Why Your Property Manager Should NOT Be Your Accountant
Written By Leigh Williamson, Tax Accountant at BEC CFO & CPA
Property management companies provide an invaluable service. They handle the day to day operations associated with rental property ownership. This can include collecting rent payments, screening tenants, handling necessary repairs and maintaining building safety standards. They can make the business of owning rental properties seem easy. Nothing is too easy, though, and it’s important to be careful when granting your property management company complete authority over your property finances.
I’ve witnessed several instances of fraud in the property management industry. Some companies have an agenda from the start. They own a property management company while their son-in-law owns a construction company. Perhaps the landscape company they exclusively use is an affiliated business of theirs. Maybe that’s OK, if they are up front with you about these affiliations.
Other times, property managers start off with good intentions. One of the properties they manage needs a new roof. They hire a roofer and at the end of the job, the roofer gives them a “Thank You” card with $1,000 in it. Now, the property manager is looking for other roofs to replace. Subsequently, the roofer happens to mention that roofing isn’t the only service they provide. A partnership has been established and your best interest is no longer being served.
Either way, having an unaffiliated person reviewing these transactions is a good idea. Below are some red flags that accountants know to look for:
Construction costs seem to be increasing. Take the roof example; your property manager tells you that you need a new roof. Do you really need to replace the entire roof? How many roofing companies looked at it and determined that? It is important to always get a 2nd or even 3rd opinion before performing major construction.
To this point, GET BIDS! If your property manager doesn’t want to supply bids for jobs, that is a huge red flag. I had a property manager reluctantly provide 3 bids for a roof job. I was skeptical about these bids because each roofing company was located over 30 miles away from the property that needed the roof. There were plenty of roofing companies in the nearby area. In this instance, the Board went out and got 3 other bids which came in almost $25,000 lower than the bids the property manager provided!
This is why it is important to know your vendors. You should know the people that consistently work on your property. They work for you, not the property management company. Introduce yourself to the landscaper. Set up a meeting with the plumber, electrician, etc. A red flag I noticed by reviewing payables was the property management company was using the same vendor over and over again. This vendor was performing drywall jobs, replacing decks, constructing stairs and cleaning out crawl spaces. When I questioned this, the property manager told me that this vendor was the General Contractor (GC). General contractors are great for coordinating large construction projects, but for your rental property, most of the time, the property manager is the general contractor. That’s what you’re paying them to do. They should be hiring a drywall technician to replace drywall, a deck company to replace decks, etc. If they are hiring a GC, that GC is going to subcontract out the work for a fee, a fee that you are going to pay.
Having an unaffiliated accountant helps mitigate certain risks. I recently reviewed the books of a large condominium complex and learned a few things. First of all, the monthly condominium fees are being recorded in total as income each month and an offsetting accounts receivable is being set up in each condominium owner’s account. There is nothing technically wrong with this approach, however it does make it impossible to review the income statement without also reviewing the balance sheet. The income statement would show that all monies are being collected and calculate a net income/loss based on that, when in reality it’s possible that no cash at all was collected. Attorney fees are similar. When property management companies use an attorney for collection matters, they generally charge a property owner’s accounts receivable account. Meanwhile, the property has to pay the attorney’s billings until the funds are collected from the property owner. If the money is never collected, the property has not only lost the funds due from the property owner, but the money they spent on the attorney as well. An accountant could prepare a cash flow statement that would show exactly how much cash is coming in and how much is going out which is an essential part of maintaining a healthy business.
Accountants also know the importance of collecting W-9s from vendors and filing 1099s at the end of each year. W-9s provide tax identification numbers and tax filing status’ of the vendors you are using so that you can report payments you make to the IRS. In the example above, where a property management company uses an affiliated business or a “friend” for services rendered, without filing 1099s, these companies have the ability to not claim this income. The responsibility for filing 1099s ultimately lies on the property owner, not the property management company.