Hidden Fees of Management Companies

How to Spot Them — And Avoid Them

Your HOA condo Board has been looking to hire a new management company, and the one they’ve chosen sounds perfect. They like the community manager, the company has a good reputation and the quoted annual rate is well within your association’s budget — but six months later, the association  is several thousand dollars in the hole and there’s a special assessment coming.

What happened?  Turns out the management company’s great rate was just a baseline. You’ve been paying extra for everything from postage to correspondence. Some companies may even charge you for maintaining your association’s checking account! You may not realize it, but there are different philosophies among management companies — not always made clear — between all-inclusive pricing and à la carte. So how do you protect yourself?

When you get a quote from a management company, what does that quote include?

We took over the management of an association,  where we quoted a $42,000 annual fee that was all-inclusive, with some exceptions that we had mentioned to the Board.   The Board wanted to pay the same as it was paying its current management company, $36,000. We did some calculations and said OK.  When we got all the association documents from the old management company and saw the financial statements, we were surprised.  We saw that the management fee was $36,000 — but with additional cost add-ons, the association was paying $60,000 total. There was $24,000 a year in additional charges.

Some association are looking only for a full management package.    An à la carte structure could drive a Board crazy with ‘Well, that’s not in the contract, it costs extra”.   Who on the Board is going to do it to save a some money?'”

How to find hidden fees in association management contracts

Matter of Degree

The first thing to realize is that “flat rate/all-inclusive” and “à la carte” actually fall along a spectrum. Virtually no property management firm is all one or the other.

Some management companies include mailings in their fee, don’t charge extra for working on capital improvement projects and don’t charge to maintain the association’s bank account. At the other extreme, some firms have a per-unit charge for all mailings, charge a percentage of the capital improvement cost if you want them to oversee it and charge you bank fees.

Most management companies fall in-between.  Note that a high annual management fee minimum doesn’t guarantee fees won’t be charged: One firm with a $36,000 minimum, on the high end of the scale, may have hosts of add-on fees, while one with a $12,000 minimum does not.

Of course, numbers alone don’t tell the whole story: A Board also chooses a firm based on such intangibles as reputation. But the choice between all-inclusive and à la carte remains one of the single most important points to keep in mind.

There are management companies that charge for individual copies, some charge for every fax, some may charge the association back as cost-plus.  It can add up to quite a bit of money.

Capital Projects

Where management expenses can really pile up is on capital-improvement projects, such as installing new roof or new clubhouse.. Association managers are about evenly divided on whether or not — and in which manner — they charge to oversee capital improvements.

No one definition for “project management” can mean trouble

One problem is that the term “project management” can mean different things. It’s generally done by an architect / engineer or a specially hired project manager with an engineering background, whom a Board retains to be onsite everyday to oversee the work, answer questions, facilitate fixes and report back to the Board.  But it can also mean being the point person who facilitates communication among the board, the residents, and the architect/engineer.

Some management companies don’t charge a project fee if the Board has retained the services of a consultant to design and construction-manage a project.   If a Board says, ‘We want you to manage the project,’ then many management companies will negotiate a fee and it will usually be a percentage of the job’s total cost, one common method of billing.

Other than making sure the work is being done on schedule and on budget, the manager’s job is more to communicate to residents — what’s being done when, and if there’s a setback, what’s being done to fix it,  Management definitely has to be involved and it takes time.

Ask and Tell

So what can a Board do?  Ask questions, of course — but what and how many? A board can’t think of every possible scenario where a management company might have unexpected fees. A mileage charge to drive to your building? A fee to attend the monthly meeting if there’s a thunderstorm that night? What can you ask about without it becoming overbearing?

Good boards do ask questions.   Some boards, send highly detailed “Request for Proposal” (RFP) forms.

Sometimes, overreliance on a checklist of questions can be overkill.   Sometimes the checklist leaves no real room to explain things because they’re on to the next question.

It all comes down to expectations: A Board can’t foresee every contingency for which it might be charged and a management company can’t foresee every unexpected obstacle that takes time and effort above and beyond. Simply be aware that companies may charge extra for things a board might consider the normal cost of doing business — and when you insist that a company be reasonable, reassure that you will be also.