With your time at a premium and your money on the line, minimizing risk should be any real estate owner or investor’s top priority. Hiring reputable property management companies can help protect those interests, but working with any third-party vendor has inherent risks.
Here, we’ve outlined five common scenarios in which we see risk exposed. By proactively protecting yourself in these areas, you can rely on the property manager’s accurate financial inputs to help maximize revenue opportunities and avoid fraud, errors or surprise write-offs.
One of the keys to success for a real estate company is having complete and accurate financial reporting. Inaccuracies or missing items in the financial reports should set off alarms. Real estate owners oftentimes trust their property management companies to handle financial reporting – and that’s okay – but owners should always review the financials, or have a certified public accountant do so, because errors and omissions can often be indicators of a larger problem.
Third-party agreements often allow for significant reimbursement of expenditures incurred by property management companies and their employees. From construction fees to day-to-day costs such as tenant retention expenses, it can be difficult to ensure the validity of all of these payments and ensure they are in accordance with agreements. This is particularly true when real estate owners have multiple properties across different regions. Often, owners do not look at the individual expenses, making it easy for employees to expense personal items or non-essential goods.
A lack of consistent staffing often indicates possible issues that go deeper than what is visible on the surface. These issues can range from poor communication and collaboration to more serious situations such as fraud. For example, a property management company that experiences high turnover could indicate an even larger issue if the organization doesn’t have well-documented and well-enforced internal control procedures.
Well-documented internal control procedures are a necessity for any company. Organizations should have a clear outline of who performs each task, who approves each key decision and who reviews the overall process. There needs to be a distinct segregation of duties and preferred processes and procedures to ensure consistency and accurate record-keeping.
Many real estate investments do not require an audit by a third-party public accounting firm. However, regardless of the requirements you are facing, having third-party oversight is generally a good idea for the level of protection and comfort it provides, even if the review is just a high-level overview of your property management company’s policies and procedures.
There isn’t a one-size-fits-all approach when it comes to third-party risk management, but establishing a framework and efficient processes suitable for your organization is critical. Procedures designed to avoid future risk combined with a thorough review of your existing property managers’ accounting policies and internal control procedures can reinforce high-quality reporting and service delivery. Baker Tilly can help you do both.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.