This is the fifth episode in our new weekly video series covering property management principles. This episode covers a property manager’s duties and higher standard of conduct provided to a landlord.
The prior episode analyzes the attributes of a successful property manager.
The prudent investor standard
A property manager’s obligations to a landlord include:
- holding a broker license;
- diligently performing the duties of their employment;
- sufficient oversight of the broker’s employees acting on behalf of the landlord;
- handling and accounting for all income and expenses produced by the property;
- contracting for services, repairs and maintenance on the property as authorized;
- monitoring utility services provided by the landlord;
- advertising for prospective tenants;
- showing the property and qualifying tenants;
- negotiating and executing rental and lease agreements;
- responding in a timely manner to the needs of the tenants;
- evaluating rental and lease agreements periodically;
- serving notices on tenants and filing unlawful detainer (UD) actions as needed;
- performing regular periodic property inspections; and
- keeping secure any personal property.
In addition to these tasks, the property manager:
- confirms the existence of or obtains general liability and workers’ compensation insurance sufficient to protect the landlord, naming the property manager as an additionally insured;
- obligates the landlord to only those agreements authorized by the landlord;
- maintains the property’s earning power, called goodwill;
- hires and fires resident managers and other on-site employees as needed;
- complies with all applicable codes affecting the property; and
- notifies the landlord of any potentially hazardous conditions or criminal activities affecting the health and safety of individuals on or about the property.
A property manager has a duty to employ a higher standard of conduct regarding the operation of a property than a typical landlord might apply. This standard is called the prudent investor standard.
A prudent investor is a person who has the knowledge and expertise to determine the wisest conduct for reasonably managing a property. The prudent investor standard is the minimum level of competency expected of a property manager by a landlord, whether or not the landlord is familiar with it.
In contrast, the expectations of resident and non-resident landlords may not necessarily be based on obtaining the maximum rental income or incurring only those minimal expenses needed to maintain the long-term income flow of rents from tenants.
Resident owners are more apt to maintain property in a condition which they find personally satisfying, not necessarily in accord with sound economic principles. Often they are not concerned about the effect of the marketplace on their property’s value until it is time to sell or refinance.
Likewise, the landlord may not have the knowledge or expertise to effectively manage the property. Most owners of rental income property pursue unrelated occupations which leave them very little time to concentrate on the management of their properties.
However, property managers are employed to manage property as their primary occupation, one in which they have developed an expertise. A landlord’s primary reason for hiring a property manager is to have the property manager maintain the condition of the property at the least cost necessary and keep the rental income stable and as high as the market permits at a reasonable vacancy rate.
Thus, the property manager bases decisions on the need to generate the maximum income from the property and incur only those expenses necessary to maintain the property’s good will and preserve the safety, security and habitability of the property.
To conduct property operations in compliance with the prudent investor standard, a property manager considers the following factors:
- the type of the property and its niche in the market;
- the socioeconomic demographics of the area surrounding the property’s location;
- the competition currently existing in the local market;
- the current physical condition of the property; and
- the existing liens on the property.