Property management agreement

Key Takeaways

• A property management agreement is a services contract between an owner of income property and the manager who will run it, setting duties, spending authority, and pay.
• The agreement binds the owner and the manager. Tenants are not parties to it; they are bound by their own lease with the owner.
• In Washington, managing property for another person for compensation is real estate brokerage services and requires a license (RCW 18.85.011 and RCW 18.85.331).
• A Washington firm needs a written property management agreement, or a written directive signed by the owner, before opening an interest-bearing trust account for that owner's funds (WAC 308-124E-115).

What It Means

A property management agreement is the contract an owner of income property signs with the person or firm that will run the property day to day. It answers four questions. What is the manager responsible for, which normally covers marketing vacancies, screening applicants, signing leases, collecting rent, arranging repairs, and keeping the books. How much authority does the manager have, including the dollar ceiling on repairs the manager can approve without calling the owner. How is the manager paid, typically a percentage of the rent the manager collects plus a leasing fee for each new tenant placed. And what does the owner still carry, such as funding reserves, insurance, the mortgage, and property taxes.

The agreement also fixes the term, the notice each side must give to end it, and what happens to funds and records at termination. It creates no relationship with the tenants, who are bound instead by their own Lease Agreement with the owner. Because the manager acts for the owner across a continuing series of matters rather than one transaction, a property manager is the standard example of a General Agent.

How It Works in Washington

In Washington, the manager's side of this agreement is usually a licensed real estate firm, because the work itself is licensed activity. RCW 18.85.011 defines real estate brokerage services to include leasing and renting real estate and performing property management services, and RCW 18.85.331 makes it unlawful to act as a real estate broker, managing broker, or firm without a license, while also barring an unlicensed person from suing to collect the compensation. Narrow exemptions exist under RCW 18.85.151, including an owner handling property for their own account and an on-site employee who delivers leases, receives rent payable to the owner or firm, or shows rental units under the direct instruction of the owner or the designated or managing broker. The school's post on why a general agent is a smart choice for property owners walks through what that ongoing authority looks like from the owner's side.

The agreement also drives trust accounting. Under WAC 308-124E-115, an interest-bearing trust account holding a single owner's funds may be opened only when a written property management agreement or a written directive signed by the owner directs it. Damage and security deposits may not be disbursed to the owner or anyone else without the tenant's written agreement until the end of the tenancy, and property management commissions must be withdrawn at least once monthly. Supervision runs through the firm's Designated Broker, and RCW 18.85.011 defines a Broker as a person acting on behalf of a firm, so the owner's contract is with the firm rather than with an individual licensee acting alone.

Example

Rainier Property Group, a licensed Washington firm, signs a property management agreement with Ellen, who owns a 10-unit building in Olympia. The term is one year and continues month to month after that, with either side able to end it on 30 days' written notice. Rainier's fee is 8 percent of the rent it collects, plus a leasing fee of half a month's rent for each new tenant placed. Rainier may approve any repair up to $500 per item without calling Ellen and must get her written approval above that.

The building is fully leased at $1,500 per unit, so March rent collected is $15,000 and Rainier's management fee for the month is $1,200. Rainier pays $2,400 in vendor invoices out of the trust account, withdraws its $1,200 fee, and remits $11,400 to Ellen with an itemized statement, which is $15,000 minus $2,400 minus $1,200. The tenants' security deposits stay in the trust account and are not part of that remittance, because they cannot be paid out to Ellen while the tenancies continue.

Common Mistakes and Exam Traps

• The management agreement binds the owner and the manager; the lease binds the owner and the tenant. Questions about which contract a tenant is party to are testing that split.
• In Washington, managing rentals for someone else for compensation is licensed activity, so an answer saying property management needs no license is wrong (RCW 18.85.011).
• A property manager is a general agent, not a special agent. The broker hired to sell one property is the special agent, because that authority covers a single transaction.
• Security deposits held by a Washington firm belong in trust and may not be released to the owner during the tenancy without the tenant's written agreement (WAC 308-124E-115).