Real estate agencies have been warned against cutting corners on valuations when buying rent rolls, with NAB revealing to REB that independent assessments have uncovered costly shortcomings, prompting buyers to abandon deals.
As agencies turn to property management to safeguard their businesses against a weakening sales market, NAB business bank executive, professional services Lucy Zheng has warned that buyers risk acquiring rent rolls worth significantly less than projected due to failures in due diligence.
Speaking on a recent episode of the PMX Podcast, Zheng said that while not all financiers required an independent valuation, agencies should be prepared to spend several thousand dollars scrutinising an acquisition before committing to a purchase.
She revealed that NAB had seen purchasers use independent valuations to renegotiate more favourable terms with vendors, while others had abandoned acquisitions altogether after discovering problems with the underlying assets.
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“We’ve seen plenty of examples where prior to committing to the purchase, our customers come and chat to us,” Zheng said. “After seeing the value of that and going through that [independent assessment] report themselves, they’ve been able to use that to negotiate a more favourable term with the vendor.”
“In some cases, they’ve actually backed out of the purchase altogether if skeletons are found.”
Zheng said independent valuations could cost as little as $1,000 to $2,000 for smaller rent rolls, with larger acquisitions attracting higher fees.
However, she argued that the expense was insignificant compared with the potential financial consequences of acquiring a poorly managed rent roll.
“You’re paying a few thousand dollars, but you’re committing to a lot more than that. So it’s money well spent, in my opinion.”
Among the biggest risks facing prospective buyers were poorly executed management agreements, which Zheng warned could significantly undermine the security of an agency’s recurring revenue.
She said valuations should examine compliance, management agreements and the composition of the rent roll to establish whether the asset was worth its asking price.
“Ultimately, if the contracts weren’t signed properly, nothing’s stopping the landlord from walking out tomorrow,” Zheng said.
“If you’re the incoming purchaser of that rental, that significantly deteriorates the asset that you’re looking to buy.”
Zheng said the warning also applied to vendors, with agencies potentially improving their rent roll’s value by addressing contractual and compliance shortcomings before bringing their business to market.
Industry in change as majority of agencies flock to property management
The comments follow the August release of the NAB Performance Era report, which surveyed real estate agencies and other professional services providers on what is shaping their year ahead.
The report found that most real estate agencies were seeking to strengthen their property management division amid the softer sale conditions.
“So from our report, we found that most agencies do agree with that point and are already invested. I think we’ve got 70–80 per cent already invested into the property management side of the business, and they see that as a significant value add for them,” Zheng said.
“Some see it as a really effective defensive strategy for their business, especially in the current environment.”
‘A talent challenge’ in property management
Zheng said property management businesses were struggling to grow and retain talented professionals.
She said it was particularly challenging for property management businesses in regional areas to find or retain staff.
“You know that talent challenge that a lot of our agencies face is how do you grow and retain talent.
“I was given one quite extreme example in mining towns where anyone can go find a job. The small agencies in town really struggle with finding the managers,” she said.
While AI is an important tool for streamlining property management operations, Zheng said it would never fully replace the value of the human experience.
“There’s a really important recognition that human oversight and relationships are still paramount at the end of the day,” Zheng said.
Listen to the whole episode HERE
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