Discover how you can stop property management fraud before it starts. In this training, you’ll learn the commons ways that unscrupulous property managers steal from commercial owners, tell tale signs that management may be stealing, and how to protect your commercial investments from bookkeeping theft:
Property Manager Horror Story (True Story!)
Meet All-Star Debbie:
- She has been managing the property for six years.
- Keeps the property well maintained, occupied and cash flowing.
- Is responsible for all the accounting; payroll, paying the invoices, and bank reconciliation.
- She even helps close deals, pulling financials for the lenders. She’s always there to help.
Debbie is an all-star property manager. We all want one of those because they take care of everything so we can do more deals. Well, life started to unravel for Debbie, and she went from All-Star Debbie to Thief Debbie. Here’s how it happened:
- Debbie’s always seemed to be short of cash, yet she managed to lease a brand-new Mercedes.
- She went through a divorce, so the owners gave her a flexible schedule. The owner’s kids babysat for her so she could go to work and take care of legal matters.
- The divorce caused her major credit card debt, and she asked the owner for a raise. Now, Debbie was already getting top pay, so they implemented a bonus system. She would get bonuses if she could keep the property full and meet certain goals.
Meet Thief Debbie
Debbie saw that the owners were getting dividends of $200,000 per year, and she felt entitled to that money, even though she was getting top pay and bonuses. So, Debbie started embezzling money by writing checks to herself. She would pay a utility expense bill for $850. Then she would write herself a check for $85. She wrote another check for $700 for the office printer. And then wrote herself a check for $70. Then after it was cashed, she went back into the system and changed those two checks to electrical and office expense so no one could find it. Debbie did this for four years.
One day, Debbie got into a bad car accident, and she had to take two weeks off to get her car repaired and heal up. In the meantime, the owners brought in a temp CPA to fill in for her. The temp accountant decided to reconcile the bank accounts and she discovered the double checks. Almost every category in accounting had double checks. Debbie was confronted, confessed, and has spent three years behind bars. The judge ruled against her a judgment of about $175,000, which the owners will never see because Debbie is flat broke.
Protect Yourself from Fraud
Over the course of the four years, Debbie was able to steal $210,000 because she had complete control over the accounting, and then this trust did not line up with her character when things began to unravel personally for her. Unfortunately, this kind of situation happens all too often. According to the Association of Certified Fraud Examiners, the average embezzler steals $145,000 and 22% of them steal more than a million dollars. As an owner you can’t control someone’s personal life, however you can control the accounting on your property.
7 Functions of a Commercial Property Manager
- Accounting
- Rent collection
- Leasing
- Repairs and maintenance
- Security deposits
- Mortgage and utility payments
- Inspection of the property
These are the seven basic responsibilities of a typical commercial property manager, and they revolve around one thing: YOUR MONEY.
This topic is so important. There are some awesome, trustworthy property managers out there. However, there’s a few bad apples in the bunch that give good property managers a bad name. Over the last 20 years of being in this business, I’ve had great property managers. But in those early years, I had some that were bad apples. I learned from them, and I’m sharing what I’ve learned so it doesn’t happen to you.
4 Ways Property Managers Commit Fraud
As an owner you need to have watchful eyes, but you also need to know what you are looking for. Here are 4 ways a property manager can steal from you:
1. Pocketing Unreported Income
Example: The property manager fills a vacant unit, but doesn’t record it in the property management software. When you question them about the vacancy, they say they are working on it and make excuses. They hide the unit status in the property management software for a few months while they pocket the money. Then they will move that person in on the management software even though that person’s been in there for three months.
2. Create Bogus Invoices
Example: They create $1000 invoice for contract services, which gets paid to a fake company and that fake company is theirs. Then they pay the bogus invoice for work that was never done and pocket the money. The property never needed that work, they created it so they can pay themselves and steal from the owners.
3. Receiving Kickbacks
Example: The property manager orders a $3,500 air conditioning unit, but it should have cost $2,500. They pay a thousand dollars extra for the AC unit, and then the air conditioning company kicks back $1000 dollars in profit to the property manager. That is totally unethical and, in my opinion, against the law. This is how they steal from you and it’s difficult to find unless you can stay on top of your game.
4. Double Check Fraud
Example: The property manager writes one check for the utility expense and one check to themselves. They then cash the checks, pay it to themselves, and then come back and change the check in the accounting system to the utility vendor. You will never see it unless you match that check versus the expense on your P&Ls. If your property manager has complete control over the accounting, you’ll never know. This is exactly what Debbie did and it can go unnoticed for years.
6 Signs Your Property Manager Might Be Stealing from You
Property managers are like all of us, human beings tasked with things to do for a living, and sometimes their personal lives can take control of their work lives. If they exhibit any of these signs, you need to be extra watchful.
- Financial Issues: If you notice that someone in the property management office is having financial difficulty, that could be a sign that they need more money and your property with all the cash coming in could solve their issue.
- Living Beyond Their Means: You notice that the property manager is living beyond their means. You know their take home pay, so how are they buying new cars and going to Bora Bora, Tahiti and buying expensive jewelry? Could it be that they’re embezzling?
- Divorce: Divorce is a horrible thing, and it is worse than bankruptcy. When your property manager is getting divorced, it’s a sign that their personal and financial life is about to turn completely upside down.
- A Noticeable Change in Their Habits: If all of a sudden they who were once cheerful, are now depressed, or they used to have everything super organized and now it’s disorganized; that’s a warning sign.
- You Suspect Drugs or Gambling: Unfortunately, drugs or gambling can impact the work-life of your property manager in A-class properties down to C-class properties. Next thing you know, to support the drugs and gambling, they begin stealing from the property.
- Control Issues: An example of this is when they are the only ones with access to the accounting system. No one else has the passwords. If you need a bill printed out, they do it. Anything to do with accounting and money, they do it. They have complete control and won’t allow anyone to touch it.
3 Steps to Prevent Property Management Fraud
Solution #1: You Must Have Internal Controls
All your accounting procedures must be documented. Once an invoice comes in, what happens to it? If you hire a third-party manager, you need to call and ask. You must know that process. All the receipts, all the invoices must be double-checked. You need to check that the invoices are valid. This is where the beginning of fraud prevention starts. Internal controls and separate procedures and best practices need to happen here.
Solution #2: Have Your Own Accounting
You need to segregate your accounting duties. If you recall, the problem with Debbie was she had complete control over the accounting. She entered all the bills, paid the invoices, and did bank reconciliations giving her complete control. What they should have done is separate those duties. We call that segregation of accounting duties. Basically, one person does data entry, and another pays the bills.
Solution #3: Control Over Bookkeeping
I’m not suggesting you be the bookkeeper. However, you can have control over it and know what’s happening with the books for your property using software. Your property manager will be working with online software. They can give you your own user ID number, so you can get access to an ownership portal. You can go in and look at income, expenses, checks and run your reports 24/7.
BONUS: For the student investors enrolled in our Protégé Program, we have a separate third party property management/accounting software. We have our students add their information from the property managers into that system so we as coaches can look at the numbers and make sure things match up. We are an experienced set of eyes watching for property management theft and fraud.
What do all three of these simple solutions have in common? CONTROLLING YOUR MONEY. You need to control your money! As a commercial real estate investor you are buying income producing property and you need to be in control of the income and expenses.
My elderly uncle had a land lease with a Tuscon bank who’s obsolete building now sits on our property) who sabotaged his parking, right of way, and setback with building expansions that covered our 1/2 acre parcel and without notifying him of any of the changes. They then purchased all of the property surrounding our uncles property make new parking and right of way. To offset criminality, this bank then sold their building to their partners– a conglomerate most often known as Sears Financial who then rented the building to their close partners (Commerce Bank of Arizona). Soon after this sale, my uncle passed away and left his property and lease to me and my sister, which is when we began receiving letters from Sears Financial that we need to sell or lease the property to them in accord to their demands. Sears Financial also used leverage from Tucson Planning and Zoning stating that without Sears’ surrounding properties, our property was now in serious jeopardy of noncompliance. In other words, Sears Financial purchased and managed a building with full knoweldge that their building had sabotaged our property, which now places our entire investment in eminent tax forclosure, condemnation, etc. because the city feels obsolete building is still in the highest tax bracket of a financial institute even though no one is interested in a building dependant upon the surrounding properties of our former property manager.
I appreciate the knowledge you have given me. This is very good to know.
Oh my goodness, what good information. I have been too trusting of my property management company. Everything was going well until this past year. I did not receive any rent money for almost the entire year. They did not fully check out a tenant or get a photo of who was renting my house and turns out it was several people not just one retired school teacher. These people destroyed my house ( or so I was told) with trash outs and damages repaired and utilities I have paid over 7000.00 to the property management co. I keep asking what is the total amount? Why are the utilities so high? Why don’t I get any invoices? I was even charged $1000. for a bank service charge? Is that even possible? The best part is that when I asked about the bank service charge it miraculously appeared back in my accounting cashflow sheet and they claimed that I somehow got a owner proceeds check that month despite the tenants were not supposed to be able to pay rent because they were being evicted. I let this go on for a year like a dummy. Finally I had enough and I asked another property management company to take over. I am still owed funds from the first company and I am wringing my hands to see if I will get them the end of March. I wish I had read this article sooner. I would have pulled out of this company sooner.
I believe my property management company is committed fraudulent utilitiy schemes and received monthly kickbacks from WaterCompany that is located in a different state. Also padding Tenants monthly meter usages etc.
My Property management, Pernicano reality is continually erroneously bill me fines that I am not responsible for. Furthermore, I am possibly looking for representation in a lawsuit for Breech of Fiduciary duty on the part of Pernicano reality as well as Selective Enforcement.
They will complain that they have to leave early because their system went down. Their computer had a failure and they have their own portal for auto pay and their own private cell tower that’s connected they don’t pay us enough, so they takeoff work, and then they blame it overpayment through the automatic portal for attendance. When I looked at my portal, my payment went up as soon as that they made an excuse that their our system went down their computers. They shut down my Internet to my apartment and then when I looked on the app that I paid my auto pay through the payment went up all of a sudden so I had to go back in and make sure and correct that to the right amount because they changed it so I called my card company to make sure because they charged me twice in one month before playing a little tricks make an excuse that their system went down and it was the systems fault and it was the computer‘s fault not theirs, so they got away with fraud. Because they want people to pay with money order or directly from their bank, instead of using the auto pay.
We just started to get submitter monthly report not for water we pay$100 for garbage When we ask manager She gets mad calls us name
Excellent information. Much Gratitude
Question: Can a property manager be sued
For not keeping property well kept when it
was within his contract to do outside
Maintenance such as lawn care,etc. where
Neglect caused the landlord to receive
Negligence notices from the principality because
Of not adequately maintaining property under
Contract? A fee was charged by principality.
MANY THANKS.
Awesome info!!!!!!! Thank you so much!
Thank you Peter. This was very necessary. Even after interviewing a Property Manager.
I have seen property managers tell the landlord the unit was rented for one price, when it was actually rented for another higher price.
Grateful for receiving this education!
I have been a professional property manger for over 30 years. The presentation was very good but, I wanted to give some other items to watch out for:
1. Watch out for managers who include bills for themselves amongst the other bills. I.e. You have 100 electric bills that are paid and they try and sneak their own into the mix hoping no one notices. I review every bill that is to be paid. If it does not have my stamp of when I saw it and approved it along with my initials it does not get paid. I also check the check register at the end of every month to compare it to the bills I approved.
2. Home Depot or other parts and materials ordered. Watch out that everything that is bought for your property actually is used for your property. Go over the receipts and if you do not know what something is or where it went ask. Also, sometimes they will buy something that you think went on to your property buy they lied about its use and returned it for a credit that they took. I make sure that I get a copy of every receipt and that compare it to monthly bills. (Home Depot, Lowes, HD Supply, etc.)
3. Over-charging for rent. They tell you that a unit is rented for $1000.00 but they are charging the resident $1100.00 and keeping the difference. They can also be adding on other fees that you do not know about. I.e. An assigned parking spot is extra and separate from the rent. Watch out for managers who make tenants pay more than one check a month. Everything owed for the unit should be able to be included in the one check. Ask a tenant what they are paying make sure that it matches the lease. Also for units that are rented before they are reported to you, check what the lease says.
4. Watch out for managers who accept payment in cash. I have never accepted cash as a payment for anything in property management. Gives the person collecting the rent the opportunity to take the cash and there is no record that they got it. I have seen residents get evicted for non-payment of rent who paid in cash. When they go to Court they say I paid the manager in cash every month but, they can not prove it. Payments need to be done by check, money order, or electronic transfer. All of these can be traced.
5. Application fees. These are not necessarily a rip off to the owner but can be to the applicant or both. Is the charged amount reasonable and actually what the manager is being charged? If an applicant is clearly not qualified are they charged for an application nd background check that will never be processed because the applicant is already known not to qualify. The applicant has already indicated that they make to little income or that they have another disqualifier such as a criminal record or a recent eviction.
Pay attention to the details. If a management company, manager, bookkeeper, etc. know that you are reviewing what they do, they are less likely to try and steal from you or your residents. If you have many accounts and/or tenants. Randomly select some files or tenant ledgers to review. If you find issues, review more. If everything is good, review different files at some point in the future. Also, even with very honest people sometimes mistakes are made. I recently had a fire alarm/sprinkler contractor do their quarterly required inspection. When I reviewed the invoice, I noticed that they put in the wrong code and I was billed instead for a quarterly back-up generator inspection which was more money. I called the contractor and had the bill corrected.
Good to know all of this.
Excellent video and article. Short, sweet, and to-the-point!
Great information Mr. Harris. I don’t have any property management company yet, but I always think what ways property management can use still money from the owner. Now I know so I can be alert when I use one.
Thank you,
Irma
thank you for the info.
I would like to add that the PM can stole money by creating more work order that belongs to tenant responsibility and charge the landlord. It is easy to deduct money from the landlord and not the tenants.
Good to know as well.
you are so right on! and its done to the properties insurance company when PM sends in claims of damaged property (alledged by tenant). thats hella sad especially when its done to a low income property that qualifies for grants. money is not all they steal from their residents either. cant wait to discover who my PM’s insurance co. is….have a great day!
Excellent article! The separation of duties is a critical item.