Peter Lohmann's Mailing List - Issue #42
The Iron Law of Property Management and Trust Accounting Woes
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The Iron Law of Property Management
Moses Kagan (you should subscribe to his email list) has a great rule that he tweets about from time to time:
IRON LAW OF SUB-INSTITUTIONAL CONSTRUCTION MANAGEMENT:
You must owe the contractor $$; she must *never* owe you work.
— Moses Kagan (@moseskagan)
Mar 3, 2023
I would like to propose an Iron Law of 3rd Party Property Management:
You must always owe your client money; she must never owe you money.
Let me count the reasons why:
It’s a trust accounting legal requirement that you must never allow any individual property owner’s overall balance to dip into the negative (or below the amount of all security deposits).
If a property owner abruptly terminates you (it will happen), you need to have funds on hand to pay out any remaining bills & invoices for the property, your own termination fees, etc. Good luck collecting on that money if you don’t.
You need funds on hand to pay for unexpected/emergency maintenance (aka - a Reserve). We use $500 per unit.
And while we’re on the topic of trust accounts…
Trust Accounting: Get It Right or You’re Dead
If you mess up trust accounting as a 3rd party property manager, you're done (your state can shut you down). Here's what you need to know, from someone who's screwed it up in every way possible (but now has it more-or-less on lock). Big thanks to Jack Lansky at APM Help for clarifying a few of these items for me (he’s helping us clean up our Buildium books right now.)
A "trust" account is where you keep property owner contributions, rent, and security deposits. THIS IS NOT YOUR MONEY. It should NOT appear on your corporate books anywhere (not even as a liability).
Most accountants, bookkeepers and CPAs do NOT KNOW about trust accounting and WILL mess it up. Hire someone with specific knowledge of your property management software AND trust accounting. Even that is no guarantee of quality results, as I have found out the hard way.
You may or may not be allowed to earn interest on the account depending on state law
As the biz owner you need to STAY CLOSE to the accounting. Accounting is a core function of a property management business. This is not something you can ignore or totally delegate. Get comfortable enough to know when it's right/wrong and be able to do basic cleanup.
Do not EVER allow your property owners to hold the security deposits. YOU must hold them in your trust account.
Because this is not your money, there is a MUCH higher expectation on how you must handle and account for it (as compared to typical small business accounting). If you mess this up, your state can and will shut down your business. This should keep you up at night.
Don't mix in your own properties (if you own any). Use a separate bank account.
Some states require yet another separate trust account for security deposits.
Monthly you must "triple-tie out" the trust account as part of your reconciliation process. IMPORTANT.
Other items to pay very close attention to related to trust accounting:
Setting up the chart of accounts correctly in your PM software
Handling pre-paid rent correctly
Watching for stale checks and handling properly
Bank security & access control
Free Process Webinar
I’m appearing on an upcoming Evernest webinar to discuss process optimization. They even made a fancy graphic for it! Click to register:
Coming Soon: National Property Management Pricing Report
The outstanding folks over at ProfitCoach (they handle all our corporate accounting at my property management company) just announced something really exciting. They’re going to be conducting an in-depth survey on PM pricing that will culminate in the 2023 ProfitCoach National Pricing Report. This is something totally new (to my knowledge, anyway).
Please take 14 minutes with me to complete this pricing survey, so that our industry can have comprehensive and accurate information about pricing! By completing the survey, you’ll also be first on the list to receive the final report once it’s available.
Industry News & Events
A group of US senators have sent a letter to the Department of Justice, urging an investigation of the role RealPage’s Yieldstar algorithm plays in setting rents.
The NARPM Broker/Owner conference is in April. You can register here. I’ll see you there! If you are a consulting client of mine (or affiliate) - I’ll be doing an exclusive meetup.
Registration for SMBash is now open (starts April 27th in Austin). Going? See you there. This event was SO fun last year.
Enough beating around the bush on the Vision vs Integrator roles.
Here is the cold, hard truth on why many of you don't understand these perspectives, and won't get the partner or setup you want.
— Josh Schultz (@joshuamschultz)
Mar 1, 2023
That’s all for this week! Enjoy your weekend. -Peter
Property Management Coaching: I have one slot open right now. This isn’t my main thing, but I absolutely love doing it. If you manage between 50 and 500 doors and want to work with me one-on-one, let’s chat. Three-month minimum engagement.
Looking for a longer-term partnership, private community, my full Notion package and more? You may be a good candidate for our Property Management Business-in-a-Box program. Apply here.