In most property management relationships, a rental property owner is expected to establish a reserve account. Reserves are a specific amount of money that the property manager can access to deal with daily obligations, maintenance issues, and emergencies. The owner also agrees to make sure that the fund never falls below the specific reserve amount.

I recently received an email from a prospective new client.  The property owner asked about reserves and the concept of reserves.  It appeared that he had a bad experience on this issue.  Here is part of the message.

“What sort of issues are customarily allowed to be charged against the reserves?  The reason I ask is a concern that it is common for a property management company to address any maintenance issue under ($x) without the consent of the owner.  While I understand maintenance is essential, there is no protection for the owner that the management company will not take advantage and make unnecessary alterations.  Payment is then forced on the owner by simply deducting against their reserves.” 
This is a really great question.  When hiring a manager, you certainly deserve to know how the reserves will be utilized.

Property Management Reserves Defined

In most property management relationships, a rental property owner is expected to establish a reserve account.  This reserve is a specific amount of money that the property manager can access to deal with daily obligations, maintenance issues, and emergencies. The owner also agrees to make sure that the fund never falls below the specific reserve amount.

Management Contract Sample Language for Reserves

 Here is the language used in the WILMOTH management agreement to define how we utilize reserves.
Reserve: OWNER agrees to submit to MANAGER an initial deposit of $ 300 per unit managed.  OWNER agrees to maintain a $300 balance in the account for each unit managed.  The Reserve is only to be used for emergencies, minor maintenance requests, utilities and other incidentals and maintenance requests in order to meet the “WILMOTH Housing Minimum Standards.
The above language is not universal.  You should search in a management agreement for the “Reserves” language to have clarity of what your management company is entitled to do with reserves.

Why Reserve Provisions Exist

Every company is different.  Before hiring a manager, be sure you understand their maintenance and repair practices.

Emergencies

Emergencies require immediate decisions to protect the value of the property or the health and occupancy of your tenant. They are one of the big reasons you hire a manager so make sure you trust them to be able to represent your best interests.  Reserves rarely cover emergencies and most management agreements address emergencies as an exception to spending limits.  Reserves are the owner’s equity in the immediate actions needed.

Minor Maintenance Requests

There are also incidentals that can occur as part of the management of the property and an owner should not expect the manager to fully front the payment to the contractors or purchase of materials.  The reserve provides the Manager the ability to not request a contribution from the owner every time a door knob needs to be replaced.  The reserve amount actually serves as a control point that provides permission to make ordinary repairs to the property as needed. Unless it is an emergency, or the owner has been non-responsive, they already know about these repairs.

On-Site Repairs

It costs money for any person to make a trip to your property.  It is not unusual that a problem can be easily addressed with one trip.  it is also not practical to track down the owner for approval if a simple $25 part needs to be installed.  The key for us is the guidance of our “minimum Standards” that are incorporated into our management agreement.  Our fiduciary responsibility to you is to maintain your home to keep tenants living conditions within these standards.  We need to do this for the least amount of investment possible.  You have to trust that your manager will not take advantage.

Owner Non-Responsiveness

There are also laws protecting tenants if an owner or manager is non-responsive to maintenance requests.  The owner and manager will both be facing potential liabilities if legitimate issues are not addressed.  Some owners choose to avoid the manager in order to avoid expenses.  The law views both the owner and manager as responsible for the tenant’s rights of habitability.  Reserves provide a very small amount of cushion to allow decisions to begin to be made.

Owner Concerns About Reserves

The actual reason a reserve account exists does not address the ultimate concern posed by this owner.  His concern is a manager who just spends the reserve in ways not approved by the owner. The question above opens up an entirely different issue in my mind.  Who can you trust?
It seems to me that this owner may have had a bad experience with a manager using their reserve.  Lets face it, $300 is not going to go a long way in making repairs or handling maintenance.   But there needs to be a control point, and it is reasonable that a property manager knows that the funds are available to pay a contractor or to run to the hardware store to buy supplies for the home.
There are some maintenance repairs that should not require a manager to obtain approval (ie a broken door lock).   For this reason, WILMOTH created our Minimum Housing Standards.  These standards provide a set of guidelines that all parties can agree will be the guide for handling minor maintenance requests.
Significantly, in the case of emergencies, a manager will often need to front a significant portion of the cost from their own funds.  The Manager has to trust reimbursement from the owner will be forthcoming.  Trust has to work both ways.

Different Strokes For Different Folks

In my experience there are two types of management companies.  One manager does insist upon being provided total discretion over the leasing and management decisions.  This type of manager might be right for you if you are really busy and do not wish to be troubled with the day-to-day operations.  The second choice is to function in more of a partnership with the owner.  It is much easier to establish management operations that proceed from a partnership approach, and then moves to an independent operation approach; than it is for the independent (total discretion) company to work with an owner who wants to be a partner.  Maybe this owner was working with the wrong type of manager?
The answer to the email inquiry is that he is right.  The entire definition of the reserve concept must be understood.  Does the definition protect an owner from a manager who makes decisions routinely without communicating to the owner?  Does the reserve provide an agreed cap where the manager can’t continue without risking their own funds and their client relationship?
What kind of manager have you hired?  If your monthly distribution routinely includes charges you knew nothing about,  you are in an independent arrangement.  Maybe that is not what you need.
If the utilization of the reserve is an issue, then there is likely an issue with the type of manager.  This needs to be addressed to decide if the manager can adjust their practice to more of a partnership model.  The relationship you maintain with your manager should be one that includes trust. The partnership model involves communication and documentation.  The relationship is transparent.  The cooperation results in an understanding regarding utilization of reserves.  Most importantly, the end result is trust between both the owner and the manager.

 

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