Set Management Fees or Performance Based Pay for Management Companies?

Hi Everyone,

I’m sure everyone would agree when I say we are in an epidemic of competitive management fees in the industry. I have seen large organization go as low as 2% management fee to simply close the deal, and at the end of the day is actually costing their firm money to actually work for a developer. How is that a smart move? Do you really want someone who is managing their company with that much risk managing your asset? Is saving a few bucks in Management fee worth the risk?

I think as developers, investors, owners, and agents, we really need to rethink how we evaluate a management company, and how to properly pick the right agent for your asset. I don’t think that is safe anymore to really consider simply the traditional management fee from anyone, but actually rethink new ways to properly compensate for management.

I strongly believe we should consider incentive payments vs. set fees. I think part of the RFQ, RFP, or whichever your bidding process might be; it should list compensation with an incentive table (performance based pay), in which the agent realizes that they must perform to a certain level to get a certain level of compensation. This way you know that a management company is not just taking an asset under management for the set fees, because to make money is going to require them to perform.

What do you guys think? Should it be the traditional set fee? (3-4% or minimum amount) or should it be a performance based compensation in which they will have to perform to a certain level in the chart to get a certain level of compensation. Almost like a sales agent and commission?

Would love to hear everyone input in this matter.

Thanks,
Pedro

Pedro,



I think the concept is great,all too often a Manangement Company may under sell themselves. Assuming that you are referring only to market rate residential rentals? Please clarify

Based on my experience the proposed fee should be dependant on certain conditions, such as:


Location

Current Occupancy

Physical Condition

Is it really a turnaround opportunity?
Is it feasible to create value?

Budget, do they have one?

Is the income commensurate with the market?


Expenses - must be evaluated such as contract services,
is the owner married to their contractors?

Will they permit the manager to do an RFP for the
contract services?

Will the owner (s) consider capital improvements to make the property more competative in the market? Etc...