Misappropriation of Funds in Property Management

Misappropriation of Funds in Property Management - Merit Real EstateWhen you have a rental property, you have an important choice to make. Should you manage the property on your own or use an outside property manager?

If you live in the same area as the property and have plenty of time to invest, you might be able to handle this task on your own. However, if you live in another area and are primarily concerned with receiving income from the property, a property manager is a better choice.

Property management companies like Merit Co. handle the hard work of finding and screening tenants, collecting rent, and handling the care of your property. We take the worry out of property management in Colorado Springs, making sure you receive your regular rent payments and updates about the condition of the property.

Improper Use of Funds

One of the challenges of hiring a property manager is trust. The further you are from the property, the easier it will be for a property manager to take advantage of the situation. In addition to rent checks, property managers often have access to funds dedicated to the repair and upkeep of the property. Without clear oversight, your manager might be tempted to make personal use of these accounts.

As the property owner, it may be some time before you suspect that something is wrong. In most cases, misappropriation of funds is done quietly and does not affect your regular rent deposits. Late or inconsistent deposits would quickly draw your attention. Instead, the manager will use fraudulent accounting practices to siphon off money. Low-level embezzlement can be as simple as using a petty cash fund for personal use. If you notice that this fund is frequently empty, you should ask for an accounting of the expenses.

In more serious cases, the property manager might pad repair costs or work with a vendor who kicks back some funds gained through an inflated price. If it seems like your manager never takes bids on repairs or your repair costs seem unreasonable, it is worth further investigation. Another red flag is if the vendors your manager uses are all PO boxes instead of physical addresses. That unknown subcontractor may just be the manager paying him or herself.

Finally, make sure your manager sends you a detailed report every month. There should never be a problem with you or some other auditor examining the report. Make certain your property manager understands that you will be paying attention.

Preventing Fraud and Embezzlement

Many people who have been convicted of fraud or embezzlement do not enter the relationship with bad intentions. Often, a personal financial crisis leads them to look for an easy solution. They will rationalize their theft believing they are only borrowing the money.

The easiest way to prevent this situation is to have clear guidelines and oversight concerning the financial pieces of your rental property. Performing a background check on your property manager is an important protective step. You want to see what sort of issues this person has had in the past.

The property manager should expect at least an annual audit and understand that there can be spot checks during the year. Using cloud-based accounting software can allow you to see what is going on from a distance.

For repairs and other large expenses, you should have a clear approval and vetting process. You might require that your property manager use a pre-approved list of contractors. Another protective process is putting a two-person check-writing process in place. In this process, the person who writes the checks is different from the person authorized to sign them. This practice prevents all the accountability from resting on a single person.

A Partner for Property Management in Colorado Springs

The experts at Merit Co. regularly manage almost 300 properties in the Colorado Springs area. Our property managers are all licensed real estate agents who understand the rental market. We pride ourselves on maintaining professional boundaries and clear accounting practices.

We prepare and send detailed reports to our property owners every month and encourage open conversations.  If you need help with any aspect of your rental property, contact us today or call 719-645-7636

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