Purchasing a rent roll can be both exciting and daunting. It’s a unique process, and even the most experienced real estate professional can make mistakes when it comes to this type of purchase. Here, O*NO Legal Founder and Legal Strategist, Kristen Porter shares what to expect when you purchase a rent roll.
Purchasing a rent roll is a great way to increase the cash flow of your real estate business.
It’s something many agents aspire to do. But while agents know the ins and outs of the residential sales process like the back of their hand, many are not fully aware of what to expect when purchasing a rent roll.
Here are the five major steps that you’ll need to be prepared for if you want to make your rent roll purchase work for your business.
The first step is the Term Sheet. This document covers all the high-level terms both parties agree on, and this can be binding or non-binding.
The biggest mistake we see in this space is clients agreeing to high-level terms, such as price and multiplier, and signing the Term Sheet before they come to see us. This means they’re signing a contract without receiving advice.
They then come to us with the executed Term Sheet, hoping we can review the Contract for Sale. In most instances we find unfavourable terms for a purchaser, especially if they have not purchased a rent roll before.
It’s very hard to then try and change those terms in the contract once they have been agreed in a Term Sheet – even if the Term Sheet is not binding.
Our hot tip: Always include a clause saying it’s subject to due diligence and proper legal contracts and review.
Due diligence is critical for any sale and may happen before contracts are signed, or after exchange if the contract is made ‘subject to due diligence’.
It’s important to get your ducks in a row and ensure you are buying what you think you are.
This is the time to test the price/multiplier that you have agreed to – put simply, you are checking if the rent roll/business is worth what the vendor has said it is worth.
During this time, you’ll also check the rent roll has clean and accurate records, review trust accounts and the trust account audits.
Whether or not you are taking on staff, you need to check their employment contracts. If you are taking on staff, you will have them sign new contracts.
For those you aren’t taking on, you’ll need to check for restraints on future employment or anything else that might impact you down the track.
Check the books and ask yourself a couple of questions:
- What does it cost to operate this rent roll?
- Is it in line with your expectations?
Consider whether you’ll be taking over the premises lease, or rolling the rent roll/office into your own. If you’re taking over the premises, check the lease – rent, term, rent renewals, etc, as you will inherit these obligations once the lessor has consented to the assignment of the lease to you.
Our hot tip: Engage a consultant to do this for you, unless you have bought many rent rolls before. Not only is it extremely time consuming, but this is where you find out if you are buying a good business or a lemon.
Contact for Sale to exchange
Usually, the vendor’s lawyers will prepare the Contract for Sale and the purchaser’s lawyers will review it.
The contract will set out all of the terms of the sale such as price, multiplier, retention amount and period, what constitutes a lost management, how employees are dealt with, securities to be released, if there is a lease or franchise to be taken over, if there is a sales part of the agency being sold, how commissions and listings are to be handled, plus other legal elements to ensure a smooth transition.
During this process, a deposit is paid on exchange, usually around 10 per cent.
Like in a conveyance, you will enter into the contract, then there will be a period between exchange and settlement.
Our hot tip: Make sure you use a lawyer familiar with rent roll purchases so they can advise you if something is ‘unusual’ or not with the deal.
Exchange to settlement
This is when we get the rent roll/agency ready to be handed over to the purchaser.
If you are taking on employees, you will have new employment agreements signed, and if there is a lease or franchise, this is when consent is obtained to assign those to you.
New management agreements will be signed – but only starting once settlement has occurred. In some states the agreements can be assigned, and this is when you will be required to go through the legislated assignment process.
If there are any charges over the rent roll/agency (like a mortgage over a house), those need to be released so the purchaser does not inherit any of the debts of the agency.
On settlement the retention amount is put into trust for safekeeping to deal with lost managements at the end of the retention period.
Out hot tip: Make sure the vendors call all owners/landlords to introduce you before sending notices out about the sale – this will help with the transition and result in fewer lost managements.
The retention period deals with lost managements. It’s up to the purchaser to keep a record of the lost managements during this period.
At the end of the retention period, the purchaser sends the lost management list to the vendor and an adjustment is made to the purchase price to take those into account.
Out tip: There can be multiple times you adjust for lost managements in the retention. If the retention period isn’t too long, only have one point for adjustment so you save on time, administration and fees.