The dominant compensation model in third-party multifamily management, which pays managers a percentage of collected rent—typically 1.5% to 5% of gross revenue—creates a misalignment between manager incentives and owner interests, according to Ron Kutas, CEO of OneWall Communities. While the model drives sophisticated revenue generation, it leaves expense oversight largely unaddressed, exposing owners to significant cost growth across service contracts, maintenance, and administrative charges.
Under the percentage-of-collections fee structure, if a manager reduces operating expenses—cutting vendor costs, improving maintenance efficiency, or renegotiating contracts—net operating income rises, but the manager's fee remains flat because it is tied to revenue, not profitability. As Kutas explains, 'If a management company doesn’t grow rents but spends all of their time on reducing expenses, the net operating income at the property will go up, which will satisfy ownership, but their fee stays flat.' This structural issue means managers have little financial incentive to invest time in expense management.
The consequences accumulate across multiple areas. Service contracts for landscaping, trash removal, cleaning, and snow removal are typically renewed annually, often with rate increases of 2% to 5% per year that go unchallenged. Kutas notes these numbers 'can be in the tens, if not hundreds of thousands of dollars annually' across a portfolio. Maintenance and repair present a related problem: when technicians lack training or supervision, they may call outside vendors unnecessarily. For example, an HVAC unit that could be repaired for $500 to $750 might be replaced at $7,500 to $10,000 because the manager's fee is unaffected by the choice. Kutas describes expense justification as 'always a black hole.' General and administrative expenses add another layer, with management companies billing back corporate overhead to individual properties on a pro-rated basis, with charges accumulating over time.
Owners relying on standard monthly reports face a visibility gap. Reports focus on revenue metrics like occupancy and rent growth, not expense justification. Owners can see dollar amounts spent but cannot determine whether repairs were necessary or alternatives were explored. For investors underwriting acquisitions based on projected net operating income, this invisible expense layer can significantly erode actual returns.
OneWall Communities, which operates as both an owner and third-party manager, structures expense oversight through regional cost-per-unit benchmarks and line-by-line reviews of every expense category. The firm shops service contracts annually to keep vendors honest, and requires all billback items to be listed as exhibits to property management agreements. Kutas emphasizes that a revealing question in budget reviews is: 'Who is the top vendor paid this month, and why?' He describes a 450-unit property where the answer revealed an HVAC contractor billing for roughly 100 service calls in one month—nearly 25% of units—triggered by a hot spell that untrained staff handled by calling vendors at $180 per visit instead of explaining that weather exceeded system capacity.
OneWall's approach requires trained on-site staff, detailed benchmarking data, and management time that generates no additional fee income under standard contracts. For owners evaluating third-party managers, the practical question is whether their current manager has any financial reason to perform this work, and if not, what reporting or contract terms would create one. As Kutas notes, the percentage-of-collections model rewards only half the job, leaving owners exposed to unchecked expense growth.
