How Transparent is Your Condo Management Company? You won’t believe what you are about to see.

Do you serve on the board?  Do you realize that the typical base fee of condo management companies (that serve smaller buildings ie. 100 units and under) only covers about 33% to 50% of their total income?  Do you realize that the base fee you are paying your management company is not really all that you are paying?  Some companies include a very detailed itemized document that explains all the extra charges in a clear and transparent fashion.  But there are other companies that say everything is included and don’t itemize any extra charges.

How many hours do you think it takes to manage your condo association?  Obviously it depends on the size of your building.  But let’s take a typical 20 unit condo association building for example.

In the above spreadsheet, I have shown you the most common types of services that are included in condo management.  I then approximated the number of hours it would take to provide these services by quarter and then for the year.  And then calculated what that turns out to be on a monthly basis.  I didn’t even bother including many other services that come up from time to time like property tax reduction support and matters related to a new homeowner or new tenant.  There is an on-boarding process for new homeowners and new tenants just as there is an on-boarding process for a new community.  In this example, the average hours per month it takes to PROPERLY manage this building is 17.

Now that might vary from month to month but on the average it works out to be 17.  I included the worksheet that shows the actual services broken by quarter and by year.  What is the point of all this information?  To educate board members about the true cost of having a management company.  To understand that if it takes about 17 hours a month to provide the basics of condo property management, how much should the association budget for these services?  How much does a good condo law firm charge by the hour?  About $200 to $300 per hour?  So how much would a condo management company charge by the hour if they were to charge by the hour versus by the month?  So the next question is that if an association is paying a condo management company a monthly fee that works out to about $30/hr., how could a condo management company make a profit?  The answer is very simple.  They are not.  And therefore they need to make money other ways in order to make a profit.  You do understand that a condo management company is in business to turn a profit.  Right?

So if your management company says that everything is included in their base fee and it works out that you are paying them about $30/hour, you are either getting REALLY bad service or they are making money in ways that you are not realizing or BOTH!

So how do companies make money secretly if they don’t include a la carte prices on the management agreement.  Well there are a variety of ways.  And here is a list of the most common:

1. Charge vendors an annual fee to be on their vendor list.  These fees can range from a few hundred dollars to thousands.  This is just so a vendor can have the chance at bidding on a job for the management company.  The problem with this is the management company is doing this to make money not to find the best qualified vendors for their association clients.  Secondly, this results in vendors inflating bids because vendors are not looking to make less money.  They have operating costs just like any other business.  So these costs get passed onto the association project costs.
2. Ask vendors to artificially inflate bids to include kickback fees to the management company.  In this scenario, the management company solicits a few bids and then goes back to some or all of the vendors and asks them to adjust their prices to include kickbacks to the management company.  This approach is also used so that the management company can make one of the vendor’s quote look the best and steer the board towards a particular vendor.
3. Send a vendor a bill/invoice.  In this scenario, the management company tabulates how much business each vendor received over a period of time typically over a calendar year and then sends them an invoice for a percentage which would be typically 10% to 15%.  Again, this leads to inflated vendor prices as they are not looking to have their profit margins diminished.
4. Mark up invoices.  This is about as shady as you can get.  In this scenario, the management company gets an invoice and adds money on top of it and then enters it into the accounting system.  The board doesn’t even realize it yet the management company is making more and more money while the board thinks they are only paying the low low base fee.
5. In this last scenario, the property manager works out a deal with a vendor and sets up an arrangement so that the property manager gets a kickback directly from the vendor.  In this scenario, the vendor is padding their charges and invoices to take into account the kickback to the property manager.  This goes on with out anyone knowing about it except the property manager and the vendor.

There are many other shady practices but these are the most common.  Now that you are aware of these deceptive practices, what are you going to do about it?  Are you taking into account all this information when you are looking to hire a new management company?  Are you questioning how a management company can make money if they are charging such a low base fee?  Are are you just thrilled that you can keep your assessments unchanged because you found a management company that quoted you a ridiculously low fee?

Do you value your time and money?  How much is your time worth?  How much control do you want over your expenses?  Just because you don’t see a bill doesn’t mean that you shouldn’t worry about how your association money is being spent.