“Ask the CPM”

Dear CPM,

I found a great investment property that I would like to purchase. During my course of due diligence I am also interviewing management companies and have noticed that some companies seem to be charging lower management fees and at the same time have their own “in house” maintenance. The present management company is a perfect example. Although their fees are low, when I examined the financial statements I noticed that the maintenance bills are extremely high. The property appears to have tons of deferred maintenance. As a matter of fact, 8 out of 48 units need total rehab! Needless to say I won’t be using their services. At any rate, what are the ethics involved in property management companies also providing maintenance and repairs. I would think that there is a conflict of interest, wouldn’t you. Can I sign with a company and insist that they NOT use their own maintenance crew?

Sincerely,
Dennis in distress

Dear Dennis in distress,

Thank you for your questions. I hope these answers remove your distress:

1. What are the legalities involving a property management company (pm) that charge you a low management fee but have an in-house maintenance and repair company?

In my opinion this is a bait and switch concept. Though not illegal it could be unethical especially if any profit derived from the maintenance company is not disclosed to the owner. Property managers are licensed by the state and owe the owners a fiduciary obligation, which means in simple terms to act in a position of trust for the benefit of the principal (owner).

2. Can you hire a pm company and insist they not use in-house maintenance?

The answer is yes! You can and should. The real question to be answered here is what is the job description for a pm and what qualities do you demand, compare then hire a pm?

1. The first job of a pm is to extend the life of the asset thereby extending the life of the income stream.
2. Shield the owner from the cares of day-to-day operations so owners can make informed business decisions.
3. Provide monthly accounting showing all income and expenses with copies of all invoices and checks written.
4. Establish a budget to reach ownership goals providing stability, equity growth and then a cash flow.
5. Provides the tenant with quiet enjoyment of the unit they pay rent for.

Now then we can establish a check list to hire a pm.

1. Hire a company that only uses licensed and insured vendors, not in-house staff.
2. Hire a company that has a certified property manager C.P.M. on staff.
3. Hire a company that is only in the property management business. You don’t want a company that manages your property as a loss leader to attract owners to sell them more lucrative services like maintenance or listings and sales.
4. Hire a company that has been in business more than 5 years and has a qualified and trained staff.
5. Hire a company that can demonstrate having an organization of more than simply accounting, maintenance, and management.

Finally, when you hire a company that will be charging you approximately $2.00 per day per unit, don’t ask how to get it done cheaper! Instead, you should be asking what efforts will be made to extend the life of your property, develop a budget to increase your equity and cash flow and assist in reaching your written ownership goals. The answer to those questions will help you decide who is best qualified to manage your property!

Dennis, please check the web site for REMS, Inc. at www.wemanageproperty.com. I think you will find a property management company to remove your distress and assist you in reaching your ownership goals!

Tom Loegering, C.P.M. (tomsr@vel.net)

Will House Bill 2474 affect my rental properties?

If you own rental property in Arizona, a Financial Shock is coming!

Yes, House Bill 2474 takes effect September 21, 2006. This coordinated effort by the County Assessor and Department of Revenue is designed to identify any property listed as owner occupied that is, in fact, rental property.

A similar program in 1984 found 60,000 misclassified properties. The program today is expected to find in excess of 107,000 properties to be reclassified and will result in fines and higher costs to property owners. These higher costs include but are not limited to the following:

1. First will be an increase in property tax. The state rebates 35% of homeowners’ school tax.

2. The next increase will come from the city rental sales tax which various city by city but if managed properly can be passed to the tenant.

3. There could be an increase in your mortgage interest along with charges of fraud and misrepresentation if in fact you never occupied the property.

4. Insurance costs usually are higher for rental property and your policy may be void if you haven’t notified your insurance company.

5. There is also the foreseeability of interest due and penalties of more than $1,600.00 due on rent tax.

6. Finally there are legal issues. Section seven of your sales affidavit must be checked for owner occupied or rental. Misrepresentation on this form is fraud and punishable by law.

If you own the property and stated that you would be an owner occupant and you are not you must get this paper trail corrected!

Either contact the Arizona Department of Revenue or contact Tom Loegering (Ask the C.P.M.) at tomsr@vel.net. You may also call (623) 374-2420 or our Los Angeles office at (310) 793-9500.

Bringing your property into compliance will help us prove good management doesn’t cost it pays!

One thing is certain: We are in a crisis. Waiting around for ‘the government’ to do something about rising fuel prices seems more and more futile! Let’s face it; we are the government! It is we who must realize the U.S. price for gas is cheap by world standards. In order to keep prices low, we must use less $3.00 per gallon gasoline. We’re spending too much at the pump. We’d all like to find ways to spend less, right? Well, driving less would be one sure fire way to reduce the amount of money spent on fuel.

Employers can play a huge role in achieving this goal by a couple of alternative methods. One alternative would be to encourage employers to offer four day (ten hours per day) work weeks. Many municipalities employ the four day work week. An individual who travels 42 miles round trip could save (based on $3.00 per gallon, and using hypothetical of 21 MPG) $6.00 per week in fuel consumption or 20%. That is 2 gallons of gas per week X 52 weeks= 104 gallons of gas each year. Now, multiply that by just 5,000 employees and we’re talking about 520,000 gallons of gasoline saved in a year. That is a collective savings of $1,560,000! That’s just based on 5,000 employees. What would the nationwide savings be?

Another option that should be commonly used is telecommuting or ‘motivating by modem’. Employers who realize that home based employees are actually an extension of the employers’ office could seriously influence the number of cars on the road. Instead of just saving 20% in job related fuel consumption, the savings will be 100%! But the benefits are even deeper.

The IRS has published on their website www.irs.gov, a tax tip for individuals who use a portion of their home or apartment for business purposes. They may be able to take a home office deduction as self-employed or as an employee. Expenses that may be deductible for business use of the home include a portion of rent, utilities, insurance, and even painting and repairs. These deductions can be claimed if that part of their home or apartment is used regularly and exclusively:

1. As their principal place of business for any trade or business

2. As a place to meet or deal with their clients or customers in the normal course of trade or business

Generally, the amount to be deducted is based on the percentage of the space used for business.

In the past, savvy property management companies like REMS, Inc., have and are continuing to renovate residential space to accommodate the demand for home based employees. They’ve dubbed the term “All Internet Buildings”. Tom Loegering, CPM (certified property manager) with REMS, Inc. stated in a recent interview “We have found that productivity can be enhanced and it is possible to motivate by modem. Our company is currently operating in Arizona and California, and much of our correspondence and interoffice ‘chatter’ is conducted on the internet. We encourage many of our employees to work from a home office, and we have found we are better able to communicate with our clients and tenants”. He went on to say “several years back we carried that theme into our business office, the first All Internet Building. Due to outsourcing jobs to employee’s homes, the building had extra space available. So, we brought the T-3’s to the extra space and rented it to small businesses so they could move in and plug in to our system!”

Today, because of technology, as well as exorbitant gas prices, some companies have carried this theme to apartment properties. By using technology, prospective tenants can locate wired apartments by logging onto www.wemanageproperty.com or other property management websites offering this technology solution. Technology is turning “difficult to rent” units into residential ‘hot spots’ where tenants are able to work from home. Mr. Loegering further states, “These tenants are seeing a savings in the cost of fuel and vehicle depreciation, and smart tenants are getting state and federal tax rebates by maintaining home offices.”

This is a win-win situation. Rental property owners get more use and income from space that would have cost much more to bring on line and become rent producing. Tenants appreciate having owners and management that are helping them save money and therefore, they stay longer. Programs like this save employers the cost of office space for an employee. Coupled with actual commute time savings, positive results go well beyond saving money only on gasoline.

The greatest benefit of technology is that it affords us more choices. The concept of the home office gives us the ‘drive less/spend less’ choice. Reducing demand for foreign oil will help lower prices, help our communities reduce pollution and traffic, and afford more people the benefit of more time at home with their families while increasing productivity and pressuring oil producers to lower prices.

We all need to work together to help our country in this time of crisis.

Margaret Ortiz
Carson, CA
Peoria, AZ

Dear CPM

I have several small residential investment properties which are professionally managed. I hardly ever get to speak directly with my property manager. When I have time during my lunch break I try calling her and the office staff at the management company usually tells me that “she’s out in the field”! What do you suggest I do? I’ve even tried calling her in the evening (around 8-9pm) and I have to pretend it is an emergency just so the answering service puts my call through! Shouldn’t she be available during the day to take my calls? Should I look for another company to manage my property? What is the standard that I should be expecting?

Sincerely,
Incommunicado in Inglewood, CA

Dear Incom,

You have posed very good questions. The answer lies in understanding, 1.) What you want from your manager; 2.) What you should expect from your manager, and; 3.) What you are getting from your manager.

Small properties have difficulty attracting quality professional management. Typically, top management companies will not manage properties with less than 100 units because they are not economical to manage. For example, if you have a 10 unit building with the average rent at $500.00 and are paying your management company 8%, that is only $400.00 per month or $40.00 per month, per unit. That is $1.33 for 24 hours of service per unit. Amazingly, that is actually 5 1/2 CENTS per hour! Now, what do you get for 5 1/2 cents per hour?

a. A monthly statement showing income and expenses with invoices ready for an IRS audit.

b. A person that accepts calls on a 24 hour basis from tenants and vendors.

c. A person that collects the rents and keeps the units filled with rent paying tenants.

d. Staff that coordinates ‘move-in’ and ‘move-out’.

e. Staff that conducts routine inspections.

f. Staff that conducts rent surveys to keep your rents aligned with the current market. All for 5 1/2 Cents per hour?

Now, to your questions: What should you do to reach your property manager? I suggest you use standard means. When you call her office and she is “out in the field”, she’s probably inspecting properties. So, you should leave her a message. Don’t pretend you have an emergency at 8 or 9 p.m., just leave a message.

The other answer to this question is to send an email message and it should be acceptable to get a response with 24 hours. The answer to your next question is no, she should not be available to take your calls, but you do have the right to get your questions answered in a reasonable time.

Should you look for another company to manage your property? This can only be answered by your setting the standards you wish to receive from your management company. For me, that answer would be that I want my investment property to first be maintained in stable condition so the rents can continue to reduce my debt and increase my cash flow. While I am relieved of the day to day obligations and disturbances to my personal time and piece of mind. Then I want my rents to be increased because I know for every $100.00 of rent increase, at 8.53 X gross rents, my equity will increase $10,000. That occurs while I pay my property manager between 5.5 cents and 8.33 cents per hour per unit! That is my standard and I feel it is a very good value. Don’t you?

If you wish to get the most value from your property manager you must do a good job of being the owner.

As an owner you should present your management company with a written set of goals you wish to achieve from the ownership of your income property.

On an 8 1/2″ X 11″ sheet of paper, write out your goals. Ask the manager to assist you in developing a plan to achieve these goals. Next, supply a budget that your property has been operating on and be prepared to fund needed repairs and upgrades. As the owner, you will win if you work with your management company and understand and respect the skills and dedication you are receiving for the price you are paying.

Hope this helps!
Tom Loegering CPM

Dear C.P.M.,

I just purchased my second property in Inglewood, CA. As soon as I stepped foot on the property in my role as new owner, the tenants began to bombard me with repair requests! When I walked through the building during inspections (prior to purchase), everything and everybody seemed just fine. Now, suddenly, they are complaining about everything. All of their requests seem valid, but I don’t know how to put them in order or priority. Any suggestions? I need to consider my cash flow, which at the time, is pretty low. Also, the tenants of my four plex are requesting washers and dryers in the long defunct laundry room. The old machines in the room were vandalized and I’m reluctant to buy new ones. Should I just leave that situation alone? Am I obligated to supply them with laundry facilities?

Sincerely,
Efrain R.

Dear Efrain,

Let’s start at the beginning. Never introduce yourself as the owner. To some tenants this just means that you are rich and need to give them what they want. Introduce yourself as an employee for the owner and say you are there to introduce yourself as the responsible party. Tell them that you are there to meet them and to make up a schedule for regular maintenance and that you also want to know what repair work they want and need. Tell them that you are not promising anything only making up a list to present to the ‘owner’. Then set up the budget to get the money necessary to fund that budget. As to the priority, you must take care of health and safety items first then do cosmetic work to improve the curb appeal. Later you can set up your schedule of maintenance items. Remember that for each dollar of maintenance you do you will save 15 dollars in repair costs. Cash flow comes from well maintained buildings, not from slum properties. Deferred maintenance is more expensive in the long run.

As to the laundry room, there are two answers here: financial and legal. The financial part is easy. If your tenants want it and use it, then do it. There are ways to get this done without using your cash. The second part is a question to ask your attorney or read the contracts you have with your tenants. If your contracts say your will provide a laundry, then provide a laundry you must. Hope this helps you. Good luck. Tom Loegering C.P.M.

Below you’ll find two quotes extracted from a white paper for brokers and agents with Coldwell Banker Commercial entitled “The Evolution of the Commercial Real Estate Industry - How Key Changes Throughout the 20th Century Created the Industry We Know Today.” In these quotes is, for all intents and purposes, the answer to the question of whether you should buy, sell or exchange up.

1. Studies show that development opportunities today may be greater than any time since the end of WWII. Looking ahead as the nation’s population grows to approximately 400 million people in 2050, there will be ample development opportunities in the years ahead. By 2030 alone, the nation will need to provide 50% more commercial, residential and industrial space!

2. The home-based workforce has grown 23% over the past decade according to the U.S. census and this trend will likely have a sizeable impact on future development patterns. Clearly the “extra room” critical for such businesses tends to be found in suburban and opposed to urban settings.

We are clearly living in exciting times where you can decide to be rich or poor … there will be little middle ground.

Despite all of the Wall Street blather about a housing bubble, the market in the southern part of the United States is moving ahead at a 3-6% annual increase (10% down on a $265,000 is a $26,500 investment that returns 30-60% on down payment and gives you shelter and tax advantages). These numbers work for all price ranges of income property.

So, the answer to the question posed by the title of this article is:

a. Buy and get into the deal stream now.

b. If you sell a property you should exchange up for tax deferred growth.

At REMS, Inc., we have many clients that follow the formula. Buy it, fix it up, refinance, refinance exchange, exchange, exchange and put in trust, and die rich!

Now, in the Phoenix metro area you have the opportunities to make your financial dreams come true. For further questions and answers related to this or any other subject, please contact Tom Loegering Sr. @ Ask the CPM or tomsr@vel.net.

Dear CPM,

I own a six unit building in Wilmington, CA. I’ve been self managing the building. It’s been a little tough and I’m getting to the end of my rope. Same old story … the tenants want my attention 24 HOURS A DAY! That is, all but one. They have never made a single complaint and that, surprisingly, is starting to worry me. I would love to get into their unit to inspect but on what premise can I gain access? Should I just tell them that I want to inspect their unit? Would that be infringing on their privacy as a tenant? I’m worried that they might be destroying the unit. They don’t impress me as clean people. What do you suggest?

Thanking you in advance,

Analisa in Wilmington, CA

Dear Analisa,

Self managed or professionally managed, your property does require 24 hour attention.

It is the manager’s job to provide excellent service to the tenant’s request for service. Just like a professional manager, you should have regularly scheduled maintenance so you can be doing “inexpensive” maintenance rather than “expensive” repairs. Studies have shown that every dollar spent on maintenance will save you $14.00 on a future repair (see our upcoming REMS, Inc. newsletter for more valuable information on maintenance statistics).

Each unit you have should be inspected at regular 6 month intervals. Your “quiet” tenants need to be put on that schedule now.

In California, you simply post a written 24 hour notice. In Arizona you must post a written notice 48 hours in advance of the inspection. It is best to make an appointment so that the tenant can be home. Do not be put off by any excuse. It’s a good idea to bring a general contractor or maintenance supervisor and do a thorough inspection. Make sure all items (especially health and safety related) are put on the general maintenance schedule and repair work is completed.

These inspections are not infringing on the tenants privacy. You are simply doing your duty to provide safe and habitable housing.

I can understand why you are at the end of your rope. Keeping up with 24 hour availability is stressful. Good luck and keep up the good work. Remember, however, you can hire professional management for only $60/month/unit. Translation: $2.00 a day or 8.33 cents per hour! If you have any further questions please feel free to contact me at Ask the CPM tomsr@vel.net or 623-374-2420.

Dear CPM: I have a friend that lives in a condo. Your company, REMS, Inc. manages her community and she is simply thrilled with how smoothly things are being run. I have a question. Should someone looking into buying a condo be concerned if a community is self managed? Also, how does one determine the financial health of a community? I’ve heard it can be disastrous to buy into a poorly managed community. What steps should I take to protect myself and my huge investment?

Thanks in advance for your response.

Sincerely,
Terri

Dear Terri,

Please thank your friend for her kind referral. We do pride ourselves in assisting the board setting realistic association fees by breaking down the common areas into useful life and budget for maintenance, repair then replacement. Our team approach is designed to assist the board, work within existing laws, and set policy and procedures that will enhance the financial conditions of the association, which in turn increases the owner’s equity and quiet enjoyment of their home. Now, as far as self-managed communities are concerned, you should remember that they are run by volunteer members who do not necessarily possess the training, experience or general knowledge to properly run an HOA. Couple that with the legal issues involved and I would have to say that I would personally be concerned about buying into a community with a self-managed HOA.

In answer to your other question, one can determine the financial health of a condominium by addressing a few issues: Is enough money being collected (a) to adequately fund the reserve for major repairs and replacements, (b) to properly maintain the community day to day and (c) to enable the association to accumulate an operating surplus adequate to pay for most one time unexpected expenditures without special additional assessments.

When we took over management of your friends association they had many problems. They were barely hanging on, so we rolled up our sleeves and designed a plan. With our plan we were able to add an additional $150,000 per year to adequately fund the reserve for major repairs and replacements by only increasing the average fee a small amount. The reality is that there is no alternative to raising fees other than to let the condominium deteriorate. Your friend, like the other owners in that community is simply thrilled with the results. Their property values have increased … that’s what really matters! Our company motto, “Good management doesn’t cost, it pays!” is true.

If you would like us to help you take a look at a particular community, please feel free to contact me to set up a consultation. Think of a consultation as having a home inspection prior to purchase. You’ll have a better idea what you’re getting into, and, after all, the application of knowledge is power!

Sincerely,
Tom Loegering, CPM

Q. We are a new board and would like advice on how to select our professional advisers: auditors, engineers, investment advisor, management and lawyers. Can you help us?

A. Condominiums are unique organizations. Probably the most important criteria is that the professionals you choose have experience with and expertise in condominiums. Among other issues, auditors have to be conversant with the accounting differences in condominiums, engineers with the requirements for reserve fund studies, investment advisors with the appropriate investments, management with many, many special requirements of condominium operations and lawyers with all the myriad problems of condominiums and their possible solutions.

Second in importance in our view is that advisors must be able to communicate clearly. All professionals must avoid jargon and communicate in everyday language so that the Directors and unit owners understand what the costs are to operate their community and the problems and challenges the condominium faces. This is most important for management who has the biggest communication need as they have to communicate the myriad of issues that are involved in the operation of both the building and its relationship with owners, residents and suppliers.

Experienced professionals who communicate clearly will more than pay their way. They will be able to identify problems early and suggest cost-effective solutions so that the overall costs of operations are minimized. And they will be able to communicate those benefits to the Directors and unit owners.

Hope this helps you and answers your question. However, the best investment your board can make is to hire the best professional management company available. One that has been in business a long time and has the network of professionals that are experts in the fields you mentioned. A company that is a member of CAI (Community Association Institute) has (on staff) certified property managers (CPMs) and a general contractor and are experienced in setting budgets to maintain and enhance your home, increase each owners equity and provide quiet enjoyment for all residents. Check our website at www.wemanageproperty.com. You can also contact “Ask the C.P.M” Tom Loegering at 623-374-2430 or email Tom at tomsr@vel.net.

Dear C.P.M.,

My parents own several houses in Carson, CA. They are right next to each other. Mom and Dad are elderly and, as their only daughter, I will inevitably inherit the properties. Right now, my parents feel that it’s better to just leave the homes vacant. They are in a stable financial position and they really don’t need extra money, nor do I. The houses are in an absolute state of disrepair. I don’t have time to oversee a remodeling project at this time, nor are my parents able to do so. So, 4 houses are sitting vacant. We do have to pay a gardener to maintain the exterior after we got a notice from the city and numerous complaints from the neighbors. Obviously, we also pay property taxes. My questions are: should I hold the properties and keep them in their present state, sell now, hire a general contractor (which will undoubtedly cost a fortune) or possibly, would a property management company be able to handle getting the units in ‘rent ready’ shape? I want to make a sound decision on several levels … one of which is the best decision as far as taxes are concerned.

Sincerely, AnneMarie

Response

AnneMarie, I think I know this property. Is it near Dolores and 220th? Whether it’s the property I’m thinking of, or not, the answer is the same: owners must supply the goal. If neither you nor your parents need the money and/or the problems of ownership, it is best to sell the property in it’s “as is” condition. If you want practical advice that will show you how to optimize this investment, then here is a scenario to follow:

1. You need to get the property into a trust with you as trustee to make sound business decisions. Leaving this property in this condition (vacant and deteriorating) is not a sound business decision (unless the structures are too far gone to be repaired). By putting the property into a trust you also get the best tax break. Here, I must say, consult a lawyer and a CPA.

2. Answering your other questions:

a. Should you keep them in their present condition? No this is not a supportable business decision or a decision that benefits the community at large.

b. Sell now? This option gives you the least problems, but the least amount of return.

c. Hire a general contractor? Again this option requires you to know what you want to accomplish. Will you be fixing to sell or fixing to rent? How do you start? Hire an architect and interview several contractors to get some ideas. Remember, all require your time and attention.

d. I’ve saved the best for last … hire not just any management company but one that has a general contractor and CPM (certified property manager) on staff. They will inspect your property, contact vendors to give you estimates to repair and make ready your units for rent.

This last option gives you the ability to figure the best price if you sell and the best after tax situation. Please check the company website at www.wemanageproperty.com. If I can be of further help please call me at 623-374-2420 Tom Loegering C.P.M.