To buy or to sell: That is the rent roll question
As any small business owner would know, cash flow is one of the biggest causes of stress, and can even lead to business failure if not managed properly. For a real estate business, acquiring a rent roll can be one way to achieve instant cash flow, and eliminate the staffing problems associated with gradual growth.
According to Laura Valenti, Managing Director of Solutions Property, purchasing a rent roll allows businesses to break into new regions, and increase market share. "Buying a rent roll can really take your business to the next level, which would otherwise take you years to achieve organically," says Valenti.
Of course, the reverse is also true, in that selling your rent roll can provide a business with an instant cash injection, or set you up with an effective exit strategy. But buying and selling a rent roll is no small task, so we asked Valenti the big questions, to save you from falling victim to some common pitfalls during the process.
Buying a Rent Roll
REIQ: What are the most important issues to consider, when deciding to purchase a rent roll?
Laura Valenti: Staffing levels and training - you need to be over-staffed to be able to handle the extra workload. Consider hiring temps during the transition if necessary. You should have an efficient process for staff induction and training if taking on more staff. They should be trained and ready before the rent roll transfer. You may need to totally restructure your team and create new positions to handle the extra workload and maximise efficiency.
When it comes to procedures, are they in order and is everyone following them? Bringing on more properties when you don't have current processes in order will put stress on your staff and mistakes will be made, leading to losing clients. In regards to technology, do you utilise software to maximise efficiency? You may have been fine up to now, but consider the extra workload and how this will be handled by current manual processes. And what about your team culture. Does your team accept change? If you have team members who are set in their ways and resistant to change, you will have an uphill battle with them. You need to do some work beforehand, making the team part of the process and 'sell' it to them - make them see that the purchase will strengthen the company and improve cash flow, which will result in more staff benefits and job security.
REIQ: What common pitfalls should you be aware of?
LV: Firstly, check the location of properties. If your office is further away from the properties than the selling office, clients may see this as a negative and not transfer over. Also investigate the level of multiple property owners. It isn't good to have too many because if you lose an owner, you lose more than one property.
Another area to look into is whether the owners are local or interstate. Local owners tend to be more involved and thus high maintenance; plus the property is likely to have been their former place of residence that they were unable to sell, meaning they're emotionally involved and likely to sell in the near future. This is fine if your agency sells it, as you can recoup the purchase price of the management, but if it goes to another agency, you make a loss on that management. If the selling office is staying in business, as opposed to closing down or transferring ownership, this can be detrimental as the clients don't understand why their properties are being transferred. They may choose to stay with the selling office unless that option has been completely removed by the selling office which often doesn't happen as the selling office would rather keep the management than lose it to another office and gain no benefit.
Finally, check for properties owned by the seller or the seller's employees. These should be excluded from the sale. The buyer can still take them on but shouldn't have to pay for them as they are not secure. Ultimately, high-maintenance owners and properties will come with the territory. We don't get to pick and choose when we buy a rent roll.
REIQ: What due diligence needs to take place?
LV: Typically, the buyer will randomly look at 10-20% of files. If the rent roll is small, we suggest looking at every file. It's important to check for compliance. Management agreements, lease agreements, bond amounts, entry condition reports, pool safety certificates and smoke alarm compliance certificates. Further, it's important to check reports to ascertain proper processes for arrears, maintenance, lease renewals (percentage of periodic leases should be low), and vacancy report (vacancy rate should not be above the market average).
Also check for what ancillary fees are being charged. If they just charge a management fee and letting fee and not much more, consider the price/factor you are paying for the rent roll. It's not good practice to introduce or increase fees within the first year or two of buying a rent roll, as this doesn't sit well with the clients; you will have to ensure this is a financially viable exercise.
Regarding maintenance, look for a regular schedule of maintenance actioned. Too much maintenance may indicate sub-standard properties. But also watch out for too little maintenance attended. Every property should have at least a few hundred dollars a year spent on maintenance, so a rent roll with low maintenance activity indicates it isn't being run properly and be prepared to action years of maintenance in the first few months of taking on the rent roll.
Check the 'source' of these managements too. If many were from an outside referrer, be aware of the relationship this referrer may still has with the clients. They may encourage the clients to move to another agency after the retention period is over. Also, if there's a portion of the rent roll that was purchased from another agency, check these files thoroughly for issues, as these clients may already feel as though they have been 'tossed around' from one agency to another.
Finally, check the length of management. Clients taken on less than one year ago may still be feeling unsettled and not convinced, and a rent roll transfer will unsettle them more and give them the opportunity to try another agent (of their choice). This might be a problem if a large portion of the rent roll has come on recently.
Selling a Rent Roll
REIQ: Why might a business choose to sell its rent roll?
LV: It could be to pay off debt, the need for an instant cash injection for a project, or an exit strategy.
REIQ: What issues do you need to consider when selling?
LV: Choose your buyer wisely - selling to 'just anyone' who offers the best price may not be the best decision financially, as retention may be low due to poor service by the buyer. If you choose a buyer with a good reputation, good processes and ethical standards, your clients are more likely to accept the transfer and retention will be high.
REIQ: How can its worth be determined?
LV: A broker can help. There are lots of contributing factors including rent prices, distance from office, suburbs, multiple property owners, units versus houses, commission, and ancillary fees. A rent roll has different values to different buyers. For example, one buyer may pay a higher factor for a certain size rent roll in a particular suburb because they know this will fit in well with their current business.
REIQ: What are some common pitfalls to avoid?
LV: Not offering clients the opportunity to sign an assignment form before transfer. Clients like to feel as though they have been included in the decision to change agents. They don't feel comfortable being 'handed over' to another agent without a say in it. Also, not being prepared, with insufficient staff to handle the paperwork. Furthermore, communication between the buyer and seller is very important too, throughout the transfer and for months afterwards as there are often lingering questions and documents to be provided.
Valenti's Top Tips
For Seller: Advise clients that they will be in good hands with the new agent. The principal, manager or team leader needs to call every client before any written advice goes out. The client needs to feel like they're part of the process, or they'll go to another agency 'on principle' and the transfer rate will be disappointingly low. It's also important to not give clients the option to stay with you! This is telling them that they're better off with you than the new agent. Plus, those clients who transfer will find out and ask why they had to go while others stayed. Ultimately, it places the whole process and your reputation into question. Finally, it would be beneficial to allow the buyer access to the clients' details before settlement so the buyer can start communicating and alleviate any concerns the client may have.
For Buyers: Kill them with communication. The principal, manager or team leader must call every client as soon as transfer happens, or if possible, even before settlement. Ask for any concerns or issues upfront and pass everything onto the property manager. Send welcome emails and regular updates. Introduce clients to their property manager who should also call the clients as soon as possible after settlement. We created short videos featuring me with the relevant PMs, so the clients would see there are real people behind this, and we are there to look after them. If there are a high proportion of local owners, hold information events at your office and invite clients for a drink and nibbles and a tour of your office.