An Unlicensed Property Manager Horror Story
Not all stories are positive, but if you pay attention to the inherent lessons, you might be able to learn something – and potentially avoid future disasters. Let me tell you about a case I ran into with an unlicensed property manager and the lessons it taught us at ROOST.
A new client contacted us unexpectedly a few years ago with close to 70 single-family homes in
Springfield, Ohio they needed help with. They were from upstate New York and had purchased these properties over 24 months through a buyer’s agent based in a county just north of ours. As far as I know, they never saw the properties before they bought them. They had learned via the internet that Springfield, Ohio had some of the cheapest housing stock in the nation so they were confident in their purchases.
These owners were not the only ones enticed by our ‘bargains.’ We have worked with buyers from California, Washington, and Canada as well. They all thought they were going to get rich quickly because the asking prices of houses here were a fraction of what property was selling for in their hometowns. They all bought their properties without consulting a local professional, and they all came to us after their business plans fell apart.
These buyers all failed to consider the condition of the properties they were buying and the true cost of the initial rehab and ongoing upkeep and repair. They also consistently overestimated the amount of rent they could collect and the number of months each year they should expect to collect it. They did not necessarily overpay for their houses, but they overestimated their profit margins.
Almost all of these owners initially assumed they could manage their properties themselves from a distance. As I have written earlier, lower and moderate-priced scattered lot single-family housing requires a hands-on approach to day-to-day operations that managing from a distance does not allow.
To their credit, our friends from New York did hire a property manager to help them. Their mistake was hiring an unlicensed individual as their manager and by the time we got involved, they had lost tens of thousands of dollars.
I have not bought a house yet for under $20,000 that did not require at least some repairs, and
most require fairly extensive upgrades. The upgrades almost always involve big-ticket items like roofs and windows. Our out-of-state owner discovered this truth as well.
Our new clients were introduced to a local contractor who started rehabbing the properties. Before long, the contractor had volunteered to help find tenants, collect rent, and do ongoing maintenance and repairs. This sounded like a terrific arrangement and things went along just fine at first.
However, everything eventually fell apart because there was no tenant screening or selection process in place for new tenants. There were other reasons, too, but this was the big one.
By the time we got involved, barely half the properties were occupied and the tenants in half of those were not paying rent and in need of eviction. The owners were understandably angry and frustrated. I’m sure the manager–essentially a one-person operation–was feeling overwhelmed and taken advantage of as well.
While our owners did lose a lot of money in rent, where they really got killed was in the cost of repairs and rehabs. While their loyalty to their manager was admirable, it was their manager who was doing the construction work.
Not only was there no competitive bidding going on, but from what we could tell, the manager was billing the owners at a very substantial mark-up – and it was in addition to the compensation he was collecting as a percentage of the rent and security deposits collected.
The unlicensed manager was the only person making money on these houses. Somewhat unbelievably, we found instances where work was done on houses that should have been torn down. We found truly terrible, uninhabitable houses in very tough locations with new roofs on them. It would have been hard to prove that the manager’s actions were fraudulent or criminal.
The owners were after all paying him. He may have been incompetent, but the owners supported his actions by giving him a free hand.
We do know that, under Ohio law, acting as a property manager without a license constitutes a first-degree misdemeanor and subjects the offender to a civil penalty of up to $1,000 per violation. If the manager had been reported to the Ohio Division of Real Estate, observed, charged, prosecuted, and found guilty, then he would have owed thousands of dollars in fines.
Fortunately for our owner, this story has a happy ending.
However, there are several lessons to be learned here.
- You cannot manage property on your own from a distance.
- You need to have a set of basic standards for your property manager, including being licensed.
- You should at least spend the amount of time and effort to select a property manager that one would spend to qualify a new tenant.
Remember: A good property manager will make you money far beyond the fee you will pay them.
Final Thoughts
Investing in real estate is a good investment. I’d argue it’s one of the best investments you can make. When done correctly, you can set yourself up to have an income stream that lasts—and that’s far better than a one-and-done sale. Even a really, really big one-and-done sale.
However, the nature of the business requires the ability to keep your wits about you and make smart decisions that center around your initial investment. You know why it’s important to have a tenant in your properties (you’re not making money on empty properties) but it’s equally important to leave that property in the right hands. Unless, of course, you want to manage the whole thing yourself. That’s your right to do, of course, but a lot of investors are busy professionals.
Whether this is your main gig or just a side hustle, your time is precious. Especially when you own multiple properties, such as our New York investors, it’s a lot to keep under control. The right property manager or property management team can make certain aspects of your investment easier.
You won’t be tied up in unnecessary bureaucratic red tape and, for the most part, a property manager is the one to handle most of the elements of this business–like evictions–that investors don’t want to handle, anyway.
I encourage you to make a second investment in your time, in yourself, and in your peace of mind. Get the right people for the job and suddenly, life becomes a lot easier. Make the wrong decisions and you might end up the central focus of someone else’s cautionary tale.
