Introduction to Topic
Well, greetings. Robert Locke here, and thanks for joining us today. The conversation we're going to have today is around this topic of what's wrong with standard form management agreements. Now, very candidly, whether it's the management agreement or the rental agreement, it kind of applies to both. Although most of our discussion today is going to be on the management agreement, the same principle is applied to both sides of the equation.
Okay?
Standard Form Agreements
So before we get started-- And by the way, this is a long video, so we have made breaks along the way, every 10 or 15 minutes, so that you can pause it and come back to it in your busy schedule or take a break and maybe have staff join you in the conversation. So we'll break it up along the way. Some housekeeping documents. First of all, this is not state-specific.
Whether you're in Alabama or Georgia or California, it really doesn't matter. These principles are the same, and you'll see that as we unfold this. Secondly, I'm not your broker, your commissioner, or your lawyer. Anytime you watch a video like this or you have a seminar speaker come in, you have to have this filter in your head to ask the question, is that true in my state, and is that true of my forms committee? Is that true of the standard forms?
And you have to kind of put a filter in there. And I suppose the best disclosure that I use is don't believe everything I tell you. And that really should be true of all seminars that you go to. Okay? Now, I had a staff person recently ask the question, or a student, why am I teaching on this?
Personal Background
And so I thought that was a sincere question, so let me tell you why I'm teaching on this. I did property management for 35 years. Most of you know that. I don't have a management company anymore. Hallelujah.
October 2015, we sold out to a Fortune 500 company and got a ton of money for it. And so I get to do this full time, which I dearly love. I love the legal stuff. I actually carefully read your landlord-tenant law and your state association documents. I'm one of these weird guys that can spend hours reading a law and reading a standard form lease put out by state associations, see how closely they match.
Or comparing students' leases and management agreements with what the landlord-tenant law says. Because there's a lot of things that are not following the law, and I just get a kick out of doing this. And so the legal side of this is really fun for me, maybe boring for most of the people watching, but I get a kick out of dealing with legal issues. Okay? Now, why am I talking about this or training on this?
One-Size-Fits-All Challenges
I see managers struggling, mostly as a result of being handcuffed to a one-size-fits-all management agreement. Now, when I say a one-size-fits-all, I'm referring to something that comes out of our state association forms or something you find on the internet that's kind of supposedly state-specific for all states. Right? And so this one-size-fits-all is kind of what a standard form, what I'm talking about. Our state associations are putting out forms that are supposed to fit 20, 50, 300, 500 different managers and the way they do things in their state.
And it creates a real challenge for property managers because it forces them into a mold that they don't necessarily want. And as well as it forces them into a model that often doesn't work for their business. Now, what I mean by that is if you're in Cobb Town, Georgia, and you're managing 30 properties with average rent of $800, and half of them are Section eight, and you do it out of your home, and it's just you, you're going to do it very differently than somebody who's on the southern coast of California, average rent 3,500 with four staff managing 300. If you're downtown Atlanta, you're managing 400 and all Section eight, you're going to do it very differently than if you're a real estate investment trust with 3,000 in the state of Georgia.
So everybody has a different model, and that whole idea of a model is going to unfold as we have this discussion about a one-size-fits-all document. Now, I said earlier in this conversation, one of the things that I truly believe is that the management agreement is the foundation of your business. It's not the lease, it's not the policy and procedure manual, it's not the owner or the tenant handbook. It's the management agreement.
Management Agreement Importance
And this is why I spend so much time with students perfecting their management agreement, getting it to do exactly what they want it to do because it is the foundation of their business. It actually defines their management style. It defines their relationship, obviously, with the owner, their tenant relationship. It's going to define how profitable they're going to be, because the way a management agreement is written defines a whole lot of how much money you're going to make in the business. And then lastly, how much fun property management is going to be for you.
Now, most people don't think you should put the word property management and fun in the same sentence, and I didn't believe that for years either.
Fun in Property Management
The last 15 years of our business, we absolutely gush money, and it's really fun to be in the property management business when you're having to figure out every month, how do you spend $30,000 or $50,000 or $150,000? When it's really profitable, it's fun. And we can help you get there. That's kind of one of our cornerstones of our website, trainingpropertymanagers.com, because we want to help you prevent the litigation and protect yourself as well as turn on all the revenue streams. Property management can be a lot of fun when you're making a lot of money at it like we did.
Transition to Customized Forms
Now, in terms of people getting in the business and how they find their management agreements and what they use as documents, there's kind of two models out there that they can choose from. The natural one, the one that we most gravitate to, is the standard forms, kind of a one-size-fits-all that comes out of our forms committee with our state association of realtors. Obviously, it's their job to provide standard forms for all the agents in the state who are members of the trade association, so that when somebody decides they want to lease and manage a house, they can reach over in the forms drawer or pull up the forms on the internet and select the form that they want, and voila. They have something they can work with.
And that was the way we started our business 35 years ago. First 10 years, we used our state association standard form agreement, and that's a great place to start. But after you've been in it a while, what we realized, and what I see students even today realize, is that management agreement is put together by some of the very smartest sales brokers in the state, who none of which have proven themselves to be really terrific at building a profitable management business. And most of them kind of despise the business, but yet they're the ones we turn to get our forms off of our forms committee.
So, the second one, and once you've been in business for a few years, you kind of figure this out, is that you transition over to a customized form and get in control of your document. So, everybody that's been in the business two, three, four years, they kind of figure this out. They get to page three or four of special stipulations. They discover over and over that the issues they're dealing with in the trenches do not have answers in the management agreement. And so generally, after 50 properties or 100 properties, they go through the very difficult process of developing a customized management agreement.
And of course, we want to help you with that. That's part of our model is to help people get on good agreements. But let's talk for a few minutes first about what's right about standard forms.
Standard Form Benefits
Because, like I said, we used them for our first 10 years. There's a lot to like about standard forms created by your state association realtors. So let's examine some of those and just be honest about the benefits and the advantages of using a standard form agreement. Number one, it's cheap and quick. When I was doing real estate in Atlanta and I was selling houses and I thought I wanted to lease and manage something, I could just pull up a form.
It didn't cost me anything. I was already paying fees to the state association to be a member. And one of the benefits is all the forms I wanted for anything I wanted to do. So it was really easy and it's really cheap. It's not difficult, doesn't cost you anything.
You just pull up the form, grab it, read it carefully, figure out how to fill in the blanks, and you're up and running. Okay?
State Specific Forms
The second advantage is it's state-specific. So if you're in Alabama, you get to pull up a lease that is specific for Alabama law. And if you're in California, you get to do the same thing. So all states have different landlord-tenant laws, and so the state association realtors will go in and look at those landlord-tenant laws, form a standard document that everybody in the state can use. And it's pretty good for everybody as a starting point.
Expert Oversight
Thirdly, it's overseen by some very smart real estate people. I had the great privilege of sitting in on the forms committee with the Georgia Association of Realtors for three or four years, and I'm telling you, I was blown away by the expertise and the experience and the knowledge, and the really deep knowledge of how the real estate industry works. And the people on the forms committee were brilliant. They were experienced.
They were in the weeds. They had 50, 100, 300 agents. They knew everything about everything about the sales side of the business. And on top of that, in Georgia, we always had either the current real estate commissioner or the most recent one. We had two or three lawyers in the room, and we had the trainers in the room, the people who did real estate schools, and did pre-license, post-license training.
Really, the smartest people in the state were on these forms committees. And they knew everything about everything about everything in the residential sales side of the business. But maybe not property management, which will unfold as we go along.
Exculpatory Language
So, one of the advantages is some very smart people have looked over these documents. Another advantage is there's very strong exculpatory language embedded in the agreement. One of the things that we can count on our real estate sales industry to do for us is give us tremendous exculpatory language. Hold harmless, indemnification, agreement not to sue. All that body armor that we call generally exculpatory language.
So the real estate industry knows how to put that kind of language in a document. And in their management agreements and rental agreements, there's really good exculpatory language because they know how to protect themselves, and we get the benefit of that in our management documents when they come out of the state forms committee. Okay? The next one is your broker may require it, or in some cases, your E&O company may require that you go to the state association forms and use their forms, and that's perfectly natural. Now, we've sat down with a lot of agents and talked their broker out of using the state association forms and embrace our forms.
Because obviously, we've done this 35 years. They're really, really good forms, and they're designed to protect the property manager a whole lot better than the state association forms do. And we've talked both E&O companies as well as brokers into letting property managers or their agents embrace our forms and adopt our forms instead of the state association forms. So, your broker or your E&O company may say on the surface, you got to use the state forms. We can talk them out of that pretty easily, and we've done it more than once.
When to Use State Forms
Now, before we take a break, we're going to turn the conversation a little bit and answer the question: When should you use state association forms? Okay? Now, the state association forms, again, are made up of the very, very smartest sales brokers in the state. Now, there are some states that have property managers on the forms committee. There are some that the forms are written pretty good because they've got property managers embedded in the forms committee.
That's not the case in Georgia. They got a committee they farm things out to. But 99.9% of the conversation I heard over the three or four years I was sitting in on the forms committee is all about residential sales. Now, that's a natural conclusion because residential sales is where the big money is. Residential sales is where all the agents gravitate to because it's big money.
And in Georgia, and I suspect most other states, every corner has at least one real estate sales office in an office, and the Atlanta market and Georgia's full of real estate salespeople. That's where the money is, and where the money is, is where the conversation goes. Because the bullseye of real estate in terms of what the forms committees come out with is residential sales as it should be. However, if you are in other areas of real estate, areas of specialty, areas of volume, areas that are different than residential sales, generally, you won't use a standard form coming out of the forms committee. Here are some examples.
If you're in new homes, you're not going to use a new homes form out of the Association of Realtors. It might be okay to get started, but if you're going to build 50 homes a year, 200 homes a year, that's a specialty, and you're not going to use a standardized form. You're going to develop your own. You can go to any builder in your community and look at the form they're using, 99% of the time it won't be a standardized form. It'll be a customized form because that is a specialty product.
In addition, land sales is the same thing. You might start out with a land sales contract from your state association, but if you do any volume of land sale, you're not going to use the state association forms any more than you will with commercial sales, or high-rises, or office leasing, or managing apartments. These are all niches. They're exceptions to the big broad picture of real estate.
The bullseye always is residential sales, and guess where property management that we do falls? Yeah, it's an exception. So these kinds of operators, the people in these businesses, they might jumpstart, they might start out with a standard form from their state association, but if they're going to do any volume, they put that standard form aside, they develop a customized management agreement because, as this will unfold for the next few minutes, the focus is residential sales. And those people don't really have a great track record at doing property management, office leasing, commercial sales, and so on very well.
And we wouldn't expect them to. The volume is in residential sales. Now, one principle that I want to talk about before we take a break. The driving principle that's going to be the primary filter that we run the rest of this conversation through goes something like this. Owners don't know what belongs in a management agreement.
Now, remember, I've signed up 3,000 owners. We've rented to about 9,000 tenants. I did this for 35 years, and I found when I laid a management agreement in front of an owner, they had no concept of what belongs in the management agreement. What I hear students say all the time is, when I introduce an idea or I challenge some of their thinking is, "Oh, my owners would never put up with that." Or, "My owners require that be in the management agreement." Or, "My owners think that there should be a no-smoking clause." Or, "My owners think that they should hold
the security deposit." Or, "My owners think that the tenant should mandate renters insurance for tenants." So if you'll step back away from this just a little bit and ask
Owner Knowledge Gaps
the question, how many owners that you deal with know what belongs in a management agreement? And I assure you, the answer is none of them do. Now, if somebody comes to you with a house in Atlanta and they own one in Australia, and they have one in Denver and one in Chicago, they might have a little bit of an opinion as to what belongs in a management agreement. Very few people do, and the only person that's convinced of that is you. So I would challenge you as we go through the next part of this class to be very careful when this idea pops up in your head that says, "My
owners would never put up with that," or, "My owners insist on that." Remember this initial principle because I am totally convinced this is true. Owners don't know what belongs in a management agreement. So based on that premise, we're going to take a five-second break. I'm going to, during these breaks sometimes, give you a chance to listen to a testimony of one of our students. We'll pick up the conversation in about five or six seconds.
Don't go anywhere.
Crown Model Influence
Hi, my name's Cameron McCaw, and I'm founder and associate broker of Your In Town Home Property Management. When my wife and I decided to step into property management, we started taking some classes put on by Crown. We ended up downloading all their documents, leases, management agreements, handbooks, and anything we could find from their operation. With our broker's help, we compared the Crown documents with the standard forms offered by our state association and came to the conclusion that Crown had developed the very best documents in the industry. We adopted them for our company.
It became obvious to us very quickly why so many managers in Georgia have adopted the Crown model. We feel we're 30 years ahead of the game and where we might have been had we tried to go about this on our own, or to adopt the real estate industry forms. Every day, we feel Crown's influence on our business, and we're so much better for embracing their model. So if you're looking for a great management company to emulate and to get a huge jump on the competition, you need to look carefully at the Crown model and consider adopting their 35 years of experience in property management. We did, and we're much better off for it.
