Everyone knows the three most important things in real estate are location, location, and location. For property managers, it’s documentation, documentation, and documentation. Experienced property managers are all accustomed to continually documenting the relationship with tenants. Where they sometimes fall short is in maintaining their formal contractual relationship with property owners. That can become a problem when it’s time to transfer control of the business.

As a former corporate lawyer, I feel compelled to give the standard disclaimer about this not being legal advice. Always get advice from your own lawyer. Also, I will offer my evergreen pro tip: free advice is worth exactly what you paid for it. If you don’t believe me, observe how your lawyer’s opinion evolves between an initial, off-the-cuff oral opinion and a letter to document that oral advice.

Trust but Verify

Property management businesses are built on a high degree of trust between the property owner and the manager. Real estate is an expensive enterprise that’s far riskier than most people realize. Funds generated by the property flow through the pocket of the manager. Many spending decisions can get made by the manager without owner pre-approval. Owners need to trust the manager to give them so much control over what happens with the property and the money it generates.

As a result, the property manager will occasionally, over time, allow trust to take the place of a regularly updated, tightly drafted long-term contract with the owner. And sometimes they might not even realize that happened. Strong management contracts are at least as important as tenant documentation. When it’s time to transfer control, management agreements are even more important.

Preserve Business Value

Whether you sell the business or transfer control to family or business partners, at some point the management agreements will become the most important contracts you have. If your documentation isn’t examined with exit planning in mind, what you have the ability to transfer might not be of much value to anyone else. It’s an unpleasant but entirely avoidable situation.

You need to consider how valuable your formal contractual relationships will be to someone who takes over the business from you. This might not be something your lawyer took into account when drafting or revising your management agreement. There might be other aspects of your agreements that deserve scrutiny through the exit planning lens.

The investment you make in having an exit planning specialist examine and discuss the terms of your agreement with you is time well spent.

Summary

The transferable value of your property management business is directly related to the quality and content of your management agreement. Audit the agreements with owners regularly. Don’t let your agreements get stale. Keep your standard owner agreement forms up-to-date, and make sure they are appropriate for how your business might operate in the future.

Al Statz is the founder and President of Exit Strategies Group, Inc. For further information on this subject or to discuss an M&A, exit planning or business valuation question or need, Email Al or call him at 707-781-8580.