Top Ten Biggest Mistakes When Charging Fees (Part Two)

Following on from Part One of our article, here are the next five big mistakes we see when charging fees:

Management Fee Variation- this is found when analysing management fees that have been charged to clients across the board. For example, if you are using REST Rockend, print off your ‘property detail report’ and count how many clients are paying differing management rates. For example, your analysis could look like this (exc GST)- 7.5% (43 properties), 7.0% (50 properties), 6.0% (71 properties), etc.

I usually find large variations in the differing management fees with the largest variation to date of over 40 management fee variations! The only way to reverse this problem of inconsistency is to implement a fee maximisation campaign and bring back consistency across the board.

Lack of ‘de-incentive’ Fees- I had a situation whilst working closely with an agency in 2009. A landlord insisted that we send a property manager to a rental property to ‘oversee’ a visit from an insurance loss adjuster. What was the reason for our attendance? He wanted us to ensure that the loss adjuster did not converse with the tenant, because he didn’t want the loss adjuster to get ‘wrong information’, jeopardising his claim with the house movement!

Our mistake was that we didn’t have a fee in a place where we could say, ‘Yes Mr. Smith, we are happy to attend. As this is outside our normal duties the fee will be $X per hour’. Had we put in place an ‘outside of duties’ fee, this would have easily been settled and the client would not have pushed us to attend this very unnecessary, costly and time-consuming visit to the property.

Low ‘all inclusive’ management fee- I have now seen several agencies during business performance health checks charging a ‘one management fee does all’ where the management and ancillary fees are rolled into one easy, predictable fee expressed as a percentage. My point is simply that if you are going to charge an all-inclusive fee, make sure that you understand how much your ancillary fees add up to in a year, as a percentage.

For example, a letting fee of 2.2 weeks rent is equivalent to 4.2% of the annual rent, and 1.1 weeks rent fee is equivalent to 2.1% (inc GST). If your other fees in a typical charging year all add up to another week’s rent (your system should be able to tell you what your average weekly rent is across the board) then add another 2.1%. Add up all fees that would occur in a typical year, convert them to a percentage of the client’s annual rent income, and ensure you are profitable.

Don’t unnecessarily lose money on this type of fee just because you haven’t done the math!

Not using a calculator- When property managers boast about how many properties they signed over in a month, how much rent they got or what percentage they signed the client at, no-one seems to calculate the minimum fees in dollar terms that will be generated for that business over a year.

For example, work out your average income received per property per year. This is worked out by looking at each month for the last six to twelve months and how much total fee income you received, (not counting GST and recoverable income like advertising, keys and title searches). Also look at how many properties you had at the end of each month and divide the property numbers into the total fee income attained for that particular month. This will give you an average per month for each month.

Then work out the total average per month for all months calculated, then times this by 12 to get your average income per property per year.

If you sign up a property at say $350 per week, and you charge a management fee of 7.7% (these fees quoted inc GST), a letting fee of 1.1 weeks rent, lease renewal fee of 0.65 weeks rent, $33 for routine inspections and monthly fees of $5.50 per month, we now need to calculate the minimum fees you might receive in a year.

So in this case, count the yearly management fee per year (as expressed without GST) $1274, a lease renewal fee (a letting fee isn’t calculated as this may not occur each year, however, a lease renewal should occur) $175, routine inspection fees of $120 annually if done quarterly and monthly fees of $60 per annum. This totals $1629 per year in minimum fees.

If this doesn’t match your average income per property per year, then your average annual income per property will be going backwards! Therefore we must be mindful of the annual income we stand to attain before we say ‘yes’ to new business.

Compete on service, not fees! The biggest mistake I see is that we have the mistaken belief that most landlords focus on fees before service. I have found this is not the case! A new client coming to you in most cases is renting for the first time and could be nervous about the management of their investment property. They need to see that you are better than your competitors with your points of difference, and these points must mean something to the client. If they do not see you any different than your competitors, they will then look for a difference in the form of a fee discount request.

When we clearly display our services as unique, different and present them tailored to the identified needs of the client, we can then give unique solutions, impressing them, gaining their trust and moving to a management agreement. If they do request a fee discount, we have service quality and points of difference that we can use to show we are worth more.

Remember that the easiest point of difference for your competitors to copy is discounting, so arm yourself with effective points of difference and compete on service, otherwise, you will be competing on fees!

You are worth what you charge!

Whenever I am speaking to property investors I always tell them that a good way to identify a quality property management agency that is likely to provide them with great service is that their fees and charges are higher than other competitors.

The agency that does this obviously believes in their service, their company, and most importantly their ability to deliver quality and superior service.

It is my desire that your agency also does the same, simply because you are worth it!