Why Some Contractors Won't Work In Property Management
One of the biggest challenge property managers face is finding and retaining great contractors. The nature of the maintenance and contracting business is such that if you are good, word gets out and you get real busy. The busier you are the higher you have to price your work until you are not as busy. It is a never-ending cycle.
The Demands of Property Management For Contractors
We have demands that a lot of contractors struggle to meet. Things like:
- Being fast to produce estimates
- Punctual in starting jobs when promised
- Trustworthy so we need minimal quality control inspections
- Excellent workmanship
- Support to return if needed
- Low prices.
Guess which one suffers if you want all of these things?
Low prices of course.
Requesting Itemized Quotes
Don't expect great contractors to provide itemized quotes.
Yes, we understand why you want the job broken down to its smallest components. But...really great contractors rarely give itemized quotes. Why? Because the great contractors have been at it long enough that they make a profit. Yikes!
We want to make one ourselves but no way should anybody working for us make one!
Contractors have overhead expenses and they need to cover them. My experience (I use to be an owner of a residential contracting business) is that the great contractors are the best because they have rather significant overhead that has to be covered. This overhead is how they are able to perform and meet the demands listed above.
Many of us can handle some repairs ourselves..if we had the time. So, it is not unusual that, if given an itemized quote, we can break down the cost of materials and conclude the rest is for labor. But it is not! It includes overhead and profit-what it takes to keep the great contractor in business.
For the great ones, it is just not worth defending their bids to that level of itemization. It is easier to just go to the next job and get paid what it takes to perform and be appreciated for doing so.
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The Good Contractors Have Enough Work They Don't Need To Defend Their Profits
Don't be surprised when a great contractor will not break down a job to the smallest detail. Unless you are willing to do the job yourself, it should be expected that the contractor has to pay his expenses and make a profit or else he will be out of business. He likely uses a simple formula over cost and does not care to have that scrutinized.
The Rental Owner's Duty To Avoid Foreclosure
About ten years ago we frequently learned one of our owners was in default. The owner was collecting the rent proceeds and not paying their mortgage payment. Fortunately, this issue is not as common today. Occasionally it does still occur and the problems created caused us to take action. It is recommended that a well written property management agreement (PMA) addresses the issue of foreclosure. The suggested clause to be created in a PMA is the owner's duty to avoid foreclosure.
There are many dilemmas associated with foreclosure, The effects of foreclosure in a rental are wide-ranging. Unfortunately, foreclosure places all parties (the owner, their tenants, and the property manager) at risk. What should be the response to a notice of foreclosure on a rental property? Should it be to declare the PMA to be in default? Significantly, a default may allow the manager to cancel the PMA but it will do nothing for the tenant. In fact, foreclosure presents a very complicated situation for tenants.
Should Property Management Care If An Owner Is In Foreclosure?
There are several angles to this issue. Assuming a tenant makes their rent payment on time every month the owner can choose how to use the funds. What if the owner has a mortgage obligation on the rental? Nothing stops the owner from electing to use the rent funds for other needs. The owner has the freedom to choose to not make their mortgage payments. The foreclosure process can take as long as 18 to 24 months to complete. This period of time provides a comfort to the owner that things will get better and they will get caught up on their back payments.
The tenant will not be aware of any problems with the mortgage holder until a Notice of Default is delivered to the home. For a tenant this notice will set off the alarm bells. Interestingly, some tenants who have receive a posted Notice of Default at their rental think they are no longer obligated to make rent payments.
A property manager needs to remind the tenant of their separate contracted obligation to make their rent payments. Technically, the tenant must make payments per the term of the lease for the entire length of the lease. There are usually no clauses in a lease that excuse a tenant from making rent payments if it is found the owner is not paying their mortgage.
Duty To Avoid Foreclosure Is Really About Ethics
The issue of allowing your rental to fall into foreclosure is an ethical one for an owner. Whether or not it is ethical to collect the rent and not make the mortgage payment?
Outside of the obvious contract violation occurring with the owner's mortgage, there is not a law prohibiting this decision. Should the ethical landlord provide disclosure of their decision and actions to their tenant? It really is ethical that the tenant be made aware before a posting of foreclosure hits their front door. It is also important that the tenant understand that at some point they may have to vacate the home on somebody else's terms. Unfortunately, disclosure to the tenant is more than rare. Usually the owner does not want the tenant to know about the default as it might disrupt the tenant's payment of rent.
Depending on the locale and who ends up the owner of the property, the tenant is likely protected under their existing lease terms. It is not unusual for the new owners of a foreclosed property to make an offer for the tenants to vacate their lease. Or the new owner will strictly enforce all provisions of the lease. The message to the tenant is very loud and clear. "We do not want you living here so please leave."
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WILMOTH's Duty To Avoid Foreclosure Clause
Over 10 years ago we added language to our PMA to address owners and foreclosure.
DUTY TO AVOID FORECLOSURE: OWNER certifies that all mortgage obligations, property taxes, association fees, (and/or any other obligations which could lead to a foreclosure action against the property) are current at this time and further agrees to keep them current and paid in full as required. OWNER acknowledges that it is a fundamental obligation of a Landlord to provide their Tenant Quiet Enjoyment of the rented premises. Anything that jeopardizes Tenant’s right to occupancy, such as failure to service mortgage or discharge any lien, places that right in jeopardy. Therefore, to continue to collect rent and /or fail to notify Tenant of impending foreclosure would be a breach of that duty.
Our obligation and procedure when we receive notice of a foreclosure filing:
- WILMOTH Group, as part of operating as a licensed real estate Broker, is required to follow all real estate laws.
- The laws require WILMOTH to treat all parties to a transaction fairly, and to notify any party to a transaction that the other party may not be able to fulfill their duties.
- WILMOTH therefore has an independent duty to notify a Tenant of any impending foreclosure or failure to service mortgage debt.
The Duty To Avoid Foreclosure clause gets this issue out on the table prior to taking over a management. It forces owners to acknowledge that collecting the rent, while not making the mortgage payments or disclosing this decision, is a violation of their PMA. It is one of the few tenant protections in our agreement that is not directly derived from law. This language is the result of combining our commitment to ethics with protection of tenant rights. We also want our owners to share the priority of ethical treatment to their tenants.
Advantages of Using A Project Manager For Your Rehab
If you have recently purchased an investment property that needs rehab there are various options for how you bring your new investment into a positive cash flow position. A project manager is a beneficial partner for investors in bringing their property into marketable condition. Utilizing the experienced property manager for this service is smart due to the shared vested interests of both parties. It also coordinates objectives instead of using different partners with potentially conflicting interests.
You may decide to hire a contractor directly. You want a very high level of trust and accountability regarding draws and performance. There are contractors who will offer to roll in property management services at what appear to be a discounted rate. Frankly, the problem with this arrangement is your contractor is a contractor first. Guess what is more profitable...repairs or management? Ask any owner who has chosen this route about the cost and volume of repairs after the rehab. There may be a very good reason management fees are below the market.
Or you may choose to hire a property manager who does not offer rehab services. There is nothing wrong with this choice but they may not be much help in bringing your property to rent-ready condition. Or, what if you decide to sell after the project is complete? The advantage of a property manager serving as a project manager is the coordinated approach to bringing your investment to a profitable position.
The Property Manager As Project Manager
A professional manager who offers project management services will be able to manage and resolve all of the expectations that make hiring a contractor so difficult. They are problem solvers.
Here are some of the benefits to an owner for hiring a project manager.
A project manager can oversee work flows. They also can determine if a certain phase of a job may be completed before a different phase while waiting on the availability of a preferred experienced contractor.
A project manager can negotiate prices based on other jobs that they are contracting. Their full-time availability provides skills that are very difficult for a self-managing owner to duplicate.
Project managers resolve the questions regarding workflow. Questions such as can one phase of the project jump ahead while waiting for a preferred contractor? Or determining the location of the contractor on a day where nobody is working...but should be.
Most importantly, a project manager will control funds. Money will not be released to a contractor until work has been inspected. In most cases, the project manager will also acquire materials and have them delivered to the job site. These acts reduce the risk associated with paying upfront funds to a contractor.
A Project Manager is the owner's fiduciary. They carry on the responsibility and duties to the owner that are a part of the property management process.
You may be surprised at the affordability of these services. There are several ways a project manager may be compensated. Our preferred method is a straight cost quote (materials and labor) plus a percentage for the management services.
In the final analysis, it is important to understand your team and their capabilities. Identify who can best manage the difficulties associated with property rehab and maintenance. The property manager as project manager offers an ideal combination of services. It makes your property manager a partner in the final outcome with an emphasis on the owners needs and budget.
Hiring Contractors Can Make You Hate Owning Rentals
Investors who self-manage may decide to do so because they believe professional property managers simply perform the following services.
- Find a tenant which should be easy using a free on-line service.
- Collecting rent can be accomplished with a free on-line service.
- Use a lease that can be copied from something posted on-line.
The internet makes the process of self-management seem much easier. The piece that is hard for most investors is the process of hiring contractors. Locating and retaining great contractors is not easy. In fact, for a rental owner it may be the hardest part of self management.
The Property Manager Has An Advantage
Property managers have the advantage of the resources of the best contractors due to their ongoing relationships and experience. Most self-managers eventually realize this is one of the most significant services a property manager brings to the table. The access to options that volume provides is the difference-maker for a professional property manager. The more properties managed, the more leverage for a professional to obtain.
Ultimately, a professional manager can find solutions faster and for less money. The challenge for the self-managing property owner is the expectation that they too will enjoy this leverage.
So, lets say you still want to charge into self-management and take your chances on the contracting side. The first thing you should do is set aside some of the common assumptions about hiring contractors.
If You Are Going To Self-Manage Prepare To Change Your Expectations
The following expectations cause self-managing owners to become frustrated with hiring contractors. By changing expectations, you can learn to not hate the process as much.
- Contractors are waiting and available at a moment's notice
- They will only have one job (yours) working at a time
- Happy to offer prices that are below market because your job is more attractive than others. Or some other reason.
Great Contractors Will Not Be Waiting And Available At A Moments Notice
When you start hiring contractors the first thing to accept is the great ones are already busy. Depending on the job, you will need to build in a longer timeline, or try a contractor who is more available. Are they available because they are inexperienced or because they have one-star ratings? Without the benefits of being able to offer volume, the great contractors will likely place you near the back of their schedule.
Great Contractors Will Be Managing Multiple Job Sites
Great contractors will understand project management. They will spend a lot of time planning and deploying resources. Sometimes that means there is a day or two where they are working on a different job than yours. It is frustrating but in the long run this is a normal part of the process that produces the fastest total completion date.
Great Contractors Have To Be Paid
Pricing is relative. Great contractors have a business organization to support. They understand the margins a job needs to produce to make it appealing to deploy their resources. Most of the time they have learned this through experience and the test of time. For the person needing to hire a contractor, this will likely mean they are not the cheapest bid by a wide margin. If you have several bids and one is much lower, that is a sign the contractor does not understand the margins his business needs to survive. Or something is missing.
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Pick One, Maybe Two Of Your Expectations
You can probably focus on achieving one or two of the above expectations and find somebody for your job. For example, most great contractors have a backlog of work but also the access to labor and the skills to juggle multiple projects. To work with that contractor though, you will almost certainly need to adjust your expectations on prices.
You may hate hiring contractors, but by adjusting your expectations you will learn how to manage your property better.
Defective Chinese Drywall Repair Protocols Stir Up Controversy
The US Consumer Product Safety Commission and HUD have stirred up some controversy by siding with the National Association of Home Builders (NAHB) that not all electrical wiring in a home with defective Chinese drywall needs to be replaced. These three groups opinions and standards vary from a federal Judge who says it all needs to be replaced. The government groups have testing to support their decisions. The Judge has ordered his standard be used on 300 homes being repaired by a national drywall company.
What component does the government and NAHB endorse for replacement? Check out the story. The issue remains that it is going to be very difficult to create a standard until it is determined how a settlement can be funded.