior to termination. OREC's form provides for 60 days' notice, which is reasonable.
More importantly, look out for early termination fees. OREC's form and many other property management forms require that upon early termination of the contract, the owner must pay the manager all compensation and fees that would have been paid over the entire contract term. For example, if your contract has a 1-year term, and you terminate the contract after 6 months, the manager would be entitled to receive compensation for the entire remaining 6 months, although no work will be performed over those 6 months.
Clearly, early termination provisions can be very favorable to property managers. Some level of compensation is warranted for early termination because the manager will suffer inconvenience and a loss of expected income. However, a manager should not simply walk away with payment for the entire contract, no questions asked. Instead, the early termination fee should be tied to the manager's actual out-of-pocket costs caused by the termination. Alternatively, the fee should be based on a percentage of the remaining contract fees (e.g. 50% of all remaining contract fees).
If the early termination was the manager's own fault, then the manager should not receive any additional compensation upon termination. In other words, the property management agreement should address termination for cause. If the property manager has violated the law, engaged in willful misconduct, been continually negligent, or failed to perform the duties of the position, then the owner should be entitled to terminate the contract without notice and without payment of an early termination fee.
EXCLUSIVITY PROVISION: Only the Manager Can LeaseYou may be alarmed to find an exclusivity provision in your property management contract, stating that the property manager is the only party with authority to lease the property, excluding other managers and even the owner. Although this may appear to be unreasonable at first glance, it is actually a common and necessary part of the property management arrangement. If an owner or a competing manager were able to swoop in at the last second, lease the property, and steal the contracted manager's leasing bonus, then the contracted manager would be unwilling to enter a property management contract in the first place. Exclusivity is necessary to protect the manager*s investment of time and energy in the property.
LEASING REQUIREMENTS: What is the Property Manager Required to Include in Tenant Leases?Many property managers provide their own lease agreement for use with tenants, while others are willing to use a lease form provided by the property owner. However, you should never blindly trust that your manager*s lease will provide you with maximum protection. Remember, it is the owner, not the manager, who bears the legal risks and liabilities associated with property ownership. If a tenant files a lawsuit, fails to pay, or damages the property, the property owner stands to lose far more than the property manager. Therefore, the property owner must take responsibility to ensure that a strong lease agreement is in place for all property under management.
There are two primary ways to control the content of the lease used by your property manager. The simplest way is to include a provision in the management contract requiring the manager to use a rental or lease agreement selected by the owner. Alternatively, you can allow the manager to use his own lease agreement, but in this case, you should include specific provisions in the property management contract regarding the content of the lease form. In other words, you can control the content of the manager's lease form through the management contract. For example, the management contract might set a minimum length for leases, stipulate whether pets are allowed, or require a minimum security deposit.
CONCLUSION: Do Not Blindly Sign Oklahoma Property Management ContractsThis article provides you with a strong foundation for reviewing and negotiating Oklahoma Property Management Contracts. Pay special attention to provisions that affect the manager's incentive to keep a property under lease. Ensure that the manager can be held responsible for losses and damage that occur due to the manager's own negligence and ensure that you can terminate the contract without an unreasonable early termination fee. If you have specific questions, or if you would like a real estate attorney to draft or review your Oklahoma property management contract, please do not hesitate to contact me.