Over the last few years, we have seen some agents moving to build their rent rolls on an all-inclusive management fee income. In other words, instead of charging management fees plus letting, renewal, and other ancillary fees, they set an all inclusive management fee. This fee is usually anything from 13-19% depending on which part of the country they are operating in.
So what are the advantages?
Well the obvious advantage is the regular cash flow on leasing and renewals are received proportionately each month, instead of receipting in a lump sum once a year, or when required. So, you are receiving a portion each month through the increased management fee being charged.
This makes for ease of administration. The management fee is locked into your software system and is collected automatically. Many times incidental ancillary fees are not automatically collected on your computer system, so they can get over looked and not be charged because of work pressures or oversight within the office.
So a gross management fee can be a good way of streamlining your fee collection process.
So what are the disadvantages?
It sounds expensive. It may be difficult to convince a landlord to pay this way as the fee sounds much higher than what they are use to. Therefore, it is imperative that you have some figures to show them the comparisons between your traditional fee structure and the all-inclusive fee along with the benefits to them. For example, the ease of budgeting. They know what is being charge each month, with no big surprises when the property is re-let.
A big problem is that many agents tend to discount the all inclusive management fee in comparison to the standard range of fees they were originally charging, so there is actually a reduction in gross income. So before you change over, make sure you are not throwing money away, work out what your current gross income per property is each year before deciding on what gross percentage fee your going to charge.
A lot of agents think that a gross fee will improve the value of their rent roll. This preconceived idea is a little mislead by the understanding that the value of a rent roll is calculated by multiplying the annual management fee income by a multiplier. Therefore increasing the management fee increases the rent roll value.
However, it is our experience from selling numerous portfolios with this fee structure in place that it isn’t quite that simple. All the banks and valuers understand that a healthy rent roll is going to produce around 30% above management fee income each year, and therefore allow for that by discounting the gross management fee income by 30%.
If you are careful in setting your fee high enough you can still be in front financially but you need to do your homework first.
Quite a number of agents using the traditional fee structure are still dubious and concerned about how they can merge the two styles of charges into their office. So when you go to sell, they are not sure how they will incorporate the gross fee structure into their existing portfolio of properties being charged under the traditional method. So you may loose a buyer if they are not familiar with the gross fee process.
So whichever way you choose to structure your fees and charges, the end sales result is not going to be that much different. If the idea of regular cash flow each month is appealing and it eliminates the oversight of other missed fees and charges then it could be for you. But as we said, if you are planning to go down this track… do your homework, know what your rent roll is producing in gross income, and use that as a guide to set the new gross management fee level.