What to Check in a Property Management Agreement Before You Sign

Before the pen comes out

You have talked with a manager about your Auburn rental, and a draft agreement is sitting in your inbox. It runs several pages, and most owners skim it. That is a mistake, because this document decides who controls your rent, your tenant and your way out.

The California Department of Real Estate (DRE) tells landlords to read the property management agreement carefully, because "there may be clauses that may not be agreeable to you," and to keep a copy of the signed agreement and the lease. Its Quick Guide for Landlords Hiring a Property Manager is two pages and worth reading first.

Get it in writing even if the manager is a friend. Under Civil Code 1624(a)(4), an agreement that pays an agent to lease property for more than one year, or to find a tenant for a lease longer than one year, must be in writing to be enforceable. Most managers use a written agreement for every home anyway.

Term, renewal and the way out

Find the start date, the end date and what happens at the end. Some agreements renew on their own until someone cancels. That can be fine, as long as you know the notice period and whether a cancellation fee applies.

Look for a firm end date. The DRE brochure says the contract should have "a clear termination date," and Business and Professions Code 10176(f) lets DRE discipline a licensee who claims a fee under an exclusive agreement that has no definite, specified date of final termination.

Then read the cancellation terms for both sides. Can you end the agreement for poor service without paying a penalty? Does the manager keep any right to a fee for a tenant it placed after you cancel? Your tenant's lease stays in force when the management agreement ends, so the agreement should say how the tenant will be told about the change.

What the manager does, and what it may spend

The scope clause lists the work you are paying for. Compare it with what the company advertises. SPMG's services page, for example, lists tenant screening, rent collection with online payments and owner disbursements, maintenance coordinated through "a trusted network of contractors and vendors," lease agreements, monthly reports, and marketing and leasing.

Spending authority matters as much as scope. Most agreements set a dollar limit the manager may spend on one repair without calling you, plus an exception for emergencies. Pick a limit you can live with on an older foothill home, where a failed well pump or a septic backup can arrive with no warning.

• A repair limit per job, and whether it resets each month.
• What counts as an emergency, and how fast you hear about one.
• How repairs are billed, including any markup or coordination charge (the DRE brochure says the agreement should explain these).
• Whether the manager or anyone on its staff owns part of a vendor it uses; DRE warns owners to watch for undisclosed income of this kind.
• Your right to approve major repairs and tenant selection. SPMG's FAQ says it will "consult with you on important decisions such as tenant selection or major repairs. Ultimately, the final decision is yours."

Where your money sits

Rent and deposits a broker collects for you are trust funds. Business and Professions Code 10145 requires a broker to put money it does not hand straight to you (or to a neutral escrow) into a trust account at a bank in California, and to keep it there until it is paid out on the instructions of the person entitled to it.

The DRE regulations add timing and records. Funds must be placed with you, with escrow or in the trust account within three business days of receipt, each owner gets a separate ledger, and the ledgers are reconciled at least once a month (10 CCR 2831 to 2832). Under 10 CCR 2830, any benefit a broker receives for handling your trust money belongs to you.

The agreement should say who holds the tenant's security deposit, you or the manager, and the date each month your money goes out. Remember that the deposit is not your money yet. Civil Code 1950.5(d) says it is held for the tenant. Also look for a monthly statement requirement; DRE suggests insisting on monthly accounting reports.

Fees, leasing authority and insurance

Every fee belongs in a written schedule: the monthly fee and what it is charged on, any leasing, renewal, setup, inspection or vacancy charge, and any markup. Compare that schedule with what the company publishes. SPMG's pricing page states a typical management fee of 8% to 10% of monthly rent or a flat fee depending on the property, no turnover fees and no renewal fees, one-time turnover services available on request, and custom quotes for portfolios. The Auburn cost post explains how to set quotes side by side.

DRE can discipline a licensee for taking secret or undisclosed compensation (B&P 10176(g)). If a line item is vague, ask for it in plain words before you sign.

Next, the leasing clause. Check whether the manager may sign leases in your name, the longest term it may sign, and any rent floor you want. Then read the insurance and indemnity terms. A typical agreement asks you to keep a landlord policy and to name the manager as an additional insured. Make sure any promise to hold the manager harmless does not cover its own negligence, and that you know which risks stay with you.

The exit clause: funds, keys and records

Agreements end, even good ones. A clear exit clause keeps your tenant from being caught in the middle.

• A final accounting, and payment of your remaining funds on your written instructions.
• The tenant's deposit moved to you or to the next manager, with the ledger showing what was collected and any deductions.
• Keys, gate remotes, garage codes and lockbox combinations returned.
• Lease files, inspection reports and condition photos handed over. Photos matter: for repair or cleaning deductions, Civil Code 1950.5 requires the landlord to provide photos taken under its photo rules.
• A written notice to the tenant naming who manages the home now. Under Civil Code 1962(c), a successor owner or manager has 15 days to give the required contact details.
• Brokers must keep transaction records, including trust records, for three years (B&P 10148), so you can ask for copies later if a question comes up.