The dominant compensation model in third-party multifamily management, which pays managers a percentage of collected rent, creates a fundamental misalignment between manager incentives and owner interests, according to Ron Kutas, CEO of OneWall Communities. The model, typically ranging from 1.5% to 5% of gross revenue, rewards revenue maximization while providing little financial motivation for expense oversight, potentially costing owners tens or hundreds of thousands of dollars annually.
Under this fee structure, management companies focus on marketing and leasing to boost collections, but have no direct financial incentive to reduce operating costs. "If a management company doesn't grow rents but spends all of 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 explains. This structural issue means expense management often becomes secondary, as managers respond rationally to the incentives they face.
The consequences accumulate across several expense categories. Service contracts for landscaping, trash removal, cleaning, and snow removal are typically renewed annually with routine rate increases of 2% to 5% without active oversight. "Those numbers can be in the tens, if not hundreds of thousands of dollars annually," Kutas notes. Maintenance and repair decisions are another area of concern, where untrained staff may default to expensive vendor solutions, such as replacing an HVAC unit for $7,500 to $10,000 when a $500 to $750 repair would suffice. General and administrative expenses, including corporate overhead billed back to properties, can also accumulate unnoticed.
For owners relying on standard monthly reports, the problem is compounded by reporting frameworks that emphasize revenue metrics—occupancy, rent growth, lease trade-outs—rather than expense justification. Owners can see dollar amounts spent but typically cannot assess whether repairs were necessary or if alternatives were explored. "The justification for how money is spent on the expense side of things, especially as it relates to the maintenance of the property, is always a black hole," Kutas says.
OneWall Communities, which operates as both an owner and third-party manager, structures its expense oversight around regional cost-per-unit benchmarks and line-by-line reviews of every expense category. The firm shops service contracts annually across its portfolio and requires explicit listing of all billback items in management agreements. Kutas suggests the single most revealing question in any budget review is: "Who is the top vendor paid this month, and why?" He cites an example of a 450-unit property where the answer revealed an HVAC contractor billing for nearly 100 service calls in one month—about 25% of units—due to untrained staff calling vendors for each resident complaint during a hot spell, at $180 per visit, rather than explaining the temporary weather condition.
OneWall's approach requires trained on-site staff, detailed benchmarking data, and a willingness to invest 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 perform this oversight, and if not, what reporting or contract terms would create one.
