Should you buy a distressed rent roll?
It's an interesting market at the moment with some interesting activity in respect to rent rolls for sale, rent rolls being consolidated and new entrants in the real estate market disrupting existing agencies and players. I am seeing more internal partnership buy outs, retirement plans put into action and larger rent rolls of the 700+ looking to get out completely as stock tightens in the sales market.
What we haven't seen yet is more than usual distressed rent rolls coming on to the market. Over 3 years ago I was engaged on 5 manager appointments over the course of 18 months. These were a variety of trust account misappropriations, financial pain and mismanagement and also fraud. So are we going to see more of it in the coming months or years if this challenging sales market and pressure on commissions for managements continues? Your guess is as good as mine, and if I was a betting man I would say yes, because with a tight sales market and less stock coupled with pressure on management commission rates, only spells trouble for those that don't already have a rent roll 100% covering their fixed costs. Of course it doesn't mean everyone in this position will resort to drastic measures, however if you don't have a plan to reduce overheads, improve commission rates and sundry fees or increase sales income, then a small percentage that spoil it for everyone else will resort to illegal measures.
Should you buy a distressed rent roll?
1. Don't assume everyone will think it's a bargain - Everyone is after a bargain when an advert appears in the Saturday paper or Financial Review on a Tuesday or Thursday. Be bold with your pricing but don't think it's only worth 1 times or 1.5 times. The first stage of a sale is about short lists, and price will be a big factor. Bigger the better.
2. Who has appointed the Receiver or Manager? - If it's bank appointed then the motivation to achieve a much higher price will be stronger.
3. What will the Receiver/Manager look for? - Capability of the agency or purchaser as well as price is very important, as the purchaser will need to roll up their sleeves and get dirty with lots of hard work dealing with disgruntled owners and tenants. So be prepared to prove you have the team and experience to take over managing the rent roll. The Receiver/Manager wants to get in and get out.
4. Opportunity - Landlords have most likely had poor service and poor payment history whilst their property has been managed by the outgoing agency. This is a great opportunity to deliver good service and improve commissions and fees for the long term.
5. Take on the challenge - Hard work will reward in a growing asset which will be worth a lot more than what you've paid in the long run
Lastly, when considering purchasing a distressed rent roll make sure you conduct proper due diligence. Please check the following;
bonds - if bonds are missing then they will be protected by Fair Trading as long as a receipt was issued. It'll again require some time and effort rectifying what's missing
ingoing reports - make sure there is one for each property file. If there isn't then make sure your team is prepared for lots of inspections when you take possession
existing lease
proper tenancy applications
when was the last rent increase? - has this rent roll been keeping up with the market? If not then this is a plus as your landlord will appreciate the uplift
when was the last routine inspection done?
