Rent Roll Growth through Aquisition (Part 1)

Peter OBrien cropped

An article by Peter O'Brien (Victorian Consultant)

If Real Estate Agents are serious about their business they will have a business plan in place detailing a growth plan for their property management department. Gone are the days where a property management department was necessary to have in your real estate business just to “baby sit” the properties until the property owner decided to sell. In the present time and well into the future property management is a business that can be very profitable and plays a key role in any real estate business.

Planning for growth will enable business owners to forecast income and assist in producing budgets and staffing structure that is necessary to implement to ensure that any growth is managed properly and to eliminate as much of the risks as possible in loosing new and existing clients.

Many Companies will rely on organic growth which will only occur if correct key performance indicators and incentives are in place as well as regular training for all staff involved in the property management department. Lack of these steps will cause a steady decline in profits and growth so it is extremely important that Business Owners focus a lot of attention to this area of their business or bring in professional consultants, like O’Brien Property Group and BWT to provide advice and/or manage this process for them.

A plan detailing the growth of property management will include the steps to achieve this growth. There are many different ways to grow your rent roll and Business Owners need to consider them all and decide which method is best suited for them.

Some of the most common methods are:

-   To grow organically

-   Employ and train a Business Development Manager or Business Development Team

-   To negotiate financial and service terms with other organisations

-   Acquire a rent roll through negotiations and/or purchasing a rent roll.

In this article we discuss some important matters to consider when buying a rent roll. First and foremost, principals looking to acquire a rent roll should be doing so to provide the business with a fixed income stream. It is important to calculate all expenses, and predicted income carefully and budget all future expenses that will occur as a result of the growth.

Most Business Owners will try to use the fixed income from a rent roll to try and carry them through difficult times or iron out some of the peaks and troughs that might occur through a sales cycle.

Approximately three to four years ago the lack of property sales in the market played a significant role in the number of rent rolls available to purchase and the sale price of these rent rolls. Because there was a need to sell rent rolls at the time and the supply was good the percentage rate of fixed income to determine the value of the rent roll was significantly affected.

Many Agencies were selling either part or all of their rent roll to receive a much needed cash injection which was necessary due to the decline in income received from the low being experienced in the sales market.

When I am working with Business Owners, together we look at the rent roll specifics. One of the important elements to look at is the total expenses for the entire company. In a perfect world, a good rent roll will cover more than 100 per cent of your fixed costs.

When I am consulting and coaching on a regular basis with an Agency, as a minimum, this is what I like to achieve. From this point we aim to improve this and maximise profits by implementing different strategies. Typically, most rent rolls will cover up to 40 to 50 per cent of the fixed costs.

After looking at your current position you may decide to purchase a rent roll. The best way to find a rent roll really depends on what you want, and what’s happening in your local market. It’s important to note up front though that it can be a tough process.

In today’s market the availability of rent rolls is practically non-existent. There is no formal marketplacefor rent rolls so it is important for a potential buyer to establish relationships with the industry participants who are closest to the sellers.

O’Brien Property Group and BWT are across the majority of rent roll transactions that are happening within a market place, and our strong relationships with the local market, local brokers and industry partners – including accountants and solicitors – creates opportunities for our clients who are either looking at acquiring a rent roll or selling one.

Much of our success is achieved because we are proactive when looking for a rent roll for our clients by acting as athird-party professional to make the approach on your behalf.

We do this following the strictest levels of confidence. Being discrete, is likely to be important for the seller and purchaser. If staff and landlords become aware of the pending sale, this can cause anxiety and uncertainty around ongoing employment (in the case of staff) and around future management (in the case of landlords).

If we are conducting a due diligence process for our client who is wanting to purchase a rent roll we focus on a number of key factors to determine if it is a suitable consideration.

Commission rates are important, as these need to match your own cost base. It is important to establish what your own “break-even point” is in your current set up and use this as a guide when looking at the commission rates being achieved in the rent roll that is for sale. It’s imperative that Business Owners make sure that they are writing profitable business.

There is also an array of other items that require a buyer’s close attention, which is what we look at and we provide a report which will contain this information.

It’s important to see how much revenue is generated from ancillary fees. Bob Walters, managing director of True Property and director of Leading Property Managers of Australia (LPMA), believes ancillary fees should deliver at least, an extra 20 per cent over and above what the property management fees provide.

We look at the length of time a property manager has managed the specific rent roll. There are both negative and a positive outcomes as a result of this.

We considered it very important to complete a report detailing what the current companies (seller of the rent roll) typical “profile” is of their clients. This is important to establish whether or not this “type” of client is going to “mesh” well with your own agency.

Often young rent rolls tend to be less risk than more established rent rolls. This is mainly due to the likelihood that the clients have lessloyalty and so there is more chance of a landlord moving their property to another property manager without much concern.

Obviously the mix of properties are important and careful research needs to be done on estimating the management length for individual properties that are part of the rent roll.

This is done by considering if the rented property is the type and style to be an investment for the Owner or if it could be a property that the Owner has certain plans for, such as moving into it. It is important to know where the property owner is residing themselves when completing this task and looking at the psychological aspects.

It is also important to consider if the mix of properties on the rent roll are the type and style of property that will complement your Agency. Consideration also needs to be given if the property type generally leases quickly and to what specific target market it appeals too. Also, some agents prefer to manage houses because in most cases, the fee returns are better than for managing units, and some agents prefer to manage unitsbecause repairs and maintenance are not as extensive as with houses. (Some would say).

The quality of the rent roll is important. It is imperative to look at items including vacancy rates and tenancy arrears. Outstanding inspections and the number of tenants who are on a periodic tenancy. If you have the means and capabilities to clean up a rent roll, it may suit you to purchase a badly managed portfolio.

Often they will be less expensive to purchase and the retention of clients is almost one hundred percent due to the fact that their property was not being managed well in the first instance.

It is not our position as Consultants to give advice about borrowings so we always recommend that Business Owners have a very involved conversation with their Banker. Most financial institutions will lend 60 to 70% of the value of the rent roll to be purchased.

This is dependent on many contributing factors such as some Business Owners may be moderately geared compared to others who are more highly leveraged and suchfactors will need to be considered. Often the Lender will want to meet with the Business Owners and understand the business model and what their aspirations are for the business.

They often try to establish a principal’s ability to manage their existing property management division and how the new rent roll would be integrated with the existing rent roll. Which is where Consultants like us can prepare evidence as to the framework, capabilities and viability of your business consists of.

When conducting the due diligence process you should negotiate that you would like to have your staff attend the office of the seller and physically go through all files of the properties that form the rent roll.

Your staff should ensure that all documentation is in place and all information is available to be collected if the purchase was to eventuate. This process will confirm that the statements made concerning the adequacy of the current management is legitimate.

The terms of a contract outlining the sale of a rent roll can be difficult to understand and is a specialised area. OPG/BWT can save money for our clients by drafting an agreement based on individual circumstances and use our knowledge and experience to ensure all terms and conditions are included to offer protection for our Client. (The seller or purchaser, depending who we are working with).

Areas commonly covered by a contract include post-sale restraint provisions for the vendor; the amount of the retention sum – to cover client ‘fallouts’ – and the retention period; possible employment of the vendor’s current employees; and a description as to what happens with clients who do not agree to be transferred to the purchaser.

A buyer should also be advised clearly about the documents to be handed over to the purchaser for each property; the arrangements that apply when any of the landlord clients wants to sell their property; the supply of an audit certificate for the vendor’s trust account; warranties from the vendor relating to any current or future professional indemnity insurance claims; and warranties from the vendor that there are no encumbrances on the rent-roll.

If negotiations are successful and you purchase a rent roll, you cannot relax now because there is so much more that needs to be done. You would have just paid a considerable amount of money for a business asset which is in a vulnerable state.

New Clients to your Agency need to be comfortable that their property is being managed properly. And it is important to consider that most of the time people generally don’t like to be “told” who they are going to have manage their property, without and previous discussion to them concerning this possibility.

It can cause uncertainty for many Clients and set off alarm bells for many of them that result in them moving to other Property Management Companies. Part of the service to our clients is to assist with managing this process. Customised training and coaching focusing on how to deal with this transfer is important both for the Seller and the Buyer.

Establishing a personal relationship with the new landlords is of paramount importance, particularly if they will need to sign new management agreements. This needs to be done within 24 hours of the rent roll being transferred over to the new Agent.

It is imperative that this process is handled with the utmost care and consideration. Perception is everything, and the transition phase is your one opportunity to make the right first impression on the owners, building trust and loyalty.

This transition should be communicated to not only the new clients but also to existing ones as well. And before this point in time, the most important people to discuss the purchase with is your staff. Keeping staff well aware of these type of business decisions is paramount for the success of any Agency.

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