Property Management Agreement: What to Read Before You Sign

The management agreement is where you find out what you are actually paying. Not the percentage on the website. Not the number the sales rep quoted over the phone. The real cost is in the document, and most owners do not read it carefully enough before they sign.

Here is what to look for, what to question, and what should send you to the next company.

Management fee structure

Most PM companies in Memphis charge 8% to 10% of collected rent as the monthly management fee. On a property renting for $1,200/month, that is $96 to $120 per month. Some companies charge a flat fee instead, typically $100 to $150 regardless of rent amount. Flat fees favor higher-rent properties. Percentage fees favor lower-rent properties.

The key phrase to look for is "of collected rent" versus "of scheduled rent." A company that charges a percentage of collected rent only earns when you earn. A company that charges on scheduled rent charges you even when the unit is vacant or the tenant has not paid. That distinction is worth reading twice.

Leasing and placement fees

When a new tenant is placed, the PM charges a leasing fee. The industry range is 50% to 100% of the first month's rent. On a $1,200/month unit, that is $600 to $1,200 every time the unit turns over.

This fee covers marketing the vacancy, conducting showings, screening applicants, executing the lease, and coordinating move-in. The work is real. The question is whether the fee creates a perverse incentive. A company that earns $1,200 on a new placement but $200 on a renewal makes more money when your tenant leaves. Ask about their average tenant retention rate. If it is below 60%, the leasing fee is not just a cost. It is a business model.

Maintenance markup

This is where most owners lose money without realizing it. Many PM companies mark up vendor invoices by 10% to 20% before passing the cost to you. A $500 plumbing repair becomes $550 to $600 on your statement. A $3,000 HVAC replacement becomes $3,300 to $3,600.

Some agreements call it a "maintenance oversight fee" or "vendor management fee." Some do not mention it at all and just quietly inflate the numbers on your statement. Ask this question directly: "Do you mark up vendor invoices, and can I see the original invoice for every repair?" If the answer is not a clear yes to both, that is your answer.

Companies that use in-house maintenance crews deserve extra scrutiny. There is no independent invoice to compare against. You are paying their employee's labor rate and their parts markup with no way to verify whether the pricing is competitive. Read the full breakdown of hidden fees to understand how these charges compound.

Coordination fees and trip charges

Some agreements include a "coordination fee" or "dispatch fee" of $50 to $100 per maintenance event, charged on top of the vendor invoice and any markup. On a property that generates 6 to 8 service calls per year, that is $300 to $800 annually for the privilege of having your PM do the job you are already paying them a management fee to do.

If the agreement includes coordination fees, ask what the management fee actually covers. If the answer is "rent collection and accounting," you are paying a reduced management fee supplemented by per-event charges that add up to more than a higher flat percentage would cost.

Termination clause

This is where you find out how confident the company is in their own performance. A 30-day termination clause is standard and fair. You give notice, they transition the property, and you move on.

A 60 or 90-day termination clause is a retention mechanism. A company that needs 90 days notice to let you leave is not retaining clients on performance. They are retaining clients on contract terms. Worse, some agreements include an early termination penalty of $500 to $1,000 or a percentage of remaining contract value. That means leaving a bad PM costs you money on top of the bad management.

Read the termination section before you read anything else in the agreement. If the exit is difficult, the company already knows some clients will want to leave.

Owner notification thresholds

The agreement should specify a "not to exceed" (NTE) amount for maintenance. This is the dollar amount per repair that the PM can authorize without calling you first. A typical NTE is $300 to $500.

Below the NTE, the PM handles it. Above the NTE, they contact you with the scope and cost before authorizing the work. Emergency exceptions should be defined: a burst pipe at midnight gets fixed regardless of the NTE, but you get notified the same day.

If the agreement does not include an NTE, the PM has unlimited authority to spend your money on maintenance. That is not management. That is a blank check.

Trust account requirements

Tennessee law (TCA 66-28-301) requires security deposits to be held in a separate account. Your management agreement should state explicitly that the PM maintains a trust account for owner funds and tenant deposits. If the agreement is silent on trust accounting, ask. If the PM commingles your funds with their operating account, that is a legal and financial risk you do not want.

Red flags in management agreements

In-house maintenance with no invoice transparency. You have no way to verify pricing. The PM profits from every repair. The incentive runs opposite to your interest.

Vague fee language. Terms like "reasonable charges," "customary fees," or "as needed" without dollar amounts are blank checks. Every fee in the agreement should have a specific number or formula attached.

Auto-renewal clauses. An agreement that auto-renews for another year unless you cancel within a 30-day window (that you will forget about) is designed to keep you locked in. Look for month-to-month terms after the initial period.

Penalties for switching PMs. A cancellation fee exists because the company expects clients to want to cancel. Companies that deliver results do not need financial penalties to retain business.

Ownership of tenant relationships. Some agreements state that the PM "owns" the tenant relationship and that you cannot contact your own tenants directly. Your property, your tenants. A PM who restricts your access to your own asset is protecting their position, not your investment.

What a fair agreement looks like

A management fee of 8% to 10% of collected rent. A leasing fee of 50% to 75% of the first month's rent. No maintenance markup or a disclosed, reasonable markup with full invoice transparency. An NTE of $300 to $500. A 30-day termination clause with no penalty. Monthly statements with every line item documented. A trust account for all owner and tenant funds.

The agreement is the relationship. Everything the PM promises in conversation means nothing if it is not in the document. Read it like it is going to cost you money, because that is exactly what it does.