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Tenant Placement Fees: A Perverse Incentive

There are a lot of things about the way the property management industry has traditionally worked that make no sense to us, but one in particular that stands out is tenant placement fees.

Almost every property management company charges an extra fee to put a tenant in a property. At the most basic level, there's logic to this: placing a tenant is more work, so it results in an additional charge.

But tenant placement fees have a few problems. The first is the amount: typically one or one-half month's rent. Like management fees that are percentages of rent, percentage placement fees are simply unfair. It's not any harder to find a tenant for a more expensive property—in fact, it's often easier. So why should management companies charge more for it?

But even placement fees with a sensible cost structure have a second, worse problem: perverse incentives.

As an investor, your #1 enemy is turnover. When a tenant moves out, you likely have at least a month of vacancy. That's one month where your property is just sitting there, costing you money, and not generating a single cent in cash flow.

When management companies make money by placing tenants, they're incentivized to have as much turnover as possible. An unhappy tenant who moves out and has to be replaced nets them another placement fee, while a happy tenant who re-signs their lease for another year doesn't earn them anything.

Now, we're certainly not implying that other management companies are intentionally causing turnover to make more money on placement fees. But incentives have been shown over and over to subtly influence behavior, even when their doing so isn't intentional.

At Castle, we view the upfront cost of placing tenants as a down payment on what's hopefully a long and fruitful relationship with you, our customer. That's why we don't charge anything for the service. We shouldn't benefit from turnover, even if it means we have to put in a little more work.

Written by Max Nussenbaum