I think we’ve got the fee discussion the wrong way around…

One of the first questions asked of most property managers by a potential new client is “what’s your management fee?” which is really a misnomer for the fee when you look at the work involved in the day to day and longer view of the management of a rental property.

I have constant conversations with directors of agencies who complain that they’re having to pay higher salaries for the Property Management staff but the fees are being undercut by competitors who think the only way they can win business is by being the cheapest agent in town.

Our clients demand high levels of service and professionalism from us yet keep trying to push the fee they pay downward – somewhere, something has to give; estate agencies and specialist Property Management firms cannot continue to pay increasingly higher salaries to staff, implement new tech and provide higher levels of service to their clients while trying to remain profitable on a reducing income base.

The duties of a property manager are about as diverse as you could imagine; not only do we ensure the rent is paid in a timely manner, we report and coordinate maintenance and repair works, conduct inspections to ensure that the property is being adequately cleaned and maintained at least 6 monthly (some states are more frequent), regularly liaise with the parties on rent levels, pay the outgoings, maintain accounts which are compliant with various pieces of state and federal legislation, deal with insurance claims, coordinate essential utility compliance and safety checks and quite a bit more, not to mention manage and nurture a two-way relationship which can often be a conflicted one…

This all is with the intent of ensuring that a landlords investment performs from not only a rental income perspective but also that the capital value of property keeps pace with at least market levels.

However… the fee for doing all this is expressed as a percentage of the rent and consequently based purely on the generation of the income for the property where most of the tasks involved are far removed from this function.

I’d like to float this as an idea to you – as an industry, we need move away from the “traditional” model of charging leasing fee for a new tenant, plus the ancillary fees, and an ongoing revenue collection fee and look to implement a new model based on the overall value of the property – obviously this wouldn’t be at the same level as the current management fee, it would actually be somewhat more as a recognition of the value of the property manager’s role in the preservation of the asset value and management of revenue, and this would mean that agencies would be far more viable and could resource and support their line Property Management teams far better.

In previous blogs, I’ve drawn on lessons from the financial services sector and this is yet another area where comparison is relevant. 

If we look at the superannuation and funds management sectors as a guide, the fees paid to those management firms are based on the total value of the portfolio under management – check your annual super statement and you’ll see what I mean – theirs is a singular role of preserving or increasing the value of the portfolio rather than the dual role of a Property Manager in both this preservation function and also the management of the property’s direct income (and its outgoings) by way of rental payments, yet the Property Manager (or more correctly, the estate agency employing them) is paid only on the amount of rent received, and not on the value of the asset managed.

Look at the sales side of our industry; their fee is also derived from the value of the property being sold rather than on any other basis, so on examination of these sectors, there is an argument for a change in the way that investors are levied a fee for the management of the entire asset rather than one which purely reflects the collection of the revenue.

Now, yes, the education and professional requirements for the financial services sector are in most cases greater than they are for Property Managers, however in Victoria a new entrant to the sector is now required to have a Certificate IV as a minimum educational standard so there are moves being made to improve the overall skill and education levels, with other states also looking at where their entry standards should be set – so this argument is diluted; that said, there is still a significant way to go to lift industry standards across the board and it’s a bit of a chicken and the egg story, you won’t get a shift in one until the other improves (ie; you won’t attract high level staff unless you offer high level salaries, but you can’t offer those incomes without a consequent increase in agency income).

I know that this might sound counterintuitive to some of you but look at the calculation – the current management fee as a national average would be in the realm of 6%, and the average rental is (for the sake of discussion) around $450.00 per week (or $23,400pa) so the rough average fee investors would pay – and this is purely for revenue collection – $1400(ish) plus the leasing fee and ancillaries.

Now, the average value of a property is (again for demonstration purposes…) $650,000 and this has increased at a rate of roughly 7% annually over the last 10 years.

If you were to charge an annual fee of say, 0.5% (that’s ½ of 1%… ) of the value of the property, the fee would work out to roughly $3,500 pa (given the tax laws in the country this could be claimed as an offset on the income by the property owner so the effect is lessened).

Imagine how the quality of the staff would be improved once the agency was able to offer salaries which would be competitive with other sectors, not to mention the profitability of the agency would increase markedly, or Property Management firms being able to offer their clients enhanced levels of skill, service, product offerings and technology because of an increased ability to fund their development.

There would also be greater expectation on the role of the Property Manager, with most being expected to have deep knowledge of not only tenancy law but very good working knowledge of property, building and planning disciplines so that the service and advice given to their clients would be well rounded, carefully considered and comprehensive enough that the client would be making highly informed decisions on the future of the property.

We are all reevaluating our lives post the pandemic, perhaps this is also an area where we start to look with fresh eyes….

Food for thought….