“Do property managers pay bills out of pocket and then get refunded by keeping additional rents when sending money to the landlord? Or do they have access to landlords’ bank accounts and pay vendors directly from there? How does the billing between manager and landlord normally work?”
– Hank from Spencerport, NY
Real estate is relatively lightly regulated when it comes to the structure of contracts between landlords and the people they hire to manage their properties. While New York does impose a few restrictions on where security deposits and prepaid rents have to be held, landlords and property managers are generally free to structure the paying of property expenses and reimbursement procedures any way they like.
That said, you do raise an important point: Few property managers will be eager to sign a contract that requires them to pay major expenses out of pocket, to be reimbursed (hopefully) by the landlord at some future date. That would essentially make them lenders, as well as property managers, and that’s not a position most want to be in!
More typically, a contract with a property manager will work something like this:
In some cases, you have a gray area where the property manager can get approval on a pricey repair, contract with a vendor to fix it, and initiate a purchase order or invoice to be paid later. The landlord will have to provide the funds to the manager to pay the invoices. Net 30 (payment due within 30 days of the property manager’s receipt of invoice) is not unusual, but the sooner you can pay these vendors, the better service you’ll get! The manager will establish a paper trail to demonstrate that the landlord approved the project.
For a larger project, such as a renovation, the landlord will almost invariably fund it, though the manager may provide day-to-day supervision of the work. The landlord should come up with a capital expenditure plan and provide enough funding in stages to execute the plan. This is, of course, over and above the monthly and annual routine repairs and maintenance.
Pro-tip: Landlords might want to consider including a safe-harbor clause in their contracts with property managers, which gives them more flexibility to spend money to prevent further damage in the event of an emergency. You don’t want a burst pipe to cause tens of thousands of dollars in additional damage because your manager can’t get a hold of you to authorize the needed repairs immediately.
There should be a meeting of the minds – documented on paper – to define the term “emergency,” but one proffered definition is an incident or condition “that if not immediately addressed would likely cause damage to the rental property or injury to its occupants.”This last point is critical: If a tenant is injured because your manager was too slow to make a repair, it’s probably going to be the landlord that gets sued for damages.
Good property managers will also do their best to educate tenants about what they can do to mitigate damage as well.