The spikes in service charges have recently hit the spotlight, with costs still climbing and many residents financially struggling to keep up. Although property management companies are contending with increasing maintenance and material costs, the industry needs to consider if there is anything they can do to curb the increases for residents.
David Goldberg, CEO of property management company, POD, says one of the key things the industry needs to look at is management companies skimming commissions. Over the past few years, some firms have come under fire for skimming commissions on maintenance contracts, which ultimately unfairly raises costs for the end customer.
Skimming poses an ethical dilemma for the industry as it’s counterintuitive, but some management companies feel they need to seek alternative forms of income to make a profit as margins from management fees alone have become so slim. Here, David Goldberg delves deeper into the topic looking at why firms are skimming commissions, the signs to look out for and the effects it has on the property management industry.
“Firstly, it’s important to state that skimming is a rare occasion and is in no way a reflection of most management companies. However, it is still happening and it’s our responsibility to shed some light on the issue for the sake of not only unsuspecting residents who are burdened with the cost, but to also uphold the reputation and trust of our industry.
In basic terms, skimming refers to someone taking a cut from a transaction, and within the property management industry this can take many forms. It can include adding a markup on maintenance contracts, charging suppliers to be on approved lists, or asking for kickbacks to provide firms with works.
In the case of adding markups, a property manager’s fee should be an inclusive cost to handle all maintenance and related contracts, so there’s no valid reason to add extra charges. However, if a firm is skimming commissions, they may be siphoning off a portion of the cost for themselves by reporting that the maintenance cost more than it actually did. The additional cost is then passed onto the customer who ends up paying more for the same service they could get elsewhere.
In these instances, it can be difficult to ascertain when a company is skimming, given the money would be paid outside of the transaction and/or built into the overall cost. In fact, it is hard to spot skimming in most cases due to its surreptitious nature. However, one of the telling signs is when a firm is offering low initial management fees. The industry is seeing a ‘race to the bottom’ in terms of fees, with companies competing to offer the lowest management fee. In order to be able to offer these initially attractive fee amounts, some firms seek alternative forms of income, such as skimming, to make a profit. The issue is that agents win management contracts with these initially low charges but it is not until the overall maintenance costs are revealed that consumers see the real value.
Another telling sign is when firms use associated contractors. Of course, using the same contractors every time doesn’t necessarily mean there is anything untoward going on, as it may be that they are trusted and do a good job. However, if they are offering an unsatisfactory service, yet keep being employed, this might be a sign that there are back hand payments and agreements happening. In this instance, customers will soon become aware they are not getting the best value for money and inevitably change management agents, and let others know why they’ve left in the process. There are many rights and options open to customers to both challenge reasonableness and effect a change in agent, so there is little value in gaining commission in this way.
In fact, reputational damage is a huge risk for property managers when they decide to profit from contracts. Ultimately skimming commission is a betrayal of trust. A management firm’s main objective should be to manage properties in the most cost effective and efficient way, but by adding markups, and passing the costs onto customers goes against this. Equally by offering misleading fee quotes and failing to disclose commissions, firms who skim are actively deceiving their customers, which of course damages their reputation.
In addition to this, skimming can also erode trust with suppliers. At POD, we choose not to take commissions from suppliers as it’s fundamentally wrong. Through careful procurement, we are able to use our bulk buying power to bring better value for money, ensuring 100% of the savings we achieve are passed to our customers. Furthermore, the suppliers that work for us know they are both valued and are chosen on merit and quality of work as opposed to the amount of commission they’re able to offer.
Although there are telling signs and redress schemes that give leaseholders the ability to raise when they suspect a managing agent is skimming, this doesn’t necessarily stop it. The relationship between agent and consumer is built on trust and it is down to the management company to uphold this. The concern is that as the cost of living worsens, legislation gets tighter and the market gets more competitive, more firms will feel pressured to go down the skimming route in order to keep profits healthy. However, the more aware we are of skimming in the industry, and the signs to look out for, the more likely we will be able to reduce the effect it has on residents.
Ultimately, consumers who are having to foot the bill for the inflated charges will see that they are not receiving the best value for money and appoint a new managing agent. Firms that have been skimming will eventually learn that this is not the most effective, trustworthy and profitable way to conduct their business and their reputation will be damaged in turn”.
David Goldberg, CEO of property management company POD
