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Should you buy a distressed rent roll?

By Matt Ciallella
20 July 2016 | 1 minute read

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. So, what should you do next? 

I am seeing more internal partnership buy-outs, retirement plans being put into action and larger rent rolls (700-plus) looking to get out completely as stock tightens in the sales market.

What we haven’t seen yet is more than the usual number of distressed rent rolls coming onto the market.

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Over three years ago I was engaged on five 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. 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 per cent covering their fixed costs. Of course, this doesn’t mean everyone in this position will resort to drastic measures, but 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 The Australian Financial Review on a Tuesday or Thursday. Be bold with your pricing, but don’t think it’s only worth 1x or 1.5x. The first stage of a sale is about shortlists and price will be a big factor.

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? The capability of the agency or purchaser, as well as price, is very important, as the purchaser will need to roll up their sleeves and do 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 while 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 you with a growing asset, which will be worth a lot more in the long run than what you’ve paid.

Lastly, when considering purchasing a distressed rent roll, make sure you conduct proper due diligence. Check the following:

  • Bonds: if bonds are missing then they will be protected by Fair Trading as long as a receipt was issued. It will require some time and effort to rectify what is missing
  • In-going 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?
Should you buy a distressed rent roll?
Matt Ciallella
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ABOUT THE AUTHOR


Matt Ciallella

Matt Ciallella

Matt Ciallella is the founder of mc rent roll broking, a specialised rent roll and business broking service for real estate agents, assisting both residential and commercial agents with rent roll sales, agency sales and rent roll transition management as well as strata agency sales. The focus of Matt’s work is to simplify the process of selling and buying a business or rent roll by clearly outlining the sale process with vendors and buyers. From the initial meeting until transition, mc rent roll broking aims to understand individual and business goals and is committed to providing agents with personalised and supportive service.

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