The dominant compensation model in third-party multifamily management pays managers a percentage of collected rent, typically 1.5% to 5% of gross revenue, according to Ron Kutas, CEO of OneWall Communities. That simplicity masks a misalignment between what managers are paid to do and what owners need them to do. Kutas says most management companies direct their time and energy toward marketing and leasing to maximize collections, resulting in an industry highly sophisticated at driving revenue while largely indifferent to expenses.
If a manager successfully reduces operating expenses, net operating income rises and ownership benefits, but the manager’s fee stays flat because it is tied to revenue, not profitability. “If a management company doesn’t grow rents but spends all their time on reducing expenses, the net operating income at the property will go up, which will satisfy ownership, but their fee stays flat,” Kutas says. The incentive to invest time in expense management does not exist within the current fee structure, which he frames as structural rather than ethical.
The most visible consequence is in service contract management. Landscaping, trash removal, cleaning, and snow removal contracts are typically renewed annually or seasonally. Without active oversight, vendors routinely increase rates by 2% to 5% per year, and managers on autopilot rarely push back. “Those numbers can be in the tens, if not hundreds of thousands of dollars annually,” Kutas says. Maintenance and repair present a related issue: when a technician cannot diagnose a problem correctly, the easiest response is to call an outside vendor, leading to unnecessary replacements. For example, an HVAC unit that could be repaired for $500 to $750 may be replaced for $7,500 to $10,000. Because the manager’s fee is unaffected, there is no financial pressure to pursue the cheaper fix.
General and administrative expenses present another pattern: management companies bill back corporate overhead, office furniture, and support staff to individual properties on a pro-rated basis. Each charge may be small, but they accumulate across months and properties. For owners relying on monthly reports, the problem is compounded by reporting frameworks built around revenue metrics rather than expense justification. Kutas says revenue data was always accessible when he was on the ownership side, but expense justification was not. Owners can see a dollar amount spent on HVAC repairs but cannot see whether alternatives were explored or whether a vendor was called unnecessarily.
OneWall Communities, which operates as both an owner and a third-party manager, builds its budget review process around regional cost-per-unit benchmarks and line-by-line review of every expense category. “We do keep all of our vendors honest in terms of service contracts, and we do shop those around across our portfolio every single year,” Kutas says. The firm also requires that all billback items be explicitly listed as an exhibit to every property management agreement. Kutas says the single most revealing question in any budget review 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 a single month, nearly 25% of the units, triggered by an abnormally hot three-day stretch that untrained staff addressed by calling a vendor for each complaint.
OneWall’s approach requires trained on-site staff, detailed benchmarking data, and a willingness to invest management time in work 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 do this work, and if not, what reporting or contract terms would create one.
