What’s the Process for Buying & Selling Rent Rolls? - 10 Talking Points
When I sit down with prospective buyers & sellers I outline to them the process involved in buying or selling a rent roll. The same exact process or methodology applies. Basically, we want a smooth sale with no skeletons in the sellers closet or rent roll, and a buyer that is capable and knows exactly what they’re buying.
What this means is the following 10 talking points are really important;
1. Willing Seller: they’ve got to be motivated to sell and arrive at the conclusion themselves that it’s time to no longer run a real estate business. This can mean retirement and exiting now or at some point after the completion of the sale, or it can mean they’re tired or had enough of managing staff and still have the passion to sell or manage the rent roll, but not as business owner.
2. Qualified Buyer: get your finance sorted and pre-approved before you go head first into looking to buy a rent roll. Know your limitations on what you can acquire, i.e. if you have only 100 managements then it might not be a good idea to enquire about 1000+ rent rolls. Know your numbers of your existing business and rent roll.
3. Detailed Information Memorandum: a good memorandum is one that headlines all the right averages of the rent roll.
i. Average income per property annum
ii. Average management commission
iii. Average owner concentration, top 5 – 10 owners
iv. Last 12 months letting, admin & sundry fees
v. Correct schedule of properties with good quality information – too many rent rolls have every property classified as a residential property or a house with 0.00% commission or $0.00 rent. Are these family properties? Do you have any on 3 months’ rent free?
4. Detailed Offer: When putting together an offer on a rent roll and/or agency, make sure you address all of the salient points, i.e. price, retention amount and percentage, restraint period on the vendor you propose, and/or restriction area if you’re acquiring the office and purchasing sales goodwill. Proposed exchange and settlement date as well as your funder or if you’re paying cash. Also outline your solicitor’s details.
5. Due Diligence: your offer has been accepted or you’re accepting the purchaser’s offer after some negotiation. Whilst a Sales Advice or Heads of Agreement has been prepared and sent to the respective solicitors, it’s time to get the due diligence done of the rent roll so that when you exchange there is a high-level understanding of the rent roll. Make sure you make available or you peruse a selection of hard copy tenant files. (for what you should look for see my blog on 7 essential items for a Hand Over file at settlement). It’s also important you ask or provide last financial year trust account audit and bank reconciliations, latest arrears & vacancies reports. Understanding how the rent roll behaves is important so you know how much work is going to be involved as a purchaser post completion or how much work you have to do as a vendor post exchange prior to completion so the rent roll is at an acceptable standard.
6. Contract: Having a good contract is all about a fair contract that deals with all scenarios leading up to completion from exchange but also post-completion during the retention period. It’s most important that the vendor and purchaser have a solicitor that is experienced in rent roll sales.
7. Transition Exchange – Completion: This part of the sale is critical and I always say a much-loved rent roll rewards a vendor when you call and write to your owners to sign new agency agreements in favour of the purchaser. Have a plan including mapping out each week with what needs to be done, but getting the letter to owners’ right is critical, and no new agreement should be mailed out until they are called or at least initial contact is made letting them know of the news.
8. Handover Files for Completion: Each property file should include a critical handover checklist of what needs to be in every file for settlement. Having just a signed returned agreement is not enough for settlement. There has to be an ingoing that matches the lease, application for tenancy, signed lease, proof of bond lodgement and photocopy of the keys provided to the tenant. These are just standard minimum requirements, but more should be agreed between vendor and purchaser for a successful handover.
9. Completion & Post-completion: Once all the agreements are returned for completion usually only the agreements that are signed in the purchaser’s entity are paid for, however it’s important that only agency manages the rent roll going forward. Therefore, if not all agreements are returned in favour of the purchaser, i.e. 80% for example, and only 80% of funds have been settled on, then still the purchaser should take over the whole rent roll, i.e. 100% regardless. This makes the sale clean, the purchaser is now in full control of the rent roll, but also it motivates the vendor to get as close to 100% as possible of returned signed agreements by completion.
10. Retention: Accounting for retention comes back to a good strong contract that deals with all possible scenarios that could happen during the retention period, so it is black & white when dealing with the retention monies at the end of the retention period. A well picked or sought after purchaser is one that has the best staff and capabilities to manage the rent roll going forward. For the vendor, this means no loss of properties during the retention period due to poor management of the rent roll, or significant changes in fees & charges or staff.
From the start of looking to sell or looking to buy through to the end of a retention period, all of these 10 talking points if carried out properly should ensure a smooth and successful sale for purchaser and vendor.