Stop property management fraud before it starts! In this post, you’ll learn common ways that dishonest property managers steal from commercial owners, telltale signs that they may be stealing, and practical solutions to protect your commercial investments.
According to the Association of Certified Fraud Examiners, the average embezzler steals $145,000 and 22% of them steal more than a million dollars. As an owner you can’t control someone’s personal life, however you can control the accounting on your property.
Responsibilities of a Commercial Property Manager
These are the seven basic responsibilities of a commercial property manager, and they revolve around one thing: your money.
- Leasing
- Rent collection
- Repairs and maintenance
- Accounting
- Security deposits
- Mortgage and utility payments
- Inspection of the property
Property management fraud is such an important topic. There are trustworthy property managers out there. However, there are a few bad apples that give good property managers a bad name. I’ve had great property managers over the last 20 years as a commercial real estate investor. But in those early years, I had some that were bad apples, and those experiences taught me a lot.
How Property Managers Commit Fraud
As a commercial property owner you need to keep a close eye on your properties, but you also need to know what to looking for. Here are four ways a property manager can steal from you:
1. Create Fraudulent Invoices
A property manager can create fraudulent invoices for contract services, which then is paid to a fake company. Of course, that fake company belongs to them. They then pay the bogus invoice for work that was never done and pocket the money.
2. Pocketing Unreported Income
An example of how a property manager might pocket unreported income is when they fill a vacant unit, they don’t record it in the property management software. When asked about the vacancy, they make excuses. They hide the unit status in the software for a few months while they pocket the money. Then they move that person in on the management software even though they’ve been there for several months.
3. Double Check Fraud
In this scenario, the property manager writes one check for a utility expense and one check to themselves. Then they cash the checks, pay themselves, and then change the check in the accounting system to the utility vendor. This will be totally missed unless you match that check versus the expense on your P&Ls. If your property manager has complete control over the accounting, you’ll never know.
4. Receiving Kickbacks
The property manager receives kickbacks in this way. They order an air conditioning unit for $3,500, however it only cost $2,500. They pay out a thousand dollars extra for the AC unit, and then the air conditioning company kicks back $1000 dollars in profit to the property manager. This is how they steal from you and it’s difficult to find unless you stay on top of your game.
Telltale Signs to Watch For
If your property manager shows any of these signs, you need to be on high alert.
Living Beyond Their Means: You notice your property manager is living beyond their means. You know their take home pay, so how are they going on expensive trips, buying new cars and splurging on jewelry? Is it possible they’re embezzling?
Financial Issues: If the property manager is having financial issues, that could be an indication that they need more money, and your property with all that cash flow could solve their problems.
A Noticeable Change in Their Habits: If suddenly they are disorganized when they used to be on top of everything, or they were once cheerful, and are now depressed; that’s a warning sign.
Divorce: Divorce is worse than bankruptcy. When your property manager is going through a divorce, it means that their personal and financial life is in chaos.
Control Issues: They have complete control and won’t allow anyone access. If they are the only ones with access to the accounting system and no one else has the passwords, they have control issues.
You Suspect Drugs or Gambling: Unfortunately, drugs or gambling can affect the work of your property manager. Next thing you know, to support the drugs and gambling, they begin stealing from the property.
Simple Solutions that Protect Against Property Management Fraud
What do these simple solutions have in common? They give YOU control of your money. As a commercial investor you are purchasing income producing property and you need to be in control of the income and expenses.
1. Segregate Accounting Duties
A property manager who enters all the bills, pays all the invoices, and deals with bank reconciliations has complete control over the accounting. What should happen is a separation of those duties, or segregation of accounting duties. Essentially, one person does data entry, and another pays the bills.
2. Have Internal Controls
All your accounting procedures must be documented, and you need to know that process. This is where the beginning of fraud prevention starts. Internal controls and separate procedures need to happen at this level. Once an invoice comes in, what happens to it? If you don’t know, find out. All the receipts and invoices need to be double-checked to verify that the invoices are valid.
3. Control Over Bookkeeping
Using software is one way to oversee the bookkeeping and know what’s happening. Your property manager will be working with online software which you can have access to using your own user ID number. This allows you access through an ownership portal. You can go in and look at income, expenses, checks, and run your reports at anytime.
