Managing agents are used to people complaining about their fees. After all, no-one likes getting a service charge demand in the post. “But in fact”, says David Hewett, Chief Executive of the Association of Residential Managing Agents, “put managing agent’s fees next to what estate agents get on the average sale, and they don’t look so exciting.” He points out that a managing agent might get a couple of hundred pounds a year for each flat in a block – whereas an estate agent might get over £3,000 for selling the average property. “Besides,” he says, “If an estate agent sells a flat, that’s it and they walk away – with our members, they have an ongoing contractual relationship.”

However, establishing exactly what managing agents get is not easy. ARMA does not set fees or give any advice on market levels of pricing. David Hewett says, “If we started telling managing agents what to charge, it would be seen as price fixing by Trading Standards. And secondly, every building is different – does it have a lift? Does it have a gym? Is the roof flat or pitched? Are there estate staff? How old is the building? All these things can affect the cost of managing the property.” Instead, ARMA offers its members a model management agreement that members can use as a template. Generally, the specific services offered are shown in an appendix. It shows the regular services included in the contract, but also mentions what other services can be offered and at what price; for instance, handling precontract enquiries, or giving consent for subletting or alterations, as well as major works. David Hewett says, “Most of our members would charge separately for a major works such as roof replacement, seeing them as outside the regular management contract.”

Managing agents’ costs are largely administrative. David Hewett points out that regulation and continually increasing legislation has imposed a heavy administrative burden on managing agents, since a huge number of laws not aimed specifically at the sector have a knock-on impact. “Far too often when new regulations come in, they will be relevant,” he says. “The common parts of a block of flats are places of work. So every time the government introduces rulings about ‘places of work’, it could potentially impact the common areas of blocks of flats.” Health and safety requirements, such as the Work at Height regulations, as well as asbestos regulations, and changes in company law, all have to be complied with by managing agents and their contractors – then there’s the Commonhold and Leasehold Reform Act 2002 which requires certain administrative standards. “Administration and the accounting requirement alone is a huge burden,“before the managing agent actually gets any work done on the property,” says David Hewett.

The Disabilities Discrimination Acts, too, impose certain requirements on managing agents to ensure the accessibility of the common parts. David Hewett points out that even where a resident is carrying out work himself – for instance, installing a walk-in bath – managing agents will still have to be involved in checking the plans, checking the structure, checking the provisions of the building insurance, and vetting contractors.

As for what services the managing agent offers, that differs from building to building. A two-apartment conversion of a suburban house might require only basic services – the arrangement of building insurance, elementary maintenance, and collection of the service charge and ground rent. On the other hand many city centre apartment blocks demand more. David Hewett says that management fees and service standards need to be considered together – you can’t set a fee without deciding on the level of services. “It’s a question of looking at the management fees and saying is it value for money?” he says. He points to some Mayfair apartment blocks which sell to a purchaser with very substantial expectations of service. “They may want a live-in concierge and porter for instance.” Service charges and management fees for such blocks will be much higher than for, say, a blocks of relatively basic pied-a-terre flats in the same area. “There’s no mystique about it. It’s basically a price for a service. So if the service level is higher, it might be at a higher price.”

Brett Williams, partner at Curry & Partners in Birmingham, points out, though, that higher charges may relate to service factors that the residents can’t see. For instance, management fees are generally higher if there is labour intensive, complicated plant in the building, or if a high percentage of the apartments are rented out – which creates more work for the managing agent. He also says the status of the client has something to do with the size of the bill. “Residential Management Companies [where the residents run their own block] are more labour intensive than investor clients. They will require much more information about the development, particularly the finances, and will be more involved in the daily decision making process than many remote investor landlords. Again, simply put, if the service level requirements are higher the fee will also need to increase.” As for the size of the block, he says, “The larger ones are better for us; we tend not to look at anything below about 25 units unless there’s a very good reason. The lessees of large blocks will benefit from economies of scale that the agent has.”

David Hewett says there are two ways of costing a management contract. “First, from pure experience; or secondly, which is quite laborious, costing the whole thing out from first principles – how much time does the senior partner spend on the block, how much time does the surveyor spend on the block, and so on, and charge out on calculated hourly rates.”

Leasehold Valuation Tribunals provide a sanction against overcharging, since they are empowered to adjudicate on management fees. David Hewett says they tend to look at the ‘going rate’ in the market as their main criterion for judging whether management charges are acceptable – though “they will allow a higher rate if there is a high value of service.” It is interesting to see there have been recent LVT decisions allowing a higher management fee where there are significant service charge arrears which cause the managing agent more work! The lesson here must be for lessees to work with their agent in partnership for the benefit of the development.

Brett Williams puts a bit more meat on the bones of how his firm approaches costing. “We have a scale of fees that we use for our management instructions, from which we’ll move up or down depending on what the client wants and how much extra work we think it’s going to be. “The complexity of the lease is one factor – and the state of the property and its finances when we take it over. We charge ‘danger money’, if you like, in those circumstances. There are almost always some issues outstanding, otherwise they wouldn’t be changing the managing agent.”


DEMANDING CLIENTS

Brett says quoting for managing a new development is much more difficult, owing to a lack of information. Sometimes developers don’t seem to understand the amount of data and time that a managing agent needs to create a detailed budget. “In one case a developer came to us on Tuesday, wanting a budget for the service charge for their launch on Saturday.” Fortunately, he says, the managing agent has the opportunity to review charges every year – so if the budget needs adjusting, that can be done.

As for presenting the cost to the client, ARMA requires its members to comply with the RICS Service Charge Residential Management Code. This says that agents should charge a fixed fee, rather than setting their fee as a percentage of costs. CARL (Campaign for the Abolition of Residential Leasehold) reckons that less than a fifth of managing agents are charging fixed fees as stipulated in the RICS code – but that includes commercial agents, as well as residential. A straw poll of residential managing agents showed that most are now moving to the fixed fee system – though none lay out specific fees in their client information, stating that each contract will be quoted separately. Brett Williams says he thinks the fixed fee system is fairer to clients. “I wonder whether the way estate agents charge will change once we’re out of this downturn,” he speculates. “After all, they don’t do more work to sell a house that’s ten grand more expensive in the same street as another cheaper one.”

Although management fees compare poorly to estate agency sales commissions, a number of estate agents are entering the management agency market. “Two NAEA members made contact with us today,” David Hewett says, “wanting to become members. There are an awful lot of lettings agents and estate agents who have always had a little bit of block management but never really took it seriously. Now times are tough, they’re being more serious about coming into the market. “It’s been known for decades that the property management department was a backroom thing – not the glamorous end of the business. But in a downturn the property management department becomes the blue-eyed boy.” For instance, Savills’ half year results show property management as the single largest profit contributor in the group – most of this is commercial property management, not residential, though social housing made a strong contribution. The transactional side of Savills’ business, in fact, made a loss.


LIGHTWEIGHTS

Many management agents are concerned that new entrants may lack staying power. Brett Williams says “The worry is whether, as soon as estate agency sales pick up, they’ll drop the management side. If they just resign on all those developments they’ve taken on, then someone has to pick up the pieces – and we charge extra when we have to put things right on takeover.” However, agents which are applying to join ARMA and are committed to putting their people through the Institute of Residential Property Management (IRPM) qualifications are likely to stay in the market – it’s a significant investment of time and money. On the other hand there’s no doubt that some agents are taking on a few management contracts just to gain a little incremental revenue – and they’re not always costing them correctly.

“More than a few are charging nonviable fees,” says Brett Williams, “perhaps because some firms don’t analyse departmental income, just total income. But there’s no point in just having turnover. They think it’s all extra income – but it isn’t. There’s extra cost as well.” He’s particularly concerned that some agents are taking on new developments without realising that management agency is a long term game. “The first couple of years on a new development are really difficult as you learn your way around it,” he says. “You need five years as a minimum to make money. So it’s not just about winning instructions, it’s about keeping them.” Some of the new entrants are allegedly competing unethically by promising lower management charges, but knowing they cannot provide the same level of service at that price. That’s something disbarred by the RICS code – which, of course, isn’t mandatory.

The largest blocks are relatively immune to this pressure – the management task is obviously complex, and the directors of larger RMCs are usually very clued up. David Hewett notes that most blocks of several hundred flats have a good pool of professional residents – “the odds of not having a lawyer or accountant there are minimal.” It’s the medium sized blocks where the pressure is highest on pricing – from 20 to 100 flats, where the management fee is significant but the specialised requirements of the larger blocks are absent.


LOWBALLING

Lowballing is probably one reason why ARMA has created a training DVD and package for RMC directors, which covers the legal aspects and directors will also know how to specify a management contract properly – which makes it less likely that a lowballing bid will succeed. Brett Williams believes management agents also need to educate the end user. “That comes down to solicitors and estate agents explaining people’s rights and responsibilities when they buy,” he says. If purchasers of leasehold flats really understood what they were paying for, and why, they still wouldn’t like getting the service charge bill – but they might not grumble about it quite so much.


ARMA has a 20 page booklet, Appointing a Managing Agent available as a download from www.arma.org.uk and a leafl et Living In Leasehold Flats for buyers of leasehold flats.