Peter Lohmann's Newsletter - Issue #199

Vendor Rebates ARE Kickbacks, Actually

Last week Todd O wrote a piece entitled “Vendor Rebates Aren’t Kickbacks”.

Imagine you own a local plumbing company. You’ve been doing good work for a local property manager over the last 6 months. Now you get a call from the owner of the PM company and she tells you “We can only continue to direct plumbing work at our owner’s properties to you if you pay us.” That is so clearly a violation of the fiduciary duty (on the part of the PM) that it’s basically the textbook example!

My position is that a vendor rebate is a kickback, which is why we don’t accept them at RL Property Management. Renaming it doesn't change that. Disclosing it doesn't change that. If a vendor is cutting you a check because of the work you route to them on your owners' behalf, that money belongs to your owners.

This kicked off on my own podcast, so let me start there.

What started this

I had Matthew Tringali back on the show recently, and we got into maintenance revenue. Matthew used to own a PM shop and now runs BetterWho. He laid out three fees: maintenance coordination, project management, and a "vendor marketing fee." The first two are charged to the owner. The third is the one worth talking about.

Here's Matthew's vendor marketing fee, in his own words: he goes to the vendors he sends a lot of work to and offers to list them as "preferred vendors" on his website. In exchange, they pay him a monthly marketing fee that, and this is the whole ballgame, "can be reflective of that volume of work." He prices it off "what we did together last year." At 750 doors, he said, for me that could be "an extra $10,000, $20,000 a month or more."

When I asked about disclosing it to owners, he told me his attorney's take was that he doesn't have to, because it's a separate transaction from the work orders.

I pushed back and called the version where a vendor cuts you a check for a slice of the work they did for you "a straight-up kickback... not allowed in a fiduciary agreement." I put on my owner-fiduciary hat and said that's "money that belongs to your owners," because you're "leveraging the work that's flowing through you to enrich yourself," and if the vendor can afford to pay it, "clearly you could get the work done for that price."

Then Todd weighed in

Todd Ortscheid’s piece was responding to that episode. I have real respect for Todd. Iron sharpens iron, and he's right about a lot. He's wrong about this, and it's worth being specific about why.

Todd says the kickback rules we all learned live in RESPA. RESPA doesn't touch property management, so there's no law here, and the fix is disclosure. "The key is disclosure," he writes. Disclose it, and a rebate is "perfectly kosher."

Three problems.

Problem 1: Renaming a kickback doesn't un-kickback it

Matthew's fee is a "marketing fee" for a website mention. But by his own description, the amount tracks the volume of work he routes to the vendor. A payment scaled to the amount of business you send someone is a referral payment. Full stop. It doesn't matter whether you invoice it as a rebate, a "preferred vendor fee," or a "marketing fee," and it doesn't matter whether the money rides on the same transaction or a separate one.

I'm not inventing that standard. It's exactly what RESPA looks for: a thing of value "connected in any way with the volume or value of the business referred" is treated as evidence of a kickback. The Restatement of Agency gets there another way: labels don't control, substance does. The website listing is a fig leaf over a payment that only exists because of your owners' spend.

Regarding steering for a rebate, Todd says he's "never in all of my years in this business seen a property manager actually do such a thing," and I haven't seen the cartoon version either (picking a bad vendor for a check). But that is what a well-managed conflict looks like: invisible. The steering that matters isn't "hire the bad guy." It's marginal and not even necessarily deliberate. Two comparable vendors, and you drift toward the one that pays. A price creeps up, and you don't fight it quite as hard, because part of that number comes back to you.

Problem 2: Disclosure doesn't fix it, because it's still the owner's money

Telling the owner "I'm skimming a bit of your maintenance spend" doesn't make it stop being their spend. Disclosure changes what the owner knows. It does not change whose money it is. If a vendor can hand you $3k a month and stay in business, that $3k was already baked into the prices your owners paid. It was always theirs. Disclosing that you're keeping it is more honest than hiding it. It is not the same thing as being entitled to it.

Todd even agrees that undisclosed money is a kickback. "If you are hiding financial incentives," he writes, "that is, by definition, a 'kickback.'" But Matthew's program isn't disclosed. His own attorney told him it didn't need to be. So the specific program that set off this entire debate fails Todd's own first test and meets Todd's own definition. Todd wrote a defense of disclosed rebates built around an example that wasn't disclosed.

Problem 3: "RESPA doesn't apply to us" is the weakest line in the piece

Todd's right that RESPA doesn't govern property management. But look at why RESPA exists before you treat that as permission. Congress passed it in 1974 to eliminate "kickbacks or referral fees that tend to increase unnecessarily the costs of settlement services." The worry was precisely ours: when a provider pays you to steer business, the customer eats the cost and can't see it.

And here's what Congress did about it. They didn't require disclosure. They BANNED it, with criminal and civil penalties. Under RESPA, the value of a referral is not a compensable service, and you can only be paid for actual work at fair market value. That is the considered federal judgment on referral money in real estate, sitting one industry over from ours.

So yes, we operate in the one corner RESPA never reached. That is a gap in the law, not a moral loophole. "It's not illegal in our industry yet" is a bad place to plant a flag. I'd rather meet that standard now than have it forced on us later.

About the doctors and the financial advisors

Todd's best analogy is that doctors and financial advisors are fiduciaries who take third-party money all the time, so why can't we? Fair swing. But those are the two most heavily conflict-regulated relationships in the country, and the comparison cuts the other way.

Financial advisor 12b-1 fees and revenue sharing are exactly what produced Reg BI, the SEC coming down on funds that disclose they "may" have a conflict they actually have, and an entire fee-only fiduciary movement whose whole pitch is that they REFUSE third-party money. And doctors: paying a doctor based on what they prescribe is a federal crime under the Anti-Kickback Statute. The speaking and consulting fees Todd points to are legal only when they're for genuine services at fair value and not tied to prescribing volume, and even then they get logged in a public federal database (Open Payments) precisely because "just disclose it" was judged not good enough. Todd cites that database like it helps him. It exists because disclosure wasn't enough.

"But I deserve to be paid for the value I bring"

Maybe you do. Sourcing and riding herd on good vendors is real work, and Todd and Matthew are right that owners benefit from it. But if you deserve to be paid for it, there is an honest way to get paid: put a line item in the management agreement, name it, and let the owner agree to pay you. We do exactly this with a markup on 3rd party invoices. Charge your principal, in the open, for a service you provide your principal.

What you don't get to do is decide on your own that you're owed a raise and then collect it from the vendor, out of money your owner is funding, without your owner agreeing to that specific deal. RESPA said it plainly: the referral itself is not a service you can bill for.

The only test that matters

Forget the label. Forget whether it's one invoice or two. Forget whether your lawyer blessed it (by the way, just because you find one lawyer to green-light something does not mean it’s legal, let alone ethical). Ask one question: would this survive an owner who completely understood it and had every reason to say “no”?

Let’s see a property manager who is defending this produce a 1-page list of all the vendors who paid them, and how much, and send that out to all their owners each month:

Property Owner: "Oh i see you hired ABC plumbing again for my property. No relation to the fact that ABC paid you $3k in referrals last month?"

Property Manager: "No, that's a coincidence. They just also happened to the best vendor for your property!"

Bottom line

I like Matthew and Todd, and they're doing what a lot of smart, well-meaning operators in this industry do. That's the problem. We've talked ourselves into believing that a disclosure line and a clever invoice turn our owners' money into our money. They don't. Our reputation is already parked next to the used car salesman, and we didn't get there by accident. We got there one "perfectly legal, fully disclosed" hand in the cookie jar at a time.

Charge your owners fairly. Charge them openly. And stop taking checks from the other side of the table.

Not legal advice, and I'm not a lawyer. This is a layperson's read. Talk to an attorney who knows property management law in your state.

What's a Renter Lead Actually Worth?

In scattered site PM, most of us treat a renter lead as free. Someone clicks your Zillow listing, you didn't pay anyone for it, and now you just have to work them. So the lead feels worthless (maybe even negative, if they're a pain to deal with).

In this week’s pod, Alex Stringfellow (CEO of RentEngine) challenged me on that. He pegs a renter lead at $24–90, and makes the case that a clean database of past leads could actually add value when you sell your company one day.

We also get into the ~7-minute window you have before a Zillow browser closes the laptop, and why so many "Zillow leads" started life as Google searches. Great episode.

Also available on Apple Podcasts and Spotify

Property Management Companies For Sale This Week

• This technology-enabled STR management company in Utah is still available (asking $750k, $1.28M gross revenue)

• Longstanding property management company in Montana (asking $550k)

• Turnkey property management firm in Redding, CA (asking $338k)

• Established PM franchise managing 278 doors in West Palm Beach, FL (asking $1.2M, seller financing available)

• Fast-growing property management company in Tempe, AZ (asking $1.1M, 100+ properties under management, $2.76M gross revenue)

If you plan to buy one of the property management companies above, I recommend using Live Oak Bank’s Property Management Lending Team to finance the deal.

Industry News & Events

• RentEngine’s Q2 Leasing Data & Trends Report Webinar - July 22 @ 1pm ET

• Marriott is getting into rental apartments

• TurboTenant has launched a hybrid software-property manager service called Autopilot for a flat fee. “As more independent landlords look for ways to reduce the time and stress of managing rental properties, they shouldn’t have to choose between doing everything themselves or paying costly percentage-based management fees,” said Seamus Nally, CEO of TurboTenant. Reminds me of Hemlane. I think this trend is something to watch VERY carefully.

• An evicted Utah woman created a fake rental listing to retaliate against her property manager. She is now facing felony charges.

Closing Thought

A few quick things before you go…

• Last week’s issue went to 21,785 readers (50.8% opened, 2.6% clicked)

• The most popular link was the Lazy Leverage episode where I joined Jon Matnzer to discuss Why You're Tracking 74 KPIs and Still Going Broke (61 clicks)

• Property managers: Your professional trade association is NARPM. You need to join if you’re not already a member.

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Software I’m using to scale my 700+ door property management company:

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The content of this newsletter is for informational purposes only and does not constitute professional advice. I may have consulting agreements with, or financial interests in, companies mentioned in this newsletter. Additionally, some of the links included in this newsletter are affiliate links, meaning I may earn a commission if you make a purchase through these links. Always perform your own due diligence before making any financial or business decisions.