The ethical dilemma of property management companies skimming commission on maintenance contracts in 2023

Over the years, some property management firms have come under fire for skimming commissions on maintenance contracts. Now, amid an ongoing cost-of-living crisis and soaring interest rates, this topic has attracted new attention from homeowners and landlords alike. Is it ethical for property management firms to skim commission on maintenance contracts? What can and should be done? David Goldberg, our CEO, shares his thoughts in this blog.  

What does it mean when a property management company is skimming commissions?

‘Skimming refers to taking a sum of money from a transaction. In the context of property management, this could include adding a markup on maintenance contracts, charging suppliers to be on approved lists, or asking for kickbacks to provide these firms with works.

Say you hire a property management company to handle block or estate management, which would include handling maintenance, for example. If they are skimming commissions, they may be siphoning off a portion of the cost for themselves, perhaps by reporting that the maintenance in question cost more to fix than it actually did. Whilst this is a relatively rare occurrence, it can be difficult to ascertain when a company is skimming profits, given the kick back would be paid outside of the transaction and/or built into the overall cost.

They might also be taking monies from associated companies. For example, if firms have their own insurance brokers or maintenance teams, they may be earning margins from other areas that are not immediately obvious.

Why do firms do this?

Ultimately, the decision to skim commissions for many property management companies comes down to their own margins, which might have been eroded by several factors, including changing legislation, market forces, and perceived customer value. Lots of agents make a minimal margin on the service they provide, especially when they operate on a fixed fee basis with little knowledge of how much time will be needed to deal with reactive issues that ultimately impact margins.

Given there is no barrier to entry in the industry and a ‘race to the bottom’ in terms of fees, firms sometimes seek alternative forms of income to make a profit.

Therefore, when agents pitch for management contracts, those who skim commissions from suppliers can appear far cheaper on the surface than those who seek regular margins through their fee, as there is no requirement to report this at that point. It is not until the overall maintenance costs are accounted for that consumers see the real value (if any!).

What are the repercussions?

Skimming commissions is both ethically wrong and counterintuitive. Despite the obvious clandestine issues, it ultimately effects the customer as market forces take effect. Suppliers, like all firms, need to make a margin and if their margins are shrinking, they simply increase prices to the end consumer.

This means the customer ends up paying more for the same service they could get elsewhere and, when they inevitably become aware they are not getting the best value for money, customers will vote with their feet and seek an agent they can trust. There are many rights and options open to customers to both challenge reasonableness and effect a change in agent, so I see little value in doing so.

The cost of running a property does not only come down to the fees charged for doing so. The whole budget must be considered and what might seem like a good deal on the surface could end up costing you more in the future, when all costs are taken into consideration.

What are the signs of skimming?

Due to the surreptitious nature of commission skimming, identifying when it may be happening isn’t easy. With that being said, there are tell-tale signs that indicate the need for a deep dive into your property management company:

Low initial management fees

As management fees are only part of the overall cost, it is likely firms will offer headline-grabbing fees to win business. While that may save you money, management fees are only a very small percentage of the overall costs that come with managing a property.

Using associated companies

Check if the firm consistently uses the same suppliers, or those who are part of the same company/wider group of companies. It isn’t wrong to do that, especially if the costs are fair and market rate, but you need the process to be transparent. Using the same firms to do works doesn’t necessarily mean there is anything untoward going on, as it may be that they do a good job, but if you are not happy with the service and there is resistance to change, this might be a sign that something is not right.

What can you do to prevent this?

Ensure your property management company belong to a professional body, such as ARMA (Association of Residential Managing Agents) and/or RICS (The Royal Institution of Chartered Surveyors), which will require them to also be a member of a redress scheme.

As of 2014, anyone engaged in property management is legally required to be part of a government-approved redress scheme. This ensures that leaseholders can complain to an independent body and potentially receive compensation of up to £25,000.

Ask your agent outright 

There is a requirement for firms to declare commissions and sources of income through service charge accounts. Check carefully to ensure they list these.

Pay fees that are reflective of the service you want 

It may sound obvious, but you get what you pay for in life. If firms are offering to manage your scheme at a low cost, yet promising a top tier service, you must wonder how they can do that without cutting corners somewhere.

Ask for alternative quotes

If you suspect your property management company is bringing in overpriced contractors, consider asking to see copies of a competitive tender and ask that they get confirmation no mark-ups or commissions are being sought. This will help you ensure that jobs are awarded to the most suitable and well-priced candidate.

Final thoughts

By taking a commission, agents are eroding trust, placing the emphasis on suppliers to provide value, and creating an anti-competitive environment for both them and the end supplier.

At POD we have always taken the view that commissions are the wrong way to go and have chosen not to take them from suppliers. This means suppliers that work for us understand they are both valued and can compete in a competitive marketplace. It also sets the right culture and value in the business. As an agent, you are only as good as the contractors you use, and if you don’t look after them, the best will simply seek out those who do.’