If you have significant purchasing experience, have been a do-it-yourself landlord for a few years, and have plenty of time on your hands you may need no professional assistance at all. However, if this is not the case you might be taking a big risk doing it yourself—in which case hiring a professional would be an excellent idea. The purpose of this article is for you to explore your options so you can make a wise choice.

About the author: I have been a licensed real estate practitioner for 23 years, practicing sales and property management in the Atlanta metropolitan area. While I have worked all across Atlanta, the first property management company I owned was located in East Cobb County where I provided property management services in the cities of Marietta, Woodstock, Cumming, Alpharetta, and Roswell, Georgia. My second property management company, and the one I currently own and operate, is located in North Fulton County and is headquartered in the city of Roswell. It provides property management services in Roswell, as well as the surrounding communities, with a satellite office in East Ellijay, up in the North Georgia Mountains.  This newest company, 3 Options Realty, also offers sales services.  In addition to my professional services I have been investing in residential properties for 19 years.  I’ve learned a few things about this topic and I want to share my experiences with you.
 

Getting to the Problem

Agents are not all the same: When I first entered this profession I discovered rather quickly that not all real estate agents are the same.  That may seem obvious to you but I mention it because I also discovered that many home buyers as well as home sellers didn’t seem to be really concerned about making distinctions between agents—that any agent would do.  This observation about selecting agents applies equally to investors.  

Sales brokerage policies: Most real estate agents rarely have anything to do with leasing and certainly not with property management.  In most brokerage houses, the brokers themselves are unskilled in property management so they steer their agent staff away from that discipline.  Sometimes the broker will allow a sales agent to work with a tenant prospect looking for a home to rent, and occasionally brokers will even let their sales people list a property for rent.  Most draw the line here and do not permit the sales agents to manage the property they have listed.  In the few brokerages that do endorse property management, this duty is handed over to a specialist or a special team of people trained specifically for this and that do nothing but property management.  That is to say that the property management staff does not perform any other real estate duties, including sales.

Herein lays the problem: If an investor has arranged to work with a traditional sales agent in the purchase of an investment property, it is highly likely that the agent has not been trained and is therefore uninformed about leasing and property management. Be careful, simply asking them if they have sufficient experience might not be the best idea. They might say anything you want to hear just so they can get the sales job. I cannot tell you how many times I have gotten a phone call from investors that have just recently closed on an investment property and they are now looking for property management services.  

The agent goofed: It seems that more often than not there is something about the property that makes it unattractive as an investment property. Often times it’s about the rental price. The sales agent took a shot at guessing what the rental price might be and she missed it by a mile because she does not know the rental market.  That’s a big mistake!  There are other common mistakes besides just missing the rental price.
 

What does the Problem Cost You?

Predicting the rental rate: The problem with missing the rent rate is that the investor probably made a decision about the purchase with an expectation of a certain minimally acceptable return on his investment. If the investor had known what it would actually rent for, he might have passed on the property.  But he didn’t and now is hoping we can pull off a miracle and lease it above fair market. That is not likely to happen. But even if we did manage to do that, this solution would not be sustainable.  As soon as the tenants figure out that they are paying too much, they will give notice that they will not renew their lease at lease term. I’ve even seen them move out early, even though that usually is not economically wise, they do it anyway. They just can’t live with the idea that they are paying too much in rent.  Now we have to start all over again hoping to find other fools that will pay too much and hope they don’t figure this out too quickly. Unfortunately for the investor we had to put the property back on the market so there will be another marketing commission to pay. Ouch!

Adding insult to injury: We should note that the marketing time it takes to lease a property priced above market value is extended, sometimes by months, and sometimes we just can’t do it at all.  In such cases the investor is eventually forced to accept a lower rent and suffer a lower return, or maybe even take a loss.  

Vacancies are costly: Experience proves that vacancy is the largest expense the investor will incur over the life of the investment. Every day that the property stays vacant is lost opportunity cost. To put this into perspective, while we usually get our properly priced properties leased within seven to ten days, a situation like this could take months. That’s a lot of lost opportunity!

Median Market Price: Sometimes there are other issues.  An experienced property manager knows the market and what to expect from it. For example, if the objective investment price range were around $1,000 per month, and the sales agent found a property in an area that had this as a median price range for rentals, there is going to be a lot of competition for this lease. Contrast this to a case where the median price range is $1,200 per month.  That $1,000 price is going to get rented more quickly in that market.    

Recognizing location factors: A sales agent, untrained in property management, and unaware of the rental marketplace is not going to recognize these location factors.  There is no comprehensive database for the sales agent, or anyone for that matter, to access for a market study to ascertain these critical factors.  An agent that does leasing day-in and day-out has a working understanding of the marketplace that cannot be matched except by a fellow leasing agent.

Physical design of the house: Some properties are simply less desirable as rentals because of the physical design of the home. The second house I purchased for investment seemed to me to be perfect. I was too inexperienced at the time to know it was not.  It was a two story home with two bedrooms and a full bathroom upstairs plus two bedrooms and a full bathroom downstairs.  When I bought it I paid a price that was comparable to three bedroom homes in the same subdivision.  The square footage was comparable, but my home would have a fourth bedroom. I thought that was a beneficial distinction that would set this property apart from the competition.

My mistake: My thinking at the time was that renters might enjoy having a fourth bedroom, especially in this price range. What I later discovered was that it did have special market appeal but what it attracted was roommates. I would soon realize that roommates are not a first choice preference.  Roommates can be a real pain.  Roommates are by their very nature are unstable. The bonds of the relationships are weak. Tenant turnover is frequent, too frequent!  I have had this property now for 19 years and I cannot recall a family ever wanting to live there. I’m not going to discriminate by discouraging roommates, but I sure wish I had known better at the time.  I affectionately refer to this as my roommate house.

Lacked experience: This is actually a perfect example of what I’m trying to convey in this article. I was a moderately experience sales agent at the time. I had been exceptionally successful selling homes for four years at the time I made this decision. I now know that if I had been helped by a knowledgeable specialist that understood the rental market, I may have avoided this mistake.

Marketing to other brokers: An even bigger mistake is for the investor to allow the sales agent to market the property for lease. Listing a rental property is entirely different than listing a home for sale. Most sales agents will simply put it out on the local multiple listing service and hope it attracts a renter through a cooperating agent. The problem with this idea is that roughly 80% of renters do not hire an agent to represent them. Therefore, 80% of the marketplace will be unaware of the rental. To make things even worse, of the 20% they do attract, they will be represented by other agents that probably also do not understand this business—the blind leading the blind, so to speak. What’s needed is a leasing agent that is invested in a comprehensive marketing system that reaches that unrepresented 80%.
 

Why Understanding Different Property Management Company Organizational Styles Matters

Division of duties: If we want to we can even compound this by letting the sales agent that is listing the property prepare the lease and move the tenant in. This is a horrible idea. Whoever winds up managing this property is going to deal with a situation whereby expectations for the tenant-landlord relationship have not been established or have been mistakenly established. For example: What will be the rent collection policy? (When is rent due? What’s the late fee?  How can rent be tendered?) Sales agents operating in this capacity may not even know who the property manager or landlord will be. How can they possible set proper expectations? Failing to set realistic expectations can spell disaster for the landlord/tenant relationship. Such inefficiencies directly transfer to investment costs for the investor.

Property management company organizational styles: Consulting a professional property manager that understands leasing and sales is the ideal situation for the investor.  But maybe we need to be cautious here too. Not all property managers work the same way. The investor needs to inquire about the company policy for divvying up the work. There are two basic company styles: The portfolio and the departmentalized. Both have their own sets of advantages and disadvantages. There are also many hybrids, and I have written extensively about this in another blog, The 3 Options Realty Difference http://www.3optionsrealty.com/landlords/the-3-options-realty-difference but if we lay out these two basic ones, you can make an educated decision about what you want and how any particular company might be able to fulfill your expectations.
 

Departmentalized

Departmentalized: In the departmentalized management companies, the property managers are licensed agents but they are on payroll as administrative staff. They don’t do leasing and they don’t do sales. In those companies marketing and leasing agents do the leasing work. Once qualified tenant prospects are found they are handed over to the management department for the day-to-day management. Sometimes the leasing agent does the lease signing and move–in, and in others the property manager would perform those tasks.  Either way the thing to be careful about is how that handover happens.  How well coordinated is it. It’s really hard to do well, and most do not. There is plenty of room for miscommunications in this process. The property manager cannot be certain about what things the leasing agent has said or not said to the tenants about what life will look like under the lease.

Leasing agent does not manage: Another thing to be careful about is that in departmentalized companies, the leasing agent is probably going to be the sales agent to help with procuring the investment property. While this is 100 times better than working with a sales agent that does not understand the leasing business, the leasing agent still lacks that critical element of experience in management. That could be a big experience deficiency!  

Don’t routinely do sales: Yet another consideration is that some departmentalized property management companies do not routinely do sales. They just dabble in it capturing occasional targets of opportunity. They are not invested in sales support systems and sales training.  In such case you have the reverse of the experience problem with sales brokers not understanding property management. Property managers that infrequently participate in sales might not be especially helpful.
 

Portfolio Companies

Portfolio Companies: In most portfolio companies this dilemma is solved because the leasing agent often times continues the relationship with tenant prospects by also becoming the property manager, creating a management portfolio, and thus the name of this organizational style. These agents do it all—one stop shopping!  These specially trained agents have the skills to effectively assist with the purchase and then go on to guide the investor with their knowledge and experience in both leasing and property management.

Engaging the company brokers: Here’s a caution: Inquire about the portfolio agents’ actual experience level.  How much time have they had on the job? Can they really provide a meaningful consultation on the purchase and management?  If the agents lack experience, this can be overcome if the company’s broker or brokers are knowledgeable and engaged in the process.  For example, in our case, when we hire new property managers, we first require them to go through extensive classroom training (21 hours) by our in-house trainer. Then we instruct them that the first time they do any new task that they work with the broker.  For example, I have even gone on listing presentations with my new agents. I usually get involved in the purchase process to make sure the selected investment property meets the investor’s objectives, especially if I believe the agent lacks sufficient experience in this discipline.
 

Do Your Homework

Final thought: The important thing to remember when selecting an agent is that you need to do your homework. Learn about the organization behind the agent. Don’t assume that all agents are the same or have the experienced to provide the same level and quality of service. The probability is that agents that are portfolio managers are manifestly better than those that are something else.

Daniel R. Wilhelm
Executive Broker
3 Options Realty, LLC., CRMC®, The Green Broker
678-397-1282
dan@3OptionsRealty.com

The author of this Blog is neither an attorney nor an accountant.  Nothing written should be construed as legal advice.  Conclusions conveyed are outcomes based upon practical experience and should not be depended upon to be a common outcome of other similar circumstances. Consult with a professional before making tax or legal decisions.