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I am trying to find a company to manage the block of flats (apartment building) I live in. What is the economically rational way to pay for property management services,

  1. According to traditional microeconomics?

  2. In practice?

In particular, the trade-off I am interested in is in how much the management company is paid as a fixed fee every year, compared with percentage fees they may charge to manage the process of contracting out 'major works' for building maintenance that might occur around every 10 years. In addition, I believe some management companies get paid commission by contractors.

These charges and commissions mean that the management company has less of an interest than their leaseholder customers to get a good price for major works, because the more they cost, the more they get paid. On the other hand, if the manager knows that they will not get paid extra to manage major works, they may not put in enough time to achieve sufficient maintenance, or to get a good deal.

Should I be prepared to pay extra in order to have the company charge a fixed fee rather than a percentage on major works? If so, how much? Is there a better system that would better align the interests of leaseholders and property managers?

The practical answer I am leaning towards is that as leaseholders we should simply not expect the management company to always make a good job of contracting major works, and instead look for control over the process rather than trying to align our interests better. I'm also interested in what microeconomics has to say about this, though.

Background to the UK leasehold system: I own the long leasehold on a flat, which means I have the right to live there (or let it to somebody else) for the length of the lease. Leases are usually granted for 100 or 125 years (in practice leases are usually renewed at a relatively small cost once they reach 85 or 90 years). If 50% of the leaseholders agree, they can choose to set up a shell company to manage the building (do repairs and maintenance, buy insurance, etc.). For larger buildings, the leaseholders often then choose to employ a property management company rather than running the building themselves. The management company in turn usually contract building, cleaning, gardening etc. companies to maintain the building.

  • If you are going to live in the apartment, why do you intend to use a management company(not that they are known to being decent). If you want somebody else to deal with the problems then using them it is ok. But if you have the time to do it yourself and deal with the problems yourself and majority of the leaseholders agree set up a right to manage company and do it all yourselves. – DumbCoder May 8 '15 at 10:14
  • We do intend to create a right to manage company. We don't have the time to do everything ourselves, nor would doing do likely promote good neighbourly relations in a medium-sized block, so we intend to engage a management company. This is common practice with RTM. Major works happen rarely and are worth some extra attention, however. – Croad Langshan May 8 '15 at 20:29

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