Testing a Property Management Fee Against the Work Done

A worked example in SAR comparing two management proposals on the same Saudi building, including a year with a void and a re-letting, to show which basis actually costs less.

Two agents quote different percentages and the lower one looks cheaper. It usually is not, because the layers below the headline do the work. This example takes one illustrative building, two proposals, and two years: a quiet one and one with a tenancy change. The arithmetic shows how a higher headline percentage can be the cheaper mandate.

The situation

An overseas owner holds a small building with four apartments. Two agents have proposed terms. Agent A quotes a lower management percentage with separate letting, renewal and works supervision charges. Agent B quotes a higher percentage that includes renewals and minor works supervision. The owner wants to know which is cheaper in a normal year and in a year with one vacancy.

Assumptions (illustrative)

• Four apartments at an illustrative annual rent of SAR 60,000 each, so SAR 240,000 of rent in a fully let year.
• Agent A: management at 6% of rent collected, letting fee equal to one month of rent per new tenancy, renewal fee equal to half a month, works supervision at 10% above SAR 2,000.
• Agent B: management at 9% of rent collected, renewals included, works supervision included below SAR 10,000, letting fee equal to one month of rent per new tenancy.
• Illustrative repairs in the year: one item at SAR 14,000 and three items at SAR 3,000 each.
• In the second year one tenant leaves, the unit is empty for two months and is then re-let, and two other tenancies renew.
• Value added tax on agents' fees at the published headline rate of 15%, to be confirmed with ZATCA.

Step 1: Agent A in a quiet year

Management: SAR 240,000 multiplied by 6% equals SAR 14,400. Renewals on two tenancies: two multiplied by half of SAR 5,000 equals SAR 5,000. Works supervision: 10% of SAR 14,000 equals SAR 1,400, plus 10% of SAR 9,000 for the three smaller items equals SAR 900, giving SAR 2,300. Total before tax: SAR 21,700.

The headline 6% accounted for only two thirds of the bill. The additional layers added SAR 7,300 in a year with no vacancy at all.

Step 2: Agent B in a quiet year

Management: SAR 240,000 multiplied by 9% equals SAR 21,600. Renewals included: nil. Works supervision: the SAR 14,000 item is above the SAR 10,000 threshold, so 10% of SAR 14,000 equals SAR 1,400, and the smaller items are included. Total before tax: SAR 23,000.

In a quiet year Agent B costs SAR 1,300 more. On this evidence alone the owner would choose Agent A, which is exactly the mistake the second year exposes.

Step 3: Agent A in the year with a void

Rent collected: SAR 240,000 less two months on one unit, which is SAR 10,000, equals SAR 230,000. Management: SAR 230,000 multiplied by 6% equals SAR 13,800. Letting fee: one month at SAR 5,000. Renewals on two tenancies: SAR 5,000. Works supervision as before: SAR 2,300. Total before tax: SAR 26,100.

The void reduced the management fee by SAR 600 and added SAR 5,000 of letting fee. The agent is better off when a tenancy ends, which is worth noticing before you sign.

Step 4: Agent B in the year with a void

Management: SAR 230,000 multiplied by 9% equals SAR 20,700. Letting fee: SAR 5,000. Renewals included: nil. Works supervision: SAR 1,400. Total before tax: SAR 27,100.

Agent B is still SAR 1,000 more expensive on these assumptions. The fee basis alone does not settle the choice, so the comparison has to include what each agent achieves.

Step 5: Introduce the void length each agent achieves

Suppose Agent B lets vacant units in one month rather than two, on the evidence of their recent record. Rent collected rises to SAR 235,000. Management: SAR 235,000 multiplied by 9% equals SAR 21,150, plus SAR 5,000 letting and SAR 1,400 supervision, giving SAR 27,550. But rent received is SAR 5,000 higher, so the owner's net position is SAR 235,000 less SAR 27,550, which equals SAR 207,450, against Agent A at SAR 230,000 less SAR 26,100, which equals SAR 203,900.

One month of avoided vacancy moved the answer by SAR 3,550 in Agent B's favour. Performance on voids matters more than the fee percentage.

Step 6: Add tax and state the full owner cost

Tax at the published headline rate of 15% on Agent B's SAR 27,550 equals SAR 4,133, giving SAR 31,683. On Agent A's SAR 26,100 it equals SAR 3,915, giving SAR 30,015. Net to owner: Agent B SAR 235,000 less SAR 31,683 equals SAR 203,317; Agent A SAR 230,000 less SAR 30,015 equals SAR 199,985.

After tax on the fees, Agent B still leaves the owner SAR 3,332 better off on these assumptions. The decision rests on the void performance, not on the percentage.

What changes the answer

• If Agent B does not actually achieve the shorter void, the ranking reverses and Agent A is cheaper by roughly the difference in fees.
• If turnover is higher than assumed, letting fees dominate and the agent with the lower letting charge wins regardless of the management percentage.
• If the building needs a large works programme, the supervision basis becomes the largest variable and should be negotiated separately from the mandate.
• If fees were charged on rent due rather than rent collected, the void would not reduce the management fee at all and both totals would rise.
• If the tax treatment of any of these services differs on your facts, the final figures change and the position should be confirmed with ZATCA or a licensed adviser.

What the numbers tell you

• Compare proposals by modelling a full year, including one vacancy, rather than by comparing percentages.
• Ask every agent for the average days to let on comparable units, because that number outweighs the fee.
• A letting fee paid on every tenancy change rewards turnover, so pair it with a measure of tenancy length.
• Set a works supervision threshold in the mandate before any programme is contemplated.
• Always model the fee stack on rent collected and on rent due, since the difference is the arrears risk you are being asked to carry.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira builds the numbers on a Saudi property with you before you commit: rent and cost evidence, condition and capital expenditure, the appraisal and the sensitivities that decide whether the deal survives a bad year. The investment decision stays yours, and so does the advice of your licensed tax and legal advisers.