Rent and Manage Your Home

This is a really great question.  When hiring a manager, I too want to know how a reserve will be utilized.

Lets start with the language used in our management agreement:

OWNER agrees to submit to MANAGER an initial RESERVE of $250 per unit managed.  OWNER agrees to maintain a $250 balance in this RESERVE.  RESERVE is only to be used for emergencies, minor maintenance requests, and other incidentals.

Then our agreement states:

Without the prior written consent of the OWNER, MANAGER may also make ordinary repairs and alterations (provided the expenditures for any one item of repair or alteration shall not exceed the sum of $250.00) unless they are made under circumstances that the MANAGER shall reasonably consider to constitute an emergency. 

The first thing I want all owners to know is our practice is to contact you before we spend your money.  The exception is emergencies that require immediate decisions to protect the value of the property or the health and occupancy of your tenant.  Otherwise, you will receive a request for approval for repairs or maintenance.   The actual reason a Reserve account exists does not address the ultimate concern from this owner.  The concern is a manager who just spends the reserve in ways not approved by the owner.  Defining an emergency will be something your manager will have to be trusted to judge.  There are also laws protecting tenants and if a owner is non-responsive, the owner and manager will both be facing potential liabilities if issues are not addressed.  But there are also incidentals that can occur as part of the management of the property and an owner should not expect the manager to fully front the payment to the contractors or purchase of materials.  The reserve provides us the ability to not request a contribution from the owner every time a door knob needs to be replaced.  In our agreement, the reserve amount actually serves as a control point that provides us permission to make ordinary repairs to the property as needed.  In practice, unless it is an emergency, the owner knows about these repairs.

The question above opens up an entirely different issue in my mind.  Who can you trust?  It seems to me that this owner may have had a bad experience with a manager using their reserve.  Lets face it, $250 is not going to go a long way in making repairs or handling maintenance.   But there needs to be a control point, and it is reasonable that a property manager knows that the funds are available to pay a contractor or to run to the hardware store to buy supplies for the home.  It is also reasonable that an owner should be involved in providing a timely approval to proceed with the repair.

I might add that in my experience there are two types of management companies.  One manager does insist upon being provided total discretion over the leasing and management decisions.  This type of manager might be right for you if you are really busy and do not wish to be troubled with the day to day operations.  The second choice is to function in more of a partnership with the owner.  It is much easier to establish management operations that proceed from a partnership approach, and then moves to a independent operation approach, than it is for the independent (total discretion) company to work with an owner who wants to be a partner.  Maybe this owner was working with the wrong type of manager.

So, the answer to this owner is that he is right.  The entire definition of the reserve concept does not protect an owner from a manager who makes decisions routinely without communicating to the owner.  The reserve does provide an agreed cap where the manager can’t continue without risking their own funds and their client relationship.  But also look at what kind of manager you hired.  Does the manager approve the tenants?   You are probably then in a independent arrangement.  Maybe that is not what you need.

If the utilization of the reserve is an issue, then frankly it seems there is an issue with the type of manager you are using.  This needs to be addressed to decide if they can adjust their practice to more of a partnership model.  The relationship you maintain with your manager should be one that also includes trust.  With us, we believe in the partnership model so we communicate and document.  Keep it transparent.  Don’t use the reserve unless the owner agrees or it is an emergency.  Do unto others as you would have done unto you.