Buy or sell my rent roll. Surely it’s not that hard, right? It’s a lot harder than you think. And of course there’s a lot of money at stake as well. If you buy the wrong rent roll and quickly lose a large number of those managements, you are going to be under financial pressure, especially if you have a loan to payback. Or if you sell without the right advice, it could also cost you valuable income. It’s so important to talk with experts if you are embarking on this journey. So, let’s break down some of the nitty gritty you need to know when it comes to buying and selling a rent roll.
Have you ever wondered what is a rent roll and why it’s so important? And if you’re from Australia, you’ll probably already know the answer to this, but if you aren’t, you’re probably scratching your head and wondering what the hell is she talking about? But here in Australia, the rent roll is an asset that we grow in a real estate business. The more managements we have, the higher the value of the asset. And basically, at the end of the day, if someone was going to sell their real estate business here in Australia, the sales side of the business isn’t really worth much. But the rent roll or the number of properties that we have under management, well that’s worth something. It’s actually worth a lot, when you go to sell the rent roll maybe for retirement or simply because you’ve had enough and you want to try something different, your rent roll should provide a large income boost depending on the market conditions when you go to sell it. I have never purchased a rent roll. I’ve preferred the organic growth route, but I have sold off pockets of management for income at various times, mainly because the managements were outside of my core areas, and I wasn’t able to consistently deliver on the service that I promised. And let me tell you, this isn’t an easy process. If you don’t have the right advice and support when going through this, it can cause a lot of undue stress and anxiety. And I honestly had no idea what the hell I was doing. But thankfully, I sought out expert help before it cost me any more time and money. So I had a due diligence done, I had an accountant, a solicitor, and a broker all guide me along. So my best advice is if you are considering buying or selling a rent roll, start by educating yourself on what’s involved and seek out the help of experts to guide you through the process and ensure at the end of the day that your asset is protected. This blog is all about the legalities of buying and selling a rent roll. My guest is the very savvy Lucy Ross from Amity Law. She specializes in rent roll accommodation and advancing. Currently, though she has found a niche market helping real estate and property management, business owners buy and sell rent rolls. And when it comes to contracts, well one size does not fit all. Each contract should be tailored to suit individual client’s needs. And boy has she seen some catastrophes when things aren’t done right by the so-called experts.
HOW DID YOU GET STARTED AS A RENT ROLL SALE EXPERT?
‘I started off my university life and I did a Bachelor of Journalism and then I also did a Bachelor of Law as well. Then during my time at uni I got a job at just a general practice law firm. So I got exposed to a whole bunch of different areas of law. I did a few internships in the family courts and thought I was going to be a family lawyer for a little while, and then I kind of just fell into property. I started doing residential conveyancing, which is like the building blocks of, of property law. It gives you a really good foundation. I started doing that and then kind of found a love for commercial property as opposed to residential being part of, you know, someone’s business journey and taking them along a little bit different to residential. Then in terms of the rent roll and how I became a specialist in rent roll transactions, I kind of just fell into that as well. I kind of stumbled across it on social media and talking to real estate agents. I got a bit of a taste for it and realized that there was a little bit of a, a gap in the market. Purchasing a rent roll is super specialized. It’s not just like purchasing any kind of business. There are different things that, you know, you wouldn’t consider if you were just purchasing, you know, a fish and chip shop or something like that. So, I spoke to everybody, educated myself, spoke to consultants, real estate agents, financers, and then we ended up doing some marketing for it. We did, a buyer’s guide for anyone who’s looking to a rent roll and, drafted our own contract and the ball kind of just went from there.’
WHAT IS A RENT ROLL?
‘So essentially a rent roll is somebody’s property management portfolio. There’s a couple of ways in which you can purchase a property management portfolio. If you were a real estate agent, you have your selling and leasing side of your agency, and then you also manage properties as well. So your appointment, or your relationship with property owners to manage that property under its lease is essentially what a rent roll is. You could purchase an entire real estate agency business or sell one and a portion of that is your rent roll. More commonly what I see is that people who already have an established business, want to purchase a portfolio of properties to boost their income, or alternatively on the selling side, you’ve got a huge selling portfolio and, and you’re doing really well at your sales and you build up your property management and then you want to sell that whole portfolio. So you could sell, you know, a hundred appointments, 200 appointments, 50 appointments. It’s basically your relationship with a property owner under a form that you fill out, you are selling or buying your right to manage that property.’
WHAT HAPPENS WHEN THINGSGO WRONG BUYING OR SELLING A RENT ROLL?
‘I appreciate that lawyers can be wordy. We focus on, you know, what the formation of a sentence or a paragraph or a clause and, you know, it sometimes drives people nuts. You know, why is this lawyer focusing on, you know, this one word and this one sentence. But that’s important when things go wrong. You could be selling a rent roll or you could be buying a rent roll, and you could have a great relationship with the person on the other side. You know, it could be all about handshakes and conversations, and I’ll do this and I’ll do that. But if that breaks down for whatever reason, or there’s some miscommunication, you’re stuck with what’s in your contract. You’re stuck with what’s on that piece of paper and how that’s interpreted. If you have things like your timeframes aren’t correct, if you’re getting finance for a sale and you’ve only left seven days from when you sign that to get finance, you go to your broker, they say, that’s not long enough. Your clause in that contract says if you don’t have your finance by seven days the seller can terminate, you’re gone. You’re out, you’ve lost your opportunity. So, things like that, and a lot of the time you don’t find out about issues in your contract until after you’ve settled, after you’ve purchased a rent roll and things aren’t what you thought they were or you know, the commercial terms, the property management files. It’s not what you thought they were because you didn’t have the opportunity in your contract to look at anything. If the seller tells you once we settle the property owners appointments are yours, I’m not going to go after them. I’m not going to call up the property owner the next day and say, Hey, come back with me. Then what if they do do that? If you have nothing in your contract, which has any consequence for when things go wrong, you are paying for nothing.’
DO YOU NEED A SOLICITOR INVOLVED TOBUY OR SELL A RENT ROLL?
‘Absolutely, and I think that in the day to day in running a business, even when you purchase a property, sometimes people forget that there’s a lawyer that that should be there. They have a vital role in doing that. There are brokers that draft contracts, you know, for you as well. Usually that’s your first point of contact if you are selling and you’re going through a broker. But you should always engage a lawyer to give you advice because like I said, you know, our job is to, to deal with things when things, things grow wrong. It’s just safeguard you, for when things could go wrong, you know, hopefully they don’t, and it all goes smoothly. But you need a clear path to get there, and that’s what we help you with.’
PREPARING TO SELL OR BUY A RENT ROLL
‘So even before you get to the contract, there’s a few things which you need to do to prepare to save you money and save you stresses. So, one of those things which maybe obvious is your licensing, if you’ve just started out and this is a new business for you, you need to get your real estate agent license for property management, and you need to make sure that that license is in the correct name. It’s in the name which you’re going to purchase that rent roll in. So, you could purchase a rent roll under your name, Kylie Walker, you could purchase, it under Kylie Walker Pty Ltd as a company. You could purchase it as a trust. You need to speak to an accountant to figure out what the best way to purchase for you to, you know, minimize your tax liability to maximize asset protection. And you need to figure that out before you even chat to your lawyer, because once you’re under contract, it’s really hard to change that. It could have possibly consequences for you if you enter into a contract in your personal name, you speak to, you know, your accountant afterwards. And if they, Hey, that’s another good idea and you’re already under contract, makes it a little bit difficult. So that’s one of the things that I would say, you know, think about from the outset. Then another thing that we always recommend is a term sheet before you get into a contract. And this is a one to two page document that the buyer and the seller signs, which sets out the key commercial terms of your sale. You know, it sets out things like how you’re going to calculate the purchase price, what deposit you’re going to pay, what kind of timeframes there are under the contract for things like finance and due diligence. Are you taking on anything else in the rent roll, like are you taking on any employees? Are you taking over a lease of a premises? Then the restraint and the retention, which we’ll talk about a little bit later. That is just a one to two page document that’s simply drafted. It’s not going to cost you a lot of money to do that, but it will save you a lot of money in the long run because if you have a lawyer that reviews a 40 page contract, gives you advice on it, and then you go, Hang on, that’s not the deal that I thought I was getting. You know, you’ve paid for advice on something that is not worthwhile to you and you end up spending more money.’
WHY IS THE FORM 6 IMPORTANTWHEN BUYIUNG A RENTROLL?
‘So the Form 6 is the most important thing. What you’re purchasing is your right to manage that property and your right to manage that property is documented in what’s called a Form of Appointment. In Queensland, yeah, your right, they’re called the Form 6, which is under the Property Occupation Act. These are automatically assignable. So, if you want to sell it to somebody, all you are required to do under the Property Occupation Act is tell the owner of the property within 14 days from settlement that you are the new property manager under that form of appointment and the property management file has been sold to you. If you have an older appointment, there used to be a piece of legislation called the PAMDA Act is this acronym, lots of older rent rolls have the old form 20 A appointments, and these are not automatically assignable. So, the property owner would’ve needed to either tick the box on the form at the time, which says, Yes, we consent to you assigning this if it, if it gets to that, or you actually need to seek out that owner’s consent to assign that appointment. So it makes it a little bit difficult. You do need to figure that out before you even get into contract what the seller’s rent roll looks like. Do they have new forms? Do they have old forms? We would recommend that in the contract, any of the old forms get signed up into the new form of appointment. Something that a lot of people don’t know is that finances often want you to do that anyway. They want the seller to sign up new appointments, in the buyer’s name or so have new appointments in the buyer’s name, which the buyer will sign, and they won’t finance on anything which is older, then your Form 6. So that’s super important to know. The other thing is that, even though in this is specific to Queensland, it differs state by state country to country. Every state has their own piece of legislation, but the current form of appointment, which is the Form 6, like I said, you only need to under the legislation advise the property owners after settlement. But we don’t recommend that you wait until after settlement, until you tell all your property owners. We think it’s really important that it’s documented in the contract of sale that once the contract becomes unconditional, meaning that you’re proceeding to settlement, you’ve done your due diligence, you’ve got your finance approval that you work with the seller, and you let the property owners know prior to settlement that the property management portfolio is being sold. Property management is all about relationships with your property owners. That’s your key to this business. So, you want to make sure that you get as many property owners onboard as possible prior to settlement so that they’re happy with your services. You don’t want to get to the stage where you’ve settled and if you are just complying with the legislation and you go, I’m going to let them know 14 days after I’ve already got their property management portfolio, I’m going to let the property owners know. Now they might go, you know what I’m not happy that they’re my new property manager. I didn’t have a say in this. I’m going to terminate my appointments and you don’t get the income from that anymore.’
INTEGRATING A NEW PROPERTY MANAGEMENT COMPANY
‘With the retention period, this is a cause which is specific to rent roll purchases and sales, which is why it’s important that you get a specialised lawyer who knows that this is super important to the whole process of buying and selling a rent roll. Like we said earlier, your relationships with the property owners are key. So getting them on board even before you settle is great. In Queensland, the property management forms, can be terminated by property owners if they give you 30 day’s notice. So if you gave a property owner notice that you are buying the rent roll, you know, whatever stage in the contract, after it becomes unconditional and they decide that they’re not happy with that, they can terminate your appointment with them, um, giving you 30 day’s notice. So what the retention is that when you pay the purchase price, you would pay 80% to the seller and 20% of the purchase price would be held back in usually the vendor’s lawyers trust account for a period, usually it’s about 90 days. So, you’ve got 90 days to operate your property management business with that new rent roll. If any of the property owners terminate their appointments with you during that time you can then call back from that 20% what you paid for that particular appointment. That is unique to rent rolls, given that there can be sometimes a turnover during that period of property owners terminating your appointment, not wanting you to act because you know they didn’t sign up with you in the first place. So, the contract is important and that you document what triggers a retention claim. If you are selling, you don’t want the contract to say simply if any property owner terminates their appointment, the purchaser gets that portion of the purchase price back.’
PREPARATION IS KEY
‘I would say whether you are buying or you are selling to prepare yourself before you, before you start, engage a lawyer. If you are a seller, it’s a good idea to undertake a stellar due diligence on your rent roll before you even get to the selling stage. So, you can go through your rent roll, you can make sure all of your forms of appointment are assigned, they’re built out correctly. If you’ve got old forms, you can get them transitioned into new forms so that you’ve got a clean portfolio to sell, which saves any hiccups along the way. If you are buying, prepare as well, just line up your consultants early, get yourself a, a good lawyer, a good accountant, know whether you want to engage in a due diligence consultant to perform the due diligence on the rent roll for you. Make sure that you’ve explored your finance, so you know how much is the bank is going to lend you? How long is it going to take you?’
WHY YOU NEED A RENT ROLL DUE DILLIGENCE
‘It’s the most important part, really a due diligence. Making sure that you’ve got the opportunity to get into the business, and make sure it’s what you think you are buying. Your forms of appointment are right, so if they’re unenforceable, you don’t have the right to receive the income from that. So it’s super important and I would recommend engaging a consultant to go in and do a thorough due diligence. Don’t just sample, you know, a few and assume that they’re all going to be the same. You should get in there and to really look at them. And if there are any issues with the forms of appointments, which is what you’re paying for you have a right to have the seller fix those up before you pay for them. I recommend a vendor due diligence before you even put your rent roll on the market so you can make sure your own rent role is clean and everything’s up to scratch before the buyer goes in and starts digging around under contract.’