This articles comes from The Front Line
by Vanessa Koechlin and Sean Russell, CFP, AMP
In our inaugural edition, Sean had the pleasure to sit down with the brains behind Spirepoint Properties (www.spirepoint.ca) – Paul Blacquière and Joanne Beehler. Paul and Joanne have just gone through the nightmare experience of having their property management company go bankrupt. It’s probably a situation that most of us have not even thought about as a risk of investing, so take these lessons to heart to safeguard yourself as much as possible when it comes to your property management team.
Here’s the interview for your reading pleasure!
Sean (SR): I’d like to thank you both for taking the time to share your story with us. Why don’t we begin by getting a little background on both of you for some of our readers who may not be familiar with your company.
Paul (PB): Thanks Sean. Joanne and I are the owners of Spirepoint Properties. We’re in the business of making it easy for people to make hands off private investments into Canadian real estate. We take care of all the details associated with investing in real estate so people who want to own real estate, but don’t want the hassles associated with it, have a choice.
SR: And the fact that you take care of all the details means that you manage the property managers, which is what our story is all about. Why don’t you fill us in on what you’ve just gone through related to property management
Joanne (JB): Well, when we began purchasing multiple properties, we quickly realized that we needed to add a property manager to our team to oversee the day-to-day operations. Almost every investor that we talk to agrees that having a great property manager is probably the biggest key to successful investing and we agree 100%. We brought on a company headed by a guy in whom we saw real potential. He said all the right things and for the first couple of years he did a pretty decent job. Although, we felt that we had to manage him a lot more than we liked, in terms of always having to follow up on what was outstanding.
SR: Okay, so where did it all go wrong?
PB: It’s always easier to pinpoint these things in hindsight, but the first real situation occurred at the beginning of 2005 when he informed us that his accountant had recommended that he begin paying us at a different time. Up until that time, we had a few problems, but nothing that seemed out of the ordinary. I should also note that the best part about working with him was that he guaranteed our rents every month for certain buildings, so we had a big reason to continue working with him.
Originally, what he did was collect the rents at the beginning of the month and then pay us within a few days [net of his management fees and the previous month’s expenses, which included repairs and utilities]. We dealt with the property taxes and mortgages, so we would then pay those directly.
Well, in January, he said that he would now pay us at the end of each month and net out any associated maintenance, utility, leasing and management costs. In essence, he lined things up so that the rental income for a month would be paying for any expenses in that month. At the time, it seemed reasonable to us and we thought that the first month would be tough on cash flow, but that it would all work out after that.
JB: After the change in how we were paid, we then started to notice that his monthly invoices began to contain unauthorized maintenance and repairs costs. We had originally set up controls where he had discretion up to a limit of $500, but he seemed to be ignoring this so we asked that he have all repairs and maintenance approved by us. Of course, he agreed and many times would ask for approval. However, there were still some unauthorized costs appearing and he always had a good story when we asked for an explanation. Having worked with him already for almost 3 years, we assumed he was just overburdened with managing his staff and the number of units he had under management (which had ballooned from 100 units to approximately 200 within a year). We worked even closer with him to ensure everything was under tight control.
PB: Things got worse when we purchased a few more units in the summer. We set up work schedules for all the renovations we wanted done and put the property manager in charge of subcontracting out the work, managing the renovations team, and overseeing the timelines. While the work was eventually completed, it was not completed on time and as a result, we lost some revenue. Although not all contractors have trouble meeting timelines, our experience has shown that most do not and so we let things slide a bit more, assuming he did the best he could to manage the contractors that were available. Once the work was completed, we paid him the balance owing, assumed he paid off the individual contractors, and moved on to the next task.
JB: The property manager was also given the task of renting out one of our existing duplexes, which had become vacant. He informed us that he had rented both units to a single tenant for the price we were asking, so we were very happy. Shortly afterwards however, we started to receive phone calls from the new tenant about ignored maintenance requests. This nightmare tenant somehow tracked down our phone numbers and began calling me at all hours of the day. At that point, we realized our property manager was not doing his job and had given us a problem tenant. So we began to put on the pressure.
PB: By the beginning of November, we had had enough. We called a meeting with him and were inches away from firing him as our property manager. At the meeting, however, he admitted to us that he had overextended himself by managing too many units, so he had scaled back to 100 units and was determined to solve his company’s problems in 2006. Basically, he said all the right things to keep us as his clients.
The next week, we found out why. On November 8th, I received a phone call and an email informing me that he had disappeared and his phone was disconnected. Rumours ran wild, but it was determined shortly afterwards that his company was declaring bankruptcy. Of course, there were no assets to speak of against which we could make a claim. Remember, due to the way he was collecting rents and paying us, he had one month’s rents and had already collected the rents for the month that he declared bankruptcy. He was also holding last month’s rent for many units of the units.
JB: As soon as we heard he had disappeared, we hired another management company [the same day in fact!]. Fortunately, we had already begun the process of interviewing other companies. The new company worked with us over the next few weeks and discovered many of our units were in an appalling state, with a large number of units vacant or tenants not paying. In fact, it was so bad, that after three weeks of working with us, the new company fired us as a client! They said it was too much work for them. We were back where we started, looking for a new property management company.
Fortunately, all these problems and searching for new companies gave us insight into
what to look for in a management company. Within a few days of interviewing 15-20 companies, we found a new one which we were very happy with, and we are still using them to this day. During that first month of chaos, we also started receiving phone calls from angry contractors who had not been paid for their work, saying they would put liens on our properties. How could this be? Well, it turns out we paid the property manager for work done in late summer, but he didn’t pay the contractors. Although our lawyer assured us that a sub-contractor can only hold the general contractor or project manager liable, we are still not sure if we are out of the woods on this issue.
PB: Over the next two months, we started looking into utilities, which the original property manager was paying on our behalf, and found more issues. It appeared there were many overdue bills owed on electricity, gas and water accounts. Some of them even had outstanding bills since late in 2004. We soon learned that the electric company for our region has some serious shortfalls in their billing system that can allow unpaid bills to go for long periods of time without the account being cut off.
The electric bills were in the tenants’ names, but when the tenants left, we found out that if the bill wasn’t paid by the tenants, the electric company could still go after us as landlords for payment. So we may be on the hook for that as well. Some of the details of all of this are still to be worked out, so there may be a follow up story to this one!
SR: So, how has it all worked out since then?
JB: Well, as Paul mentioned, some of the details remain outstanding, but basically we have a claim against the property manager for the rents that he owes us, but we aren’t expecting to collect anything – we’re looking at it as a very expensive lesson. The bankruptcy trustee, in its investigation, has determined that the property manager transferred more than $120,000 to family related companies before declaring bankruptcy! So it looks like fraud may be involved. If the bankruptcy trustee doesn’t investigate, we plan to co-operate with local authorities to do it. The contractors have focused their energies on making a claim against the property manager instead of
us, so that situation seems to be cleared up. We’re still pursuing the issue with the electric company and may be taking our story to the local media if it’s not resolved.
SR: What would you say are the biggest lessons that you can share from your experience?
PB: I think the biggest lesson is that we never thought about how much we really had at risk at any moment in time. Now we will always calculate that figure and put all the controls possible to make sure it’s as low as it can be. We’ll always have some risk [for example, some of their tenants pay their rent in cash to our property manager], but we are very focused on minimizing them now. We originally followed the systems that are normally found in the property management industry, but will never do that again.
LESSONS LEARNED
Paul went on to share some very specific recommendations that we should all consider implementing immediately to avoid some of the negative consequences that they had to endure as a result of the bankruptcy of their property manager, including:
1. All tenants’ cheques should be made out directly to you, the landlord, not the property manager. Have the property manager deposit the cheques directly into your account.
2. The property manager should invoice you for their management fees and ALL maintenance costs. Do NOT let them subtract those costs out of your rents and do NOT let them wait a month before paying you net rents after expenses. This places the risk on them to collect from you.
3. Set up specific guidelines for approval of maintenance and repairs costs with your property manager and make sure they stick to them. If they do not, consider changing companies.
4. If possible, always pay contractors or trades people directly, not through your property manager. This ensures you always have proof of payment for work done and will prevent a contractor from placing a lien on your property for unpaid work. If you have to pay through your property manager, ask for proof of payment from the contractor.
5. Pay the utilities bills yourself (if you’re responsible for them), so you can ensure everything is being paid on time.
6. Schedule regular times to inquire about your tenants’ utility payment status or just to determine if the accounts are still in their names. This will help you stay ahead of potential issues and minimize any potential expenses.
7. Always walk through ALL of your units at least once a year, preferably quarterly. This allows you to see any potential problems before they become too big.
8. When you’re feeling a cash crunch, consider talking to the lenders of your mortgages and asking about their ‘skip a payment’ options. Be very straightforward with your situation and explain what you’re doing to rectify any problems.
Invest wisely,
Vanessa
If you would like to contact Vanessa or have an idea for a topic that you would like to see discussed in upcoming editions of the Front Line, you can reach her directly at (416) 603-7326 or by email at koechlin.v@mortgageintelligence.ca.
