Does a Property Manager Need a License?

14 Oct Does a Property Manager Need a License?

“Does a property manager need a license” and “property management licensing” are commonly searched for phrases on Google. The scary thing is that for each one of the people who have the forethought to at least see if they need a license, there are multiple times more who just start engaging in property management without knowing they may very well be violating their state’s laws on the unlicensed practice of real estate.

If you found this post, you’re probably interested in either getting a job as a property manager or starting your own property management company.

You need to be aware that, with the exception of a handful of states, having a real estate license (and in some cases, a specific property management license) is a requirement to provide property management service on behalf of others.

Since real estate laws can vary from state-to-state, the information that follows can be considered generally applicable, however not everything may apply in the state you plan to conduct business in. Therefore, you are highly advised to research the specific requirements in your state.

Also, in an attempt to make this information as broadly applicable to the readers as possible, and considering that most states (88%) do require a real estate and/or property management license to provide property management services for a fee, this post is written assuming most readers will reside in a licensure state. See the matrix at the end of the post that shows the requirements per state.

If you reside in a non-licensure state, you will still gain some valuable insight from this post but just know that many of the licensing requirements referenced will most likely not apply to your property management activities.

LEGAL DISCLAIMER

I am not an attorney and Property Management Training Headquarters is not a law firm. Nothing in this post should be construed as legal advice, and you are warned that the following information is for general purposes, may not align fully with the laws in your state, and no action should be taken solely on this post. If you decide to embark on the journey of a property management career or start a property management business, you should first consult with a competent lawyer in your state and/or thoroughly review licensing laws governing your state.

Definitions

• Brokerage: Real estate or property management company that is licensed with the state to operate and provide real estate related services, including property management.
• Designated Broker: This is the head honcho. Most states require at least one real estate broker be responsible for the operations of the company. The buck stops with him or her. I will refer to this person at the Designated Broker however there are various names for the same position such as Broker, Employing Broker, Responsible Broker, Independent Broker, Managing Broker, and Principal Broker
• Licensee: Someone possessing a real estate license whether a Salesperson license, Sales Agent license, a Broker Associate, or Designated Broker. States often have various real estate licensing levels and call them different names. For our purposes, a Licensee will refer to anyone having any level of real estate license including a Designated Broker license.
• Unlicensed Person: This refers to any person conducting any kind of property management related activities without being a Licensee. It can be an unlicensed personal assistant, bookkeeper, maintenance coordinator, or a random buddy of the owner.
• Real Estate Commission: Regulatory agency that oversees licensee activity in their state with the objective of protecting the public’s interests.

How People Get Into Trouble

A lot of people assume that, since they have experience owning rental properties, or are handy at property maintenance, they can start a side hustle or full on business as a property manager. The issue with this assumption isn’t the leasing or management activities themselves. The issue is the compensation component that is tied to these activities.

It is perfectly fine in most cases for someone to manage a property for another as a favor. It’s the managing and leasing for a fee that crosses the line into unlicensed practice.

For example, if a homeowner is moving for work and their father handles the rental and management of the home for free while the homeowner is away, that’s fine and no license is needed. If however the homeowner pays his father to manage the property, and his father is not a licensee, therein lies the problem.

The Official Licensing Litmus Test

Anytime I’ve discussed this topic with people outside of the property management world, they always say that they have a friend or family member that works at an apartment complex and they don’t have a real estate license. Isn’t that the same thing?

No, it’s not, and here’s why:

There is a simple litmus test to determine if a license is required to lease and/or manage real estate property.

1. Is the individual providing leasing and/or management services as a direct salaried employee of the property owner? Meaning, is the property owner paying the individual wages (hourly or salary) on a Form W-2, withholding income taxes, and paying unemployment taxes?
2. If the answer is yes (which is most apartment complexes), then the individual does NOT have to have a license.
3. If the answer is no and the individual is being paid a commission, kickback, free rent, or any other item of value not classified as employment wages to lease or manage real property, then the individual DOES have to have a license in most states.

Licensing Implications for Employees of Property Owners vs. 3rd Party Property Managers

Direct employees of a property owner (meaning W-2 wage earning employees) do not need to be licensed to manage that property owner’s rental properties. This includes all forms of real property whether single family, multi family, commercial, or otherwise. The reasoning is pretty straightforward.

If a property owner hires his own employee to manage his real estate asset, the property owner is assuming the risks involved with that employee. The same as if your local grocery store hires an employee to stock shelves, the grocery store assumes the risk that that employee may inadvertently damage merchandise by stocking it incorrectly. After all, it’s the grocery store’s responsibility to train their own employees. Similarly, it’s the property owner’s responsibility to train their own leasing and management associates.

However when a property owner seeks the assistance of a 3rd party property manager, there is often a naive assumption that that property manager knows what they are doing. This puts the property owner at risk of being substantially harmed financially and therefore most states feel an obligation to protect that member of the public by regulating property management activities that are contracted for.

Consider the example of a General Contractors:

Pretty much all states require General Contractors to be licensed, and the states regulate the GC’s activities. Why? Because if the GC doesn’t know what they’re doing, a house or building can fall over and kill people.

Members of the public don’t know what they don’t know therefore they are not in a position to properly qualify and vette contractors. Therefore the states take it upon themselves to protect the public by regulating the activities of GCs.

When it comes to real estate and property management, most property owners also don’t know what they don’t know. This puts them at risk for harm and therein lies the reasoning for licensing requirements for real estate and property management professionals in most states.

In addition to protecting property owners from what they don’t know, licensing is required to serve another function. This has to do with the fiduciary nature of property management.

Many property management agreements form what is known as a fiduciary relationship between the agent/brokerage and the property owner. This is similar to an attorney/client relationship and is needed for property managers to negotiate on someone’s behalf and enter the owner into contractual obligations (i.e. a lease agreement).

Property managers with a fiduciary obligation to their property owners must always act in the best interest of the property owner and fiercely serve and protect the owners interests within the confines of the real estate/property management transaction.

There are also a host of fair housing laws and ADA (Americans with Disabilities Act) compliance requirements that most property owners are not aware of. This is fine if they’re managing their own property and assuming that risk. But when they hire someone to manage it for them, there is a certain level of assumption that that manager knows what they are doing.

This is why property management is a regulated industry.

Application of Licensing Requirement

Now that we’ve discussed the licensing litmus test and the application of licensing regulations as they pertain to 3rd party property managers vs. employees of property owners, let’s discuss how most states apply their licensing requirement.

If your goal is to get a job as a property manager for an existing property management company, you most likely will only need a basic level real estate license. Most states have various levels of real estate licensing and whatever the most basic level is will probably qualify you to perform the functions of a property manager.

If your goal however is to start your own property management business, your state will usually require that the business itself have a real estate brokerage license. Since a business is not a conscious, living and breathing person, most states required that your real estate brokerage have a Designated Broker.

As mentioned in the definitions section above, the Designated Broker is the head honcho as far as the state is concerned and is ultimately responsible to ensure all regulations are adhered to governing the transactions taking place under that brokerage.

Obtaining a Designated Broker license though isn’t as simple as just wanting one, studying and passing a test. Most states have experience requirements to become a Designated Broker and some states require a separate course of instructions plus examination to upgrade your basic real estate license to a Designated Broker level.

If you just recently decided that you want to start a property management company, are located in a state that requires a real estate license, and you do not already have a basic level real estate license, just know that you probably will not qualify to start your own company for a period of time (often 2-3 years) to allow you time to gain experience as a real estate licensee. There are some workarounds to this by either hiring or partnering with someone who already has, or qualifies to have, a Designated Broker license.

Separate property management license

Some states have a specific Property Management License. In these states, you may be able to conduct property management services without having a full fledged real estate license if you have their separate property management license.

For the states that have this license, it is usually considered to be a stripped down version of a real estate license that authorizes a person or company to conduct property management activities as long as they don’t cross the line into real estate sales.

For individuals and companies in those states that already have a real estate license, the separate property management license is usually not required since the real estate license authorizes the practice of both real estate sales and property management.

Why a property owner should want a licensed agent

Consider this scenario:

Owner Bill is transferring out of state for a few years for work and wants to rent his home while he’s gone with the plan to eventually move back into it after his work assignment is up. Bill is aware that property managers are supposed to be licensed, but really trusts his friend Bob who isn’t licensed, but knows a lot about home maintenance. Also, Bob is that guy who knows everyone in town and will be able to rent it quickly.

Bill says, “to hell with that stupid licensing requirement. Bob and I go way back and I’d rather him take care of it for me than some random property manager who I don’t even know.” What’s the harm, right?

First off, Bob will be committing the unlicensed practice of law which in some states is considered a third degree felony. That’s right… the favor Bob is doing for Bill could be a felony crime. Some states reduce it to a misdemeanor. Either way, the message is clear… don’t engage in the unlicensed practice of real estate. What’s worse, if Bob is managing 4 other properties (5 in all), he could be facing 5 separate counts each with their own criminal sentence if convicted. Here is a good article about the unlicensed practice of real estate.

Secondly, licensees have the requirement of keeping funds belonging to others in strictly managed escrow/trust accounts. An unlicensed person could be depositing money into their own personal account with no accountability to the property owner. Bill is taking a great risk trusting Bob with these funds. Ultimately Bill is legally the landlord and therefore liable for Bob’s improper handling of security deposits and advanced rents.

Lastly, licensees are required to keep up with continuing education to stay abreast of current legal matters and best practices. The landlord/tenant landscape is changing constantly and each year, there are ballot initiatives that have dramatic implications for the residential rental industry. It is unlikely that Bob even knows about the existence of the Fair Housing Act, yet alone the requirements contained in the law.

An owner should want a property manager who is full time engaged in the business and required by licensing rules to keep up with these changing regulations.

Activities that do not require a license

With all this talk about licensing requirements, and unlicensed practice of real estate penalties, you may be surprised to find out that many specific activities a property manager completes do not require a license. While it varies state to state, most states do not consider it a licensed practice to:

• Show rental properties to prospective renters
• Provide information from, or answer questions based on, property listing data that was prepared and approved by a licensed real estate agent
  • Example: The agent prepared listing/advertising information states that a maximum of 1 dog is approved. If a prospective renter asks the unlicensed associate if the landlord will allow a dog, the unlicensed associate may answer “yes”. However if the prospective renters asks if the landlord would make an exception and allow 2 dogs, you’ve now crossed over into negotiating lease terms that are not pre-approved by a licensee. The unlicensed associate could not answer this question.
• Coordinate maintenance
• Physically collect rent payments
• Pay vendors who’ve completed work on property
• Prepare owner financial statements of which the finances are approved by a licensee
• Prepare escrow account reconciliations (must usually be reviewed and signed off on by the company’s Designated Broker)
• Install “For Rent” sign or lockbox at the property
• Make copies of keys
• Take property photos
• Prepare flyers (with information approved by a licensee)
• Schedule showings

Activities that do require a license

• Negotiating and entering into a property management contract with a property owner
• Entering into a fiduciary/representation agreement
• Writing and publishing advertisements on properties managed for a fee
• Negotiating lease terms on owner’s behalf
• Signing a lease for, and thereby binding an owner to, a lease agreement
• In some states, providing access to the property.
  • Note: In many states, it is fine for an unlicensed person to show a rental property. But some states (e.g. Florida), an unlicensed person cannot provide access to the property. This means that while the unlicensed person can conduct the showing, a licensee would have to arrive to open the front door.
• Signing other statutorily required documents on behalf of the property owner (demand notices to pay rent, demand notices for compliance, notices of non-renewals, etc.)

Competency Requirement

If all the licensing requirements weren’t enough, there is a competency requirement as an additional component. Just because you have a real estate license or qualify to be a broker and have your own property management company doesn’t mean that you are ready to dive in.

Most states have what is considered to be a competency requirement. Meaning that the mere act of taking a real estate course and passing the real estate licensing exam does not qualify you to be a property manager if you don’t know what you are doing.

In the event of a member of the public being harmed by your service, the state real estate commission may find you in violation, not of practicing without a license, but practicing outside of your competency.

For instance, I have had a real estate license for 20 years, am licensed in two states, and manage a highly reputable residential property management company. However I know nothing about commercial property management. If one of my clients were to tell me they are purchasing a strip mall and want me to manage it for them, my answer would be “sorry, I’m not experienced or qualified to manage commercial real estate.” Am I licensed to manage commercial real estate? Absolutely. Does that mean I should, absolutely not! I would instead refer them to a competent commercial property manager.

Final Thoughts

There are some hurdles to get over in order to conduct 3rd party property management. This is a good thing. It helps to ensure that those conducting property management services have a baseline level of knowledge and qualification so that the public is not harmed by naive amateurs. This helps to protect the reputation of the industry as a whole.

You’ll find that the time and effort in meeting the licensing requirements are a worthwhile investment in your time and you’ll appreciate the requirements that are in place once you’ve navigated your way through them.

Licensing Requirements By State

Ben Parham

Founder at Property Management Training Headquarters

Ben Parham is the Founder of Property Management Training Headquarters as well as the President and Managing Real Estate Broker of Integrity Realty & Management, Inc., a cutting edge real estate sales and property management brokerage operating throughout the Greater Denver Area. Ben served as the 2018 President of the Denver Chapter of the National Association of Residential Property Managers (NARPM) and currently serves NARPM National as a Southwest RVP Ambassador. Ben is a U.S. Navy veteran where he was a Cryptologic Technician (Technical) and was awarded the Joint Service Achievement Medal, two Navy Achievement Medals, and a Good Conduct Medal. He has a Bachelor of Science in Business Administration and is licensed as a real estate broker in both Colorado and Florida.