Are you with a property management company looking to draft an owner agreement? Well look no further – here are some easy tips to to keep in mind along the way. We strongly advocate consulting an attorney, and we remind you that this isn’t legal advice. However, if you need a place to start, below are some things to consider.
Note: Always make sure that you and your key employees understand every provision in your property management agreement well enough to explain what it means and why it’s important. And as a business owner, it’s important to understand the basics of contract law.
Now, let’s break it down piece by piece.
Before any major business-related decision, think of HOMER. How does this decision affect:
Detailing Basic Property Appearance
- Puts everyone on the same page: Setting a minimum standard for a rentable property allows the property manager and the owner to agree in advance about things like clean linens, appliance upkeep, and lawn maintenance. Being specific here will smooth the way for future conversations about property maintenance costs that show up on the owner statement.
- Don’t overdo it: Too much detail in this section can be overly burdensome to a owner, and the manager may decide later that some provisions are ideal, though not required.
Outlining Billed Costs
- Makes things more flexible: It’s important to define how much the manager is authorized to charge without notifying the homeowner. Usually this is $0-$500/month or whatever amount is required in case of emergency. For homes with regular pool/hot tub/lawn/snow removal charges, sometimes exact amounts are given or listed as “market rate.”
- There’s no downside: If you make the parameters reasonable and fair for both parties, the only downside is that you’ll have to decide what to do with your free time after owner statements go out and no one calls you with questions!
Defining owner use and access
- Owners will know what they can – and can’t – do: To maximize marketing efforts and provide the best guest experience, you must outline parameters for owner use and access. It’s up to you where to draw the line, but consider the following: Will there be restrictions on owner use at all? Can owners cancel an existing guest reservation if they decide to stay in their home? Do owners need to pay a cleaning fee for their stay? Can owners book paid guests or close friends/family for a reduced fee? When can owners access their property?
- Don’t get too strict: Some owners may be put-off by the idea of having to notify their property management company in order to stay-in or access their home. Alternatively, some guests may be put-off by owners cancelling their reservations or accessing the property during their stay. As with all things, it’s best to strike a balance that is fair and beneficial to all parties.
Detailing reservations, guest relations, and other property management services
- Provides a transparent overview of your services: As long as you’re talking to your homeowners about the basic appearance of their properties, it’s smart to spell out which services you, as the property manager, will provide. Things to consider: Will you stock the unit with basic supplies, like toilet paper and soap? If so, who will pay for these supplies? Will you inspect the home weekly? Will you provide additional services, such as airport pickup or concierge?
- Keep it moderate: Be wary of listing too many services in detail or specifying exact costs, in case you change your business model or accept a property with different needs. Sometimes it’s enough to tell owners something as simple as you’ll stock the property with a starter kit of supplies for guests and they’ll be enrolled in the company’s linen program for a flat annual fee based on occupancy.
Establishing an owner reserve
- Simplifies routine maintenance: For properties that have routine monthly maintenance or other costs, it’s incredibly useful for managers to keep an owner reserve amount of $100-$500 on hand. This helps keep monthly owner statements positive in slower months, and prevents the business from floating homeowners funds until high season.
- Advance costs may deter some owners: Owners of condos or other low-maintenance homes will likely balk at putting funds down in advance. To soften the blow, you might look at implementing this policy when you’re paying owners their largest check of the year.
- How to frame it: Most managers charge a percentage management fee, but it helps to clarify if that means a percentage of the nightly rent or a percentage of the total reservation cost. Other questions to consider: Are managers permitted to charge additional guest fees? Are owners responsible for credit card processing or extra housekeeping fees? What happens if a guest cancels? Who pays the sales/hotel tax?
- Take time to get it right: The management fee is the most important part of the property management agreement. Take the necessary time to perfect it and you’ll have made important strides in making your owners happy and your costs covered. Plus, making this clear from the get-go will eliminate difficult conversations with homeowners in the future.
Specifying payment timeframe of rental proceeds
- Gives owners peace-of-mind: Telling owners exactly when to expect payment will save you at least one anxious owner call a month.
- Choose a date carefully and stick to it: It’s critical to the owner/manager experience that the property manager keep their word on payment delivery dates. If there is a delay or issue with getting the payment to the owner, swift, clear communication is crucial.
Employees are the first step in strong owner relationships. Most of the management agreement covers what owners can expect from employees of your property management company, but take care to review the terms from your employees’ perspective, too. Do your employees know what they’re allowed – and not allowed – to do? Are they trusted to educate owners and refer back to the management agreement to define boundaries and develop sustainable relationships independently? Consider these questions and those below when drafting your owner agreement.
Total authorization for repairs and recurring services
- Prompt service: Granting your team this capability empowers them to make decisions on an owner’s behalf when doing so will ensure guest satisfaction and proper upkeep of the home. It also allows for decisions to be made quickly when problems cannot afford delays (e.g. bed bugs, leaks, etc).
- The downside: Some owners may insist on being contacted prior to every purchase or repair, no matter how small.
Exclusive rights to marketing booking properties
- Making things easy means more bookings: Guests are more likely to book when easy, instant booking is available and they don’t need to have a back and forth conversation just to see if a home is open for the days they want. When this kind of communication takes place, the likelihood of miscommunication increases, which could lead to double bookings and upset guests. On the internal side, claiming exclusive booking and marketing rights will increase the gross revenue generated by property managers (that means you), which translates to a higher budget for more sophisticated marketing plans.
- May conflict with independent-minded owners: When exclusive rights are in play, marketing dollars are competing not only with other local properties, but also with the same property. Additionally, while most owners will be glad to avoid the stress of marketing their home themselves, some are accustomed to managing their listings and may take issue with losing control over that process.
Honoring existing reservations (in the event of termination)
- Provides a smoother guest experience: If the owner is required to honor reservations you’ve booked at their home even when terminating their contract, guests can rest easy knowing their reservations are secure no matter the circumstances. In turn, a smooth transition lowers the risk of negative online reviews.
- Owners may want the option for clean termination: Some owners might not want to take on any responsibility after termination, especially if they sell their home. If properties move to another management company, navigating that transition will take extra work for all parties involved.
Setting minimum stays
- Guaranteed minimum income from bookings: Setting a minimum number of nights a guest can book translates to higher per-booking amounts. Plus your cleaning staff won’t be running around resetting homes every other day, meaning lower operational costs and complexity.
- May be inconvenient for guests: Balance is key here. Some guest may not want to stay at a home for 3-4 nights either because they don’t have time or the cost is out of their budget. Thus leaving out minimum stays could translate to more nights booked from those looking for quick last minute getaways.
The Legal Stuff
Assignability (Note: not mentioning this is equivalent to “yes” in most of the U.S.)
- Upside: Makes it easier to move agreements to a new LLC or beneficiary without express written consent. You’ll need assignability in the future if you decide to sell your company in an asset purchase agreement. Think about an “exit plan”. Making your agreement assignable allows for more options in the event of a merger or sale.
- There is no downside.
- More accountability: If anything happens on the property, the responsible party and the insurance are clearly defined.
- More complexity: These are complicated issues that are difficult to explain in layman’s terms and may deter some homeowners from signing your contract.
Stating the contract term length and termination procedure
- Gives the owner options: Owners will have a clear understanding of how to properly initiate termination and what their responsibilities are in such a case (such as honoring existing reservations, as mentioned above).
- Double-edged sword: If you have a difficult owner, you will also have to honor the termination language stated in the agreement before you can part ways. Existing reservations may be left with no place to stay, and you’ll be stuck with the resulting mess.