The rent roll market is a hot one, with demand far exceeding supply. So, whether you’re looking to buy or sell a rent roll, you better have your ducks in a row, says legal strategist and founder of O*NO Legal, Kristen Porter.
When it comes to both buying and selling rent rolls, there’s a lot more to consider than many people realise.
If you’re in the market to buy, you’ll have stiff competition, with the number of buyers surpassing the number of rent rolls available for sale.
That doesn’t mean you shouldn’t enter the market though, but if you do, there are four main factors to consider before taking the leap.
The multiplier
The multiplier is the magic number that determines the value of the rent roll. It’s the number you’ll multiply by the gross annual management fees to get your purchase price.
There are a few factors that determine the multiplier, which usually hovers between two and four. These include:
- Averages of annual rents and management income·
- Management term left to run on the management agreements and the authority given to the agent
- Portfolio location and desirability
- The number of landlords versus the number of properties under management
- How close the relationship is between the vendor and their landlords and whether there are special circumstances
- Property types and condition
- Systems, such as how the collection of rent and other management tasks are performed.
The retention
The retention period and retention amount are hotly negotiated elements of the rent roll sales process.
When you’re buying a rent roll, you’re essentially trying to buy the relationships already established between the agent and their landlords.
But this isn’t always smooth sailing, and some landlords will be spooked by the change and jump ship.
This is known as lost managements. The retention clauses address this by putting in place a mechanism where the buyer receives a refund for lost managements.
So, if you lose managements within the retention period, you will be refunded part of the purchase price – up to the value of the retention amount.
When negotiating the retention, it’s critical that you understand the current market.
For example, 12 months ago, the retention amount varied between five and 20 per cent of the purchase price. Now, it’s more like 10 to 40 per cent. The retention period is likely to fall somewhere between three and 12 months.
The restraint of trade
Again, this goes back to relationships. Your clients might not want to jump ship, but if they’re approached by someone they’ve already established a relationship with, they might be tempted.
To prevent this from happening, you need to ensure the vendor won’t compete against you and attempt to steal their former clients back after the deal is done.
This is done via a restraint of trade clause as part of the sales contract.
These usually vary between three and five years, but will depend on a few things, such as price, and whether the clause is limited to stealing clients or prevents them from working entirely.
Lots of factors come into play and that’s why it’s hotly negotiated!
Due diligence
It might seem like a tedious task, but it’s absolutely vital that you do your due diligence to ensure the vendor’s claims – which determine the multiplier, and therefore the sale price – are true.
It is time consuming, but without it, you could be in for a world of problems down the track, not to mention the possibility of overpaying for your rent roll.
Just like you wouldn’t buy a second-hand car without having a mechanic look over it first, or purchase a home without a building and pest report, you should never buy a rent roll without being absolutely sure everything is as you expect it to be.
Due diligence is what determines the outcome of the first three steps so it’s critical to get specialised advice, be that from a real estate agency lawyer or a property management consultant.
We had a client who came to us to ‘quickly look over the contract’ as they were ready to sign it. It turned out, the seller’s lawyers had been telling the buyer it was a standard deal, but we found some ‘nasties’ in there and recommended a full review.
That review saved them 30 per cent of the price simply by tightening up what constitutes a lost management, as well as securing a longer retention period to ensure more lost managements were captured and refunded to the buyer.
Selling a rent roll
To get the best price possible for your rent roll, you need to start the ball rolling as soon as possible.
There are four key areas you need to look at to get the most bang for your buck.
Get a higher multiplier (and sale price)
To achieve the highest possible price, you need to analyse and address all the issues that impact the multiplier, such as relationships, location, property conditions, current systems, and annual rent/income amounts.
If you want to bring your multiplier higher, you’ll need to have been working on this for a year or two before you sell. The last thing you want is to agree on a multiplier, only to have the buyer’s due diligence reveal a mess.
Management agreements
Your management agreements with your landlords are your biggest asset and are the foundation for the valuation of your rent roll.
If you assign these over in the wrong way, not only is your sale income at risk, but you’ll have the bank breathing down your neck.
Agency agreements need to be easily assignable, but they must comply with the legislation, which differs from state to state.
In most states, the management agreements can’t be assigned at all under legislation, and new management agreements must be entered into between the buyer and each landlord.
Hot tip: selling shares in the company rather than selling the rent roll as a business asset, will assist with lost managements.
In most states, if you just sell the rent roll then you need to get a new management agreement signed with each landlord.
If your management agreement is structured correctly, when you sell the shares in the company, you do not require the landlord’s approval or even their signature.
Biggest isn’t always best
A good sale isn’t just about getting the highest price. Selling to someone who won’t look after the business’ clients to the end of the retention period will lose you more than you gained by taking a higher offer.
Put simply, steer clear of buyers with a bad reputation.
Lost managements
Lost managements which occur during the retention period result in seller refunds, so the fewer clients who flee, the better for everyone.
Assisting in the transition process will reduce the number of lost managements, and therefore the number of refunds you have to pay.
We were acting on a matter where the vendor refused to call each landlord before sending them a written notice of the sale, instead opting for a generic email – despite our advice to the contrary.
The reason the seller didn’t want to make the calls is ‘there are too many calls to make’. It might seem like a lot of work, but by not making the calls, or even dealing with inquiries as they came in, that seller lost 25 per cent of the value of their rent roll in refunds – the owners went elsewhere.
So, remember, no matter how much you know about real estate, when it comes to buying and selling rent rolls, professional advice is a must.
At the end of the day, those tedious jobs that might seem inconsequential and time consuming, can cost – or save – you a lot of money in the long run.
