Thursday, 17 January 2008

Berlin Property - Cost of Real Estate Management and the Best Way to Control It - Part 2

Part 1 of this article series has explained some commonly used fee models for property management services and the going rates for these in the Berlin property market. This second part of the article will identify areas that frequently are omitted in management contracts and will lead to extra "surprise" cost that in most cases is not budgeted for. It will also provide guidelines how to prevent such surprises. Other areas of concern are not directly property management related services provided by the property manager and how this can undermine an initially competitive fee.

What is included in the agreed fee?

A healthy balance between what is included in the fee and what is included in the contract but for an extra fee and how is that fee calculated is key for cost control. If you want too much included you pay for it every month even when you are not using it. If you have too many extra services you are not in control of your cost and have to spend time signing off for extra delivery often not being in full possession of information needed for said sign off.

An example for useful extras: The writing of a rental contract should be included in the fee. The actual renting commission should be paid extra which also leaves you the option to use an external rental agent but still have the property manager responsible for the content of the rental contract. Similar regulation could apply to repairs once they exceed a certain amount.

I recommend agreeing a fee structure for extra services likely to be needed at some point during the contract during the competitive phase before the management contract is signed. You are likely to get better deals than asking for extras after signing.

Fee related performance measurement

I always integrate output orientated service descriptions or Service Level Agreements (SLA)and performance measurement tools like Key Performance Indicators (KPI) in the contracts I negotiate for clients. This way it can ensure that the property manager knows what is expected from him and also knows exactly what happens (to his fee) should he not perform as agreed.

Other services provided by the property manager

It is popular amongst property managers to have their own or be in partnership with all kinds of facility service providers like cleaners, landscaping, plumbers etc.. Without clear regulations on the letting of contracts a very compatible property management fee could easily be over compensated through these extra services.

Kick backs from suppliers, insurances etc.

It is not a general practice but not uncommon either that discounts, tip provisions etc. are paid out separately. It has to be made clear to the property manager that it would be seen as a conflict of interest if the property manager would not pass these benefits on to the property.

Overview of results

The two parts of the article Berlin property -- Cost of property Management and the best way to control it, have provided examples to illustrate the diversity of factors that influence the cost of property management and at the same time the quality of service. There is the fee model, fixed rate or percentage, no less important the contract specifications and last but not least other services provided by or under commercial interest of the property manager.

Especially international private investors will find it useful to have a local representation and an extra pair of eyes on their investment and the performance of its management. For single apartment buildings or small portfolio a full property asset management will not be affordable. In this case I recommend

  • a consultancy during the search and contracting of a property manager;
  • inspection every 3 to 6 months at the beginning going down to once or twice a year.

This allows the investor to focus on his investment plans and other activities while he knows that his property is well managed and an extra pair of eyes is watching over it.

The author is a Berliner and active in the German property market for more than 25 years. Experienced as project manager, developer and head of the German Business for a UK based property consultancy he now owns and operates Berlin Portfolio Ltd His international background and local expertise is an ideal combination for an international private investor.


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