Discover how you can stop property management fraud before it starts. In this training, you'll learn the commons ways that unscrupulous property managers steal from commercial owners, tell tale signs that management may be stealing, and how to protect your commercial investments from bookkeeping theft:
Property Manager Horror Story (True Story!)
Meet All-Star Debbie:
- She has been managing the property for six years.
- Keeps the property well maintained, occupied and cash flowing.
- Is responsible for all the accounting; payroll, paying the invoices, and bank reconciliation.
- She even helps close deals, pulling financials for the lenders. She's always there to help.
Debbie is an all-star property manager. We all want one of those because they take care of everything so we can do more deals. Well, life started to unravel for Debbie, and she went from All-Star Debbie to Thief Debbie. Here’s how it happened:
- Debbie's always seemed to be short of cash, yet she managed to lease a brand-new Mercedes.
- She went through a divorce, so the owners gave her a flexible schedule. The owner's kids babysat for her so she could go to work and take care of legal matters.
- The divorce caused her major credit card debt, and she asked the owner for a raise. Now, Debbie was already getting top pay, so they implemented a bonus system. She would get bonuses if she could keep the property full and meet certain goals.
Meet Thief Debbie
Debbie saw that the owners were getting dividends of $200,000 per year, and she felt entitled to that money, even though she was getting top pay and bonuses. So, Debbie started embezzling money by writing checks to herself. She would pay a utility expense bill for $850. Then she would write herself a check for $85. She wrote another check for $700 for the office printer. And then wrote herself a check for $70. Then after it was cashed, she went back into the system and changed those two checks to electrical and office expense so no one could find it. Debbie did this for four years.
One day, Debbie got into a bad car accident, and she had to take two weeks off to get her car repaired and heal up. In the meantime, the owners brought in a temp CPA to fill in for her. The temp accountant decided to reconcile the bank accounts and she discovered the double checks. Almost every category in accounting had double checks. Debbie was confronted, confessed, and has spent three years behind bars. The judge ruled against her a judgment of about $175,000, which the owners will never see because Debbie is flat broke.
Protect Yourself from Fraud
Over the course of the four years, Debbie was able to steal $210,000 because she had complete control over the accounting, and then this trust did not line up with her character when things began to unravel personally for her. Unfortunately, this kind of situation happens all too often. 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.
7 Functions of a Commercial Property Manager
- Rent collection
- Repairs and maintenance
- Security deposits
- Mortgage and utility payments
- Inspection of the property
These are the seven basic responsibilities of a typical commercial property manager, and they revolve around one thing: YOUR MONEY.
This topic is so important. There are some awesome, trustworthy property managers out there. However, there's a few bad apples in the bunch that give good property managers a bad name. Over the last 20 years of being in this business, I’ve had great property managers. But in those early years, I had some that were bad apples. I learned from them, and I’m sharing what I’ve learned so it doesn’t happen to you.
4 Ways Property Managers Commit Fraud
As an owner you need to have watchful eyes, but you also need to know what you are looking for. Here are 4 ways a property manager can steal from you:
1. Pocketing Unreported Income
Example: The property manager fills a vacant unit, but doesn't record it in the property management software. When you question them about the vacancy, they say they are working on it and make excuses. They hide the unit status in the property management software for a few months while they pocket the money. Then they will move that person in on the management software even though that person's been in there for three months.
2. Create Bogus Invoices
Example: They create $1000 invoice for contract services, which gets paid to a fake company and that fake company is theirs. Then they pay the bogus invoice for work that was never done and pocket the money. The property never needed that work, they created it so they can pay themselves and steal from the owners.
3. Receiving Kickbacks
Example: The property manager orders a $3,500 air conditioning unit, but it should have cost $2,500. They pay a thousand dollars extra for the AC unit, and then the air conditioning company kicks back $1000 dollars in profit to the property manager. That is totally unethical and, in my opinion, against the law. This is how they steal from you and it's difficult to find unless you can stay on top of your game.
4. Double Check Fraud
Example: The property manager writes one check for the utility expense and one check to themselves. They then cash the checks, pay it to themselves, and then come back and change the check in the accounting system to the utility vendor. You will never see it 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. This is exactly what Debbie did and it can go unnoticed for years.
6 Signs Your Property Manager Might Be Stealing from You
Property managers are like all of us, human beings tasked with things to do for a living, and sometimes their personal lives can take control of their work lives. If they exhibit any of these signs, you need to be extra watchful.
- Financial Issues: If you notice that someone in the property management office is having financial difficulty, that could be a sign that they need more money and your property with all the cash coming in could solve their issue.
- Living Beyond Their Means: You notice that the property manager is living beyond their means. You know their take home pay, so how are they buying new cars and going to Bora Bora, Tahiti and buying expensive jewelry? Could it be that they're embezzling?
- Divorce: Divorce is a horrible thing, and it is worse than bankruptcy. When your property manager is getting divorced, it's a sign that their personal and financial life is about to turn completely upside down.
- A Noticeable Change in Their Habits: If all of a sudden they who were once cheerful, are now depressed, or they used to have everything super organized and now it's disorganized; that's a warning sign.
- You Suspect Drugs or Gambling: Unfortunately, drugs or gambling can impact the work-life of your property manager in A-class properties down to C-class properties. Next thing you know, to support the drugs and gambling, they begin stealing from the property.
- Control Issues: An example of this is when they are the only ones with access to the accounting system. No one else has the passwords. If you need a bill printed out, they do it. Anything to do with accounting and money, they do it. They have complete control and won’t allow anyone to touch it.
3 Steps to Prevent Property Management Fraud
Solution #1: You Must Have Internal Controls
All your accounting procedures must be documented. Once an invoice comes in, what happens to it? If you hire a third-party manager, you need to call and ask. You must know that process. All the receipts, all the invoices must be double-checked. You need to check that the invoices are valid. This is where the beginning of fraud prevention starts. Internal controls and separate procedures and best practices need to happen here.
Solution #2: Have Your Own Accounting
You need to segregate your accounting duties. If you recall, the problem with Debbie was she had complete control over the accounting. She entered all the bills, paid the invoices, and did bank reconciliations giving her complete control. What they should have done is separate those duties. We call that segregation of accounting duties. Basically, one person does data entry, and another pays the bills.
Solution #3: Control Over Bookkeeping
I'm not suggesting you be the bookkeeper. However, you can have control over it and know what's happening with the books for your property using software. Your property manager will be working with online software. They can give you your own user ID number, so you can get access to an ownership portal. You can go in and look at income, expenses, checks and run your reports 24/7.
BONUS: For the student investors enrolled in our Protégé Program, we have a separate third party property management/accounting software. We have our students add their information from the property managers into that system so we as coaches can look at the numbers and make sure things match up. We are an experienced set of eyes watching for property management theft and fraud.
What do all three of these simple solutions have in common? CONTROLLING YOUR MONEY. You need to control your money! As a commercial real estate investor you are buying income producing property and you need to be in control of the income and expenses.