Financing in 91101>Question Details

newinvestor,  in 91106

Lender requires property management agreement

Asked by newinvestor, 91106 Sat Mar 20, 2010

Just receive the LOI from the lender and it requires us to sign a 1-yr agreement with a property management company (because we are new investors). Is there a workaround for this? Maybe negotiate down to 6 months?

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Because you are saying LOI, or letter of intent, as apposed to commitment, I am assuming that you are either buying a property that is more than 4 units, or you are using a local bank that is not selling to Fannie or Freddie, and is underwriting in the same way as they would for commercial property. These loans are more difficult to get now than any other type of mortgage financing, and regardless of your education, they know that being an investor is not as easy as it sounds, and they may have been burned one too many times by borrowers to allow self-managed buildings.
2 votes Thank Flag Link Sat Mar 20, 2010
Newinvestor, In reposnse to your question I really don't know if my ideas would fly with the bank. I have not come across this before. I threw out some ideas that might be worth trying, they can't hurt. Every lender is different and what might work for one doesn't for another. Is it a single family home or multiresidential? If you added the cost to manage the property for a year to your overall cost are you getting a good deal? If other ideas don't work, you may need to do it to close the deal and in the long run a very small fee in the overall scheme of things. Get somebody good you can learn from and think of it as a training fee thats also a tax write off.

1 vote Thank Flag Link Sat Mar 20, 2010
This is not a Fannie Mae or Freddie Mac required loan condition. This would be a lender specific condition and I've never seen anything like it in 14 years. My first question would be this: If you added your current monthly debts to proposed payment on the investment (and didn't factor in any rent from the property), what would they amount to expressed as a percentage of your gross income. If the answer to this is 45% or less, you may need a second opinion on your loan. If it's not, that would mean that they are requiring you to do this because they need the rental income on the property that you're buying to qualify you for the loan and in the absence of a history of owning and managing rental properties, they can't have your self manage the property AND use the rental income as qualifying income at the same time. This would be their version of a workaround for that problem.
1 vote Thank Flag Link Sat Mar 20, 2010

Is this a residential property? As a lender for residential properties, I have not seen this request from lender before, causing me to ask what type of property it is. Thanks for posting the question, it will be interesting to see what other answers you get.
1 vote Thank Flag Link Sat Mar 20, 2010
I liked what Lou wrote below - more downpayment (if possible), actually accepting this condition and signing up with the cheapest property management company, getting an experienced investor on board as a silent partner would make the purchase possible.

You can get rid of the property management company in a year, writing them off as your expense.
You can also learn from them - so that you gain the experience you need for the future.

Hope this helps,

Irina Karan
Beachfront Realty, Inc.
0 votes Thank Flag Link Sun Aug 25, 2013
Sorry to let you know, but this is now commonplace. Lenders want experienced investors and anyone not experienced need to sign up. Nearly every one of my comrades at other commercial lenders have this agreement. In fact, even residential 4 unit N/O/O properties lenders are asking for this. As far as I've heard, there's not much negotiation room and it's pretty much "take it or leave it".

I know some lenders won't even lend if you're not an experienced investor (actually, they will if you put down more downpayment - there's always a catch).


0 votes Thank Flag Link Mon Mar 22, 2010
In that case, it's not an uncommon condition at all and, in fact, doing a 1 year contract isn't so bad.
0 votes Thank Flag Link Sat Mar 20, 2010
Thank you all for the feedback. Btw, sorry forgot to mention that this is for a 7-unit apartment buidling so it is a commercial property.
0 votes Thank Flag Link Sat Mar 20, 2010
glen - this will be myfirst income property. i have been in the IT field for the last 12 years and have an MBA so i do understand the financial aspect of things. I do have 10-15 hrs/week to manage. of course, no formal property management experience. do you think this will fly with the bank?
0 votes Thank Flag Link Sat Mar 20, 2010
Interesting, not sure how many property managers would be willing to take a place for less than a year, but everything is negotiable. Is property currently rented. What is your investment background or current occupation. Any way you could show you have the skill set? I'm sure you do if you have the time. Check in with some property management companies and see what they charge. You may be surprised and can get someone to handle everything and leave you free to find more properties or sit on the beach :)

0 votes Thank Flag Link Sat Mar 20, 2010
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