How do Property Managers Handle Maintenance?

How do Property Managers Handle Maintenance?

This is an incredibly common question for property owners considering hiring a property manager, and it’s important to understand the various modes and factors at play.

Almost all managers use one of these models:
1. The In-House Maintenance Team Model
2. The Maintenance Mark-Up Model
3. The 3rd Party Maintenance Model

There are upside and downside to each model to explore. We’ll also look at which model Tenant Planet utilizes and why.

#1 – The In-House Maintenance Team Model

In this model, the property management company is the employer of its own maintenance crew that performs some portion of the work on your property, typically the routine types of repairs that come up from time to time. Depending on the size of the company, only a certain portion of the maintenance will be performed in house. They will likely still be contracting with outside vendors for more specialized tasks. Few firms have their own in-house HVAC or roofers, for example. Small property managers will generally only have an in-house handyman.

You want to understand what they can and can’t provide, how they vet all their service providers, and how their relationship with their vendors affects you, so be sure to ask.

How do Property Managers Handle Maintenance?

Other important issues to consider are insurance and licensure. If the property manager is using their in-house team to perform larger scale tasks, are they a licensed General Contractor? There is a wide range of jobs which require permitting and/or a licensed person to perform them. Even if the service is provided outside the firm, you need to know that the provider is licensed and properly insured for both damage to your home and workers’ compensation, should a worker be injured on-site.

*NOTE* I am not an attorney and don’t play one on the internet, so please do your own research and consult legal counsel regarding any specifics.

The insurance required for maintenance is different and specialized beyond what a management company would normally carry, so be sure to ask about that and verify the insurance is sufficient to cover any faulty labor or liability. Make sure the service providers they contract with are also covered. If they aren’t protected, you aren’t either.

Benefits of The In-House Maintenance Model

    • High Control Over the Service
      They can deploy their maintenance crew as necessary without having to get on someone else’s calendar. This control is helpful, especially when it comes to emergencies or urgent maintenance needs.
    • Service Provider Knowledge of the Portfolio
      When there is a maintenance staff who only works on the same 100-300 properties over and over, they become very familiar with the property specifics, which can help with both judgement calls and efficiencies. They know the condition of the property, the history of issues and repairs, what work can be expected to need to be done in the future, and even things like owner service preferences and what damage might be due to tenant issues, etc…
    • Vendor Communication and Job Reporting
      When there is something the owner needs to weigh in on, it is easier to manage discussions about repairs or to assist the owner with decision making when the maintenance crew is part of the property management firm.

Downsides of The In-House Maintenance Model

  • Maintenance is a source of profit
    One of the reasons that Tenant Planet doesn’t employ this model is because we believe there is a clear conflict of interest when the property manager is making money on maintenance. Owners need to know that repairs that are recommended are necessary. However, this model leads to a there a constant and inherent internal pressure on mangers to keep their maintenance staff busy.
    • “When all you have is a hammer…everything looks like a nail”
      This means that if your property manager has just a handyman or small maintenance team, often they are reluctant to bring in outside vendors to handle more specialized problems. This is because: (1) it can eliminate the profit source mentioned above, (2) it is just easier to use your team even if it is on the edge or beyond their circle of competency—which psychologically is a very powerful drive, and (3) you never want your maintenance team sitting idle.
    • Limited Vendor Access
      Particularly in small companies, when they only have one or two handymen for maintenance, sick days and vacations can cause services to suffer, since generally there is no clout with outside vendors to ensure they will provide back-up coverage. This is problematic for owners and tenants.

#2 – The Maintenance Mark-Up Model

Under this scenario the property manager has negotiated to receive a piece of the profit margin earned by the 3rd party vendors they use for work performed on their portfolio properties.

Theoretically, the negotiation is based on a Vendor Agreement between the property manager and vendor, generally stating that the vendor agrees to work at a discount due to the preference and volume of work they get from the property manager. The client is charged full market rate, and the difference between what the vendor will keep for the job and what they charge the owner is passed to the property manager in exchange for the referral.

For example, if a job was to cost the property owner $1,000 at market rate, the vendor would do the work for something like $850 and provide the $150 discount to the property manager, basically as a referral fee. The idea is that it is worth it to the vendor to share the profits in exchange for the volume of work flows from the property management company. For the property manager, it means that they have a vendor willing to let them share in profits in exchange for the preference they give them. The greater the volume of work they send to the vendor, the greater the profit percentage they can negotiate to keep.

But, there are issues with this:
(1) If the property manager is able to negotiate a discount on work, shouldn’t it be passed directly through to the owner, the party that is actually the origin of the work for the vendor?

(2) If a vendor is offering a portion of earnings to get the work, they may well adjust their prices upward over time. The property manager would need to be vigilant about trying to make sure pricing remains at market, but that is hard to do when you’re not hiring a variety of vendors or getting multiple quotes for a job. Due to the convenience of the relationship and the knowledge and familiarity the vendor will gain over time for the properties, it is easy to see where the vendor might be able to hike prices to the owners and not risk losing the relationship with the manager.

(3) This relationship lends itself to complacency on the part of both the vendor and the property management company. Involved in a mutually beneficial relationship, quality of service and work could be compromised by the vendor and overlooked by the manager.

Benefits of The Maintenance Mark-Up Model

    • Contract in Place with Vendor
      This contract to negotiate the maintenance mark-up formalizes the vendor relationship and can offer some strong support in the event of poor workmanship or slow action.
    • Property Manager, Vendor Relationship
      When this relationship works well, the vendors will, due to volume and mutual benefit, often place the property manager’s needs above other random clients, and that means faster, better quality work to preserve the relationship.
    • Large Number of Vendors
      For large property managers, there can be enough work to support non-exclusive agreements with a large number of vendors. This means they will never be short of potential workers to attend to their properties and that competitive pricing can be maintained.

Downsides to The Maintenance Mark-Up Model

    • Profit Component Drives Up Maintenance Costs
      As stated, vendors may raise prices, costing owners more than market rates.
    • Maintenance is a Source of Profit
      One of the reasons that my company doesn’t employ this model, is because we believe there is an inherent conflict of interest when the property manager is profiting on maintenance. There is a motivation to keep the vendor offering the discounts happy by referring lots of work, potentially regardless of quality. When the property manager also profits every time there is work getting done, owner satisfaction could be subordinated to vendor satisfaction, and this is not an ideal arrangement for owners (or tenants.) Both needless and/or lesser quality work could end up being the result, which is not in your best interest.
    • Lack of Clarity in Management Fees
      Many managers are very transparent about their mark-up fees, but there are also many who aren’t clear about their vendor agreements up front. Worse, many don’t list their fee as a separate charge from the maintenance, which to me is a major red flag. If you are charged $1000 in our example above, it should clearly state $850 to the vendor and $150 to the property manager, so you will know exactly how much your property manager is benefiting from your repairs.

#3 – The 3rd Party Maintenance Model

This is the model Tenant Planet and approximately 33% of the industry uses.

In this model, when a maintenance need arises, the management company reaches out to the vendor who is best suited to respond to the need, based on the nature of the work, geography, expected and needed speed of completion, etc… We selected this model for several reasons:

(1)We choose vendors based on nothing but the best interests of the owner.
(2)Our vendor relationships are based on the quality of their work and services provided.
(3)Pricing remains competitive, and it’s easy to verify.
(4)It’s simple, transparent, and appropriate. We don’t want to be in the maintenance business. Our model for success requires we are able to do what’s best for owners and their properties.

Benefits of The 3rd Party Maintenance Model

    • Alignment of Interests-
      Basically, this model avoids the conflict of interest for the property manager. Owners can know managers have nothing to gain by recommending repairs.
    • Access to More Resources
      Sometimes fresh eyes may mean new ideas for stubborn problems. There are times where a new vendor may offer a solution that the prior vendor hasn’t or a different vendor may simply be a better match for the work.
    • Purchasing Power Pricing-
      Just like in The Maintenance Mark-Up Model, managers using 3rd party vendors can still negotiate for preferred pricing based on volume and relationship, but the only reason the volumes will be high and the relationship will be good will be due to good service and quality workmanship, not a profit share. Any savings go directly to the property owner, and the manager can still enforce high standards by not referring more work to subpar vendors.
    • Property Manager, Vendor Relationship
      Due to the volume that can still be referred to good vendors with fair prices, often vendors will still place the property manager’s needs above other random clients, which ultimately benefits owners, the true providers of the work.

Downsides to The 3rd Party Maintenance Model

    • Less Vendor Control
      Because there is no explicit contract in place between the property manager and vendor, quality workmanship and service are harder for the manager to enforce. Stopping referrals is the typical remedy. A contract in place that ensures financial repercussions to the vendor can add an extra layer of accountability.
    • Less Attention to Maintenance
      When there is no financial incentive to the management company to make sure repairs and maintenance are attended to timely, owners may be vulnerable to lax standards for attending to property issues. At Tenant Planet, we don’t let that happen, but we can’t speak for everybody.
    • Greater # of Vendors New to Your Property
      Although access to more vendors means greater resources to solve problems, it can also mean that the advantages of having the same vendors, who know the property and the history of issues and repairs can be lost. That said, good managers keep good records and should be able to bridge any gaps in knowledge for a new one or may simply reach out to the prior vendor. However, without being under contract, vendors may not be quite as attentive. On the flip side, sometimes new vendors may offer fresh ideas. For example, if the issue is ongoing, such as an older furnace that’s being coaxed into not giving up, or a less than reliable water heater the owner doesn’t want to replace yet, second opinions can sometimes lead to new solutions. Vendors are not all the same.

There are many reputable property management firms, operating under each of the above maintenance models, who have happy clients with properties that are well attended to. At Tenant Planet we have our reasons for using the model we’ve chosen, and other managers have their own good reasons too.

I hope I’ve been able to present sufficient information about all of the alternatives so that you are educated enough to look for what you’re most comfortable with.

If you like our model and want to learn more, don’t hesitate to press the “Request A Proposal” button below and we can have a staff member reach out to you to learn more.

Otherwise, if you just have questions or comments, you can do that below or email me directly at parker@tenantplanet.com

Best,

Parker

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