Q: My Broker does not allow Agents to handle Property Management activities. I do rentals for my investor clients but I am unclear where rental activity ends and Property Management begins. Is there a distinction between the two and can you help me so that I do not cross that line?
A: Yes, there is an important distinction between rental activity and Property Management and it helps to better understand this distinction by reviewing background information.
I. BACKGROUND: Property Management is deemed licensed activity; therefore, the type of license that the Agent has and who is receiving the benefit of those services directly impacts what the Agent can do.
A. Agents with a Salesperson License: Per DRE regulations, all licensee activity that is performed by a Salesperson must be supervised by that Agent’s Broker; the work must be performed under the Broker’s license and all compensation must be paid through the broker.
B. Agent’s with Broker’s License: Agents who have a broker’s license may perform Property Management activities under their license, but only if those activities are authorized, in writing, by the brokerage who affiliates that Agent.
C. Agents Managing Property They Own: Property Management is licensed activity performed “for another.” If the Agent is managing property that the Agent owns, then this is not engaging in licensed activity. Some Brokers will have no objection to Agents managing their own rental property as long as it is done entirely separately from the brokerage. Agents should check with their Broker or Branch Manager for the company policy on this issue.
II. DISTINCTION BETWEEN RENTING PROPERTY AND PERFORMING PROPERTY MANAGEMENT SERVICES:
A. Rental Property: Agents handling the rental of a property represent the landlord, tenant, or both until the property is rented, the tenant has moved in, and the initial rent check has been delivered to the landlord. As long as the Agent has NO further responsibilities, the Agent is only handling “a rental.”
B. Activities that Could Constitute Property Management Services: Once a Property has been rented, performing any of the following activities could make the Agent a Property Manager:
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- Receiving rent checks and forwarding to the owner;
- Being the contact person to take tenant complaints or calls for repairs;
- Recommending, preparing and/or serving ANY Notices to tenants;
- Negotiating lease terminations with tenants;
- Conducting any final walk-through inspections with tenants;
- Hiring, on behalf of Owner, contractors, or vendors to do repair work on leased property;
- Supervising or managing the repair or re-model work on property; and/or
- As a Buyer’s Agent, conducting a walk-through of the property following the termination of a Seller remaining in possession after COE.
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III. PROBLEM AREAS FOR AGENTS ACTING AS PROPERTY MANAGERS:
A. INSURANCE: Property Management activities are often excluded from a Broker’s E&O Policy and from a Broker’s civil general liability insurance. Brokerages allowing Property Management must obtain all necessary insurance. Brokerages that prohibit Property Management often do not have the requisite insurance leaving the Agent with no or inadequate protection if a claim arises.
B. ETHICAL REQUIREMENTS: Article 11 of the NAR Code of Ethics states that Agents who are providing Property Management services must “conform to the standards of practice and competence which are reasonably expected” of Property Managers. The Code of Ethics also requires Agents who are serving as Property Managers, but are not experienced in that field, must either: (a) fully disclose to the client that Property Management is outside of your field of competence, or (b) engage the assistance of a real estate licensee who has that experience.
C. TRUST FUNDS: All checks received, even if not cashed, must be logged into and out of the brokerage trust fund log. Documenting deductions for Property Management fees and expenses is very complicated and requires separate trust fund account procedures.
PRACTICE TIPS:
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- If you are acting as a rental agent, do not include your name and contact information in the “Notice” paragraph of the Lease as the person the tenants are to contact. If you are listed as the contact person, you will be fielding questions/complaints from the tenant and you will be deemed to be the Property Manager. Tenants should only contact the Landlord or the Landlord’s Property Manager once the tenant moves into the Property.
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- Many Brokers have policies that prohibit conducting any Property Management at all or only with the written approval of the Broker. Brokers may also require that certain guidelines be followed. It is thus best to check with your Broker or Branch Manager first.
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- Never attempt to manage a property for others without the express, written approval of your Branch Manager or Broker.
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- It is essential that all of your activity in managing your own rental properties be entirely separate from your Broker. If you involve your brokerage in any way, it could lead to liability for the Brokerage and for you.
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- If you are managing your own rental property outside of the Brokerage, it is important to NEVER:
a. Use any of your Broker’s stationery, business cards, or equipment including, e-mail, and phones;
b. Meet with tenants or conduct any property management business in the Brokerage office(s);
c. Allow a tenant to send or deliver rent checks or notices to you at the Brokerage office(s);
d. Advertise the rentals in the MLS under the Broker’s MLS membership; and/or
e. Use any documents or forms that have your Broker’s name or contact information on them.
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- Only experienced Property Managers should even attempt to recommend, prepare or serve Notices on tenants. Notices to Tenants must be filled out correctly, and served in the manner specified by statute or local ordinances. If anything is done incorrectly, this can create significant and costly legal problems for the Landlord, and for the Agent who prepared and/or delivered that notice.
WEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
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