To buy or to build? That’s one of the age-old questions on many a principal’s mind when it comes to property management.
Should they build their property management division from scratch, or will purchasing a rent roll offer the potential of sales and income stability that’s worth the investment? If you’re considering acquiring a portfolio, there are many factors you’ll need to think about that go well beyond your monthly fees invoiced.
A great rent roll that’s spick and span can add tremendous value to your business, but a poorly maintained one that’s gaping with compliance holes can prove a risky and business breaking purchase.
Having supported many leading Australian agencies to purchase quality portfolios, and avoid lemons, I urge you to consider the following due diligence basics:
Critical compliance documents
A portfolio is only as good as the compliance documents that support it. No matter how high the management fees or how large the portfolio, if you’re missing tenancy agreements and incoming condition reports you’re in a whole lot of hot water.
Another vital compliance document that should be readily available across the portfolio is building insurances for properties under management.
It would be incorrect to assume that all principals are fastidious about lodging bonds correctly with the relevant body.
When undertaking the audit of portfolios, we regularly find sizeable discrepancies, which are indicative of poor systems, inadequate record keeping and inconsistent use of property management software.
If you’re purchasing a legacy rent roll (one which has changed hands several times recently), you’re at an increased risk of running into compliance issues relating to the correct business identity that the bonds are lodged under.
Personnel risk and opportunities
Will you inherit employees or contractors with your portfolio acquisition? Make no assumptions around their competence (or licensing). Are their Agents Certificates valid and have they been sighted? If utilising contractors or casual employees, be certain their ABNs are current and that their workload doesn’t put them in the ‘sham contracting’ category.
Look closely at the structure of the organisation you are inheriting. Is it without a driving force in the form of a BDM?
Are team members’ portfolio sizes appropriate? Are they under-performing or are they overloaded? And what individual behaviours does the agency’s property management software reveal about the team’s ability to manage workflow or minimise risk?
Systems and policies
The internal operations of an agency inform the quality, accuracy and compliance of their portfolio. Ensure you can survey systems, procedures and policy documents relating to portfolio management.
If you’re unable to gain access to these resources – or if you’re handed a thumb-printed folder containing just a few pages of outdated information – consider both to be red flags.
Internal systems and policy documents should reflect changing legislation (i.e. smoke alarm requirements) and be directive about which data must live in which system (as property management departments often use multiple technologies).
Managing agency agreements
A mature rent roll will likely have multiple managing agency agreements, which are continuing/ongoing whereby an owner can give 60 days’ notice to terminate their management agreement.
As the purchase of a portfolio is so costly, it is crucial a retention clause is in place to protect you – the buyer – from asset shrinkage in the short-term. Before purchasing a portfolio, it is essential you undertake appropriate auditing.
Should there be a lack of transparent access to the breadth of the portfolio provided to an auditor, we suggest you wait until there’s a better quality, more accountable rent roll to acquire.