Sell audit your property management files

We rarely see agency operators regularly sell auditing the property managed files to check if the files are up to date and information in the files complies with the industry regulations and Acts.

A quick check of the following may safeguard you against a government audit or check;

·         Are all your managing agency authorities current and signed?

o   Some agencies update their managing agency authorise annually.

 

·         Are all leases in the files and signed by landlords and tenants?

o   Most agencies operators are backing up on servers, filing services or the cloud.

·         Do you have a current completed routine/condition & inspection report?

o   Do you have adequate back up of photos to support the condition reports?

·         Are all the bonds lodged with the Bond board and do you have reconciled records?

o   Make sure when you transfer management to and from an agent you have informed the RTBA.

·         Ensure that what is in the file matches with the computer records?

o   Often agents negotiate or adjust their rates of commission without updating the agency authority in the file

It’s too late to do update your property management files if you have embarked on the sale of the property management portfolio or worst still after you have sold your rent roll. We often see vendors having to tidy up their property management files after the rent roll sale  due to the requirement of a buyer post due diligence. The landlord will be easier to obtain information if it becomes your normal annual practice to maintain these records.

Restraint of Trade- Social Media Platforms

The use of social media in the workplace is dramatically changing how we go about business, bringing both significant opportunities as well as potential threats.

Without adequate safeguards, the contacts made by employees on social networking platforms, such as LinkedIn, could be retained by the employee and used to the detriment of the previous employer.

 There are a number of actions that your business should definitely consider to help safeguard itself against potential loss and damage, in terms of client relationships, confidential information and intellectual property:

1. ensure your contracts of employment include the most thorough protection possible;
2. introduce  policies and procedures that cover the use of information in a social media context and set rules around how employees can and cannot use social media to network with customers and prospective customers;
3. matters to address with new employees on commencement of the employment relationship, so that the expectations in relation to the use of, and rights associated with, social media contacts both during and after employment are clearly set out; and
4. how other measures (such as paying for "premium accounts" on LinkedIn) can demonstrate professional networks created in the course of employment as distinct from social networks that may fall outside the bounds of employment and remain unprotected.

   

 

 

 

 

Vacant Rates in Victoria

New data shows rental vacancy rates across one state are stable or falling, while some regional markets are offering healthy yields of up to 5.4 per cent.

Real Estate Institute of Victoria said recent vacancy data showed that in Geelong, the regional centre with the highest rate; there was a 0.1 per cent fall to 4.4 per cent in October, based on the six-month average trend to 31 October.  

In East Gippsland and Wellington Shire, there was a fall from 3.4 to 3.1 per cent.

In many regional centres, such as Ballarat, the vacancy rate was already low, with housing agencies often struggling to find sufficient accommodation for tenants.  

So, while a further fall in the vacancy rate is unwelcome news for those looking for a place to live, for investors it means continuity of tenancy and the likelihood of a pool of would-be tenants from which to choose?

In Ballarat and the Central Highlands, the vacancy rate fell from 2.8 to 2.7 per cent, while in Shepparton and Goulburn, Warrnambool and the Western District; it was down to 2.7 per cent from 2.9 per cent. In the Wimmera it was stable at 2.2 per cent.

Median house rents were up in Geelong, Ballarat and Bendigo in October, while across the state the median rent for a house remained stable at $300 a week.

The median apartment rental rate was also stable at $250 a week, but in Ballarat, where the housing market is tight, it rose from $240 to $255 a week.

 

Source; REIV

Contractor Management

Contractor management can be a very challenging area for organisations to manage and your obligations under Occupational Health and Safety legislation are not absolved because you have engaged the services of a contractor. It is important that contractors have a clear understanding of what is required while on site at your workplace and that they have their own robust safety policy and safety procedures in place.

If your organisation engages contractors or sub-contractors, contractor risk management should be integrated into your safety management system. A safety induction which is relevant to the site should be completed before commencing work. The complexity of the contractor management process will depend on how a contractor is engaged, the type of work, where and under what circumstances the work is being conducted.

Designated workplace health & safety consultants with experience in your particular industry will work with you to develop a contractor management program that demonstrates due diligence and gives you a practical tool to systematically manage contractors.

A Consultant can provide you with a gap analysis to ensure your current safety policy and safety procedures are up to date with current Occupational Health and Safety legislation.

Contractor management safety services should include:

·    Review the current contractor safety management process and make recommendations

·    Development of a contractor safety management program for your business including safety policy, safety procedures, safety checklists, safety induction and/or safety training

·    Mentoring and training program to give your staff the skills to manage contractor safety

Source; Safety Australia; safetyaustraliagroup.com.au

Why do I need a Section 52 Statement?

In Victoria you are legally required to provide a prospective buyer with a Vendor’s Statement (also known as a 'Section 52 Statement') if the goodwill, plant, equipment or fittings of the business are being sold for a total price of $350,000 or less. Failure to provide this statement or satisfactorily complete it will give the buyer the right to terminate the sale contract. You must give the purchaser or their representative a completed and signed copy of the statement before they either sign the contract or pay the deposit.

The sale of small businesses is regulated by provisions of the Estate Agents Act 1980 and the Estate Agents (General, Accounts and Audit) Regulations 1997.

Your accountants will make sure you have this document is available to prospective purchasers prior marketing the business.

Why buy an existing business?

If you buy an existing business, you can analyse the profit and loss statements and balance sheet of the Company you are buying. This is an advantage because you see firsthand what you are getting in, particular the income streams of the business and the individual expenses of the business.

In addition to this you have a going concern producing revenue, with staff, brand, systems and an infrastructure in place. In essence you are making money from the day you settle.

When you start a business from scratch, you must secure and fit out a premise, build the systems, web site, arrange plant & equipment, hire and train staff- all of this before you begin to earn an income.

Statically most start up businesses struggle to make a profit and in some cases fail within 3 years from commencing. Experience would say that starting up a business require an enormous and of persistence & resilience but above all a bullet proof business plan.

What items to be included in the sale of a rent roll?

The followings items that possibly could be included in the Contract of Sale to purchase a rent roll;

 1.            Telephone numbers and Facsimile numbers- In some cases the franchisor may   reserve/own these numbers and this is reflected in the franchise agreement.

2.            The agency’s web site URL.

3.            The agency’s Trading Name.

4.            Any mobile phone numbers of staff where the business pays for or provides a mobile phone as part of the employees work agreement.

Rent Roll Market Wrap -2013

Victoria

We have seen an increase in buyer enquiry from agents wanting to purchase rent roll over the last quarter. The reason for this is that agents are experiencing a decrease in sales income and are willing to purchase a rent roll that ensures bankable and regular monthly income.

A number of sale of smaller sized rent rolls, or parts of existing rent rolls have occurred in the last quarter. The reason for this is agents have sold rent rolls in order to inject capital into their businesses. Some residential agents have sold their commercial portfolio’s, to concentrate on core activity, reduce debt.

 There haven’t been a lot of transactions where agencies have sold on a walk in walk out basis. The business confidence and the state of the Real Estate market haven’t encouraged this.

We predict that there will be more mergers of agencies over the next 12 months; so agencies with like businesses can take advantages of the economies of scale and maintain income whilst reducing duplicated costs.

The multipliers are remaining constant at $3.00- $3.20 in Metropolitan Melbourne, $3.20-3.35 for quality Inner City rent rolls that have been managed for a length of time.

The outer suburbs particularly the Western Suburbs f Melbourne the multipliers have dropped slightly to figures of $2.00-$2.40.

 The multipliers in regional Victoria have maintained their values in the $2.00- $2.50 region.

NSW     

We have experienced a huge increase in buyer activity in the last quarter. The appertite from agents looking to increase and scale up the size of their rent rolls has been huge. As a generalisation the size of rent rolls NSW have been smaller than some other States. Buyers now see the value in a large well run rent roll that provides consistent property management income and sales leads.

The amount of buyer activity in the Eastern Suburbs, North Shore and Hills District has resulted in a seller’s market.

The multipliers achieved for good sized well run rent roll is $3.20-$3.70 in Metropolitan Sydney. Rent rolls have sold in outer suburbs in the $3.00- $3.20 region. The multipliers achieved in regional areas such as the Central and northern Coast is in the vicinity of $2.50- $3.00, whereas rent rolls in the Regional Country areas have sold around $2.40-$2.70.

Tips on Buying a Rent Roll

We are seeing a growing number of business owners who for a variety are choosing to sell their rent roll. With targeted marketing of a rent roll we are experiencing good competition from buyers wishing to purchase and integrate a new rent roll into their existing one. This generates income into the business immediately.

A Buyer usually can leverage their existing infrastructure without adding huge expenses to their business. The income generated from buying a rent roll of 150 properties far exceeds the extra associated costs. These could be;

• Small upgrade to the computer system or trust accounting package
• Additional fixed office costs including desks, electricity, office space, rent etc.
• No additional staff or perhaps employing an administration person to assist the Property Manager.
• Additional sales income generated from the “new rent roll”.
• No additional procedural systems.

However, not all rent rolls may be a great investment. Care must be taken that the purchase will not cause deterioration of the existing rent roll due to poor management of the rent roll purchased.

Taking on rent roll of any size is going to require more work, however if you need to spend 80% of the staff’s time on 20% of the rent roll to “bed it down” then it is a recipe for disaster.

A structured due diligence process can reduce the potential for loss of property and allow for the program of changes and improvements to be implemented by the team at settlement.

 In short you can use the settlement period to be proactive about reviewing the files regarding the following items to ensure they are in order;

• Current lease status
• Rent increases
• Bond lodgements register
• Keys
• General or routine inspections
• Outstanding maintenance
• Property & client familiarisation
• Arrears or part payments
• Financial reporting to owners

Taking a proactive approach through thorough research and due diligence can protect the income stream of the rent roll you purchased. Needless to say it also builds goodwill with your new clients.

Due Diligence

Buyers of businesses are naturally concerned that they have made a “good” buy and that any representations made to them have been true and correct.

To provide this assurance there will often be a condition in the agreement for sale and purchase for the buyers (or their professional advisors) to check the business further. For the smaller business this may be as basic as approving the lease and the financial statements.

For the larger business the process may be far more complex and take longer to complete. The focus will be on three main areas: legal, financial and operational. Experts may be required to evaluate the different areas.

Business owners planning to place their company on the market need to anticipate the probability of some form of due diligence requirement. To ensure a win – win deal they need to be aware of what the buyer will want to see, have the information ready for inspection and be certain that no unexpected surprises will emerge. And the seller needs to see the process from the buyer’s perspective.

Missing documents, lack of co-operation or a lack of understanding of the process can lead to uncertainty, delays, suspicion and, often, cancellation of the contract,

The experienced business broker should educate both the buyer and seller on the due diligence process so that both have reasonable knowledge and realistic expectations. However, it is not the broker’s job to conduct due diligence for the buyer. The broker can facilitate the flow of information, anticipate obstacles and check that those responsible for various tasks are carrying them out in a timely fashion.

Below is a list of information that may be required under due diligence for a mid size business. This is not meant to be complete or appropriate for any specific business.

• business structure – company, partnership, sole trader
• historic summary
• financial statements and GST returns
• lease details
• assets schedule and identity of any plant, , leased, hired, or not passing in the sale
• organisation structure, employment contracts and staff schedule
• pricing, structures, discounts, terms of trade
• marketing and advertising strategies and commitments
• any trademarks or patents
• contractual arrangements e.g. franchises licenses, supply contracts etc
• computer software and other IT information
• any legal issues

Factors that influence the value of a rent roll

There are a number of factors that influence the value or worth of a rent roll. We have listed below a checklist for your reference;

1.       Number of properties under management

2.       Number of landlords

a.       Number of multiple landlords

b.      Number of owner related properties

3.       The % of commission obtained each property

a.       Trust system report only give averages of entire rent roll

4.       Geographic spread of properties

5.       The $ of management fees per property per annum

6.       Management fees - $per annum

7.       Letting fees for last 12 months

8.       Sundry fees for last 12 months

9.       Type of properties under management

10.   Length of time each property managed

How to buy a rent roll

To buy a rent roll you need to be a licensed Estate Agent.  When you buy a rent roll the price you pay is a multiplier of the management fees. Items that effect values have described in other articles on this Blog, however these are some factors that influence value;

1.            The number of properties under management- if the rent roll being sold is too small then buyers will find it hard to secure finance from a Bank. If the rent roll is small then due to finance restraints the price will be affected negatively.

2.            Banks generally like to lend on a rent roll of 150 or more properties.

3.            The ratio of landlords to properties will influence value. Ideally a 1:1 ratio is perfect.

 

4.            The geographic spread of properties.

5.            The mix of properties under management .

Any offer to purchase a rent roll will encompass the price offered, settlement terms, is it subject to finance or not, the restrictive covenant offered by the vendor and the retention period and amount.

The broker will draft up the heads of agreement and then once all parties agree on the sale price then the vendor will instruct its solicitor to prepare contract of sale. The contracts are exchanged, a deposit paid and then the buyer has the right to conduct due diligence investigations. No due diligence occurs prior to any agreement reached between parties.

At the conclusion of DD, the parties agree on the wording for the assignment letters to be sent to the landlords (VIC ) or new authorities will be sent to all landlords in the name of the new agent.

 The final settlement price is determined once all authorities have been returned or notification of assignments has occurred. Generally the settlement of a rent roll occurs at the end of the month thus allowing the vendor to account to all stakeholders. All tenant and landlord information is required to be transferred onto the purchasers trust system at settlement allowing for an easier transfer. Naturally there will be a period of involvement from all the parties to ensure that the transfer occurs as smoothly as possible.

 The retention sum and period operates for the purpose that if any property drops off for no apparent reason post settlement then a financial adjustment can be made on those properties that drop off at the conclusion of the retention period. An amount of money from the settlement sum is held in Trust to satisfy this clause.

 

Valuation in the Volatile World

Rent Roll buyers are buying the future income stream or profits of a business.

Historic results are no guarantee of future performance. Profit & Loss statements, Balance Sheets will show past profits and trends but cannot tell you what will happen next year.

Averaging figures for the last 3 or 4 years can be dangerously misleading, particularly if the business is experiencing a decline in the present downturn. The most recent results are the best indicator of the businesses’ health and future profitability. The buyer must make a subjective judgement as to what the future really holds.

Businesses that consistently monitor their cash flow will be in a better position to take advantage of when the economy will rebound.  Eventually businesses will emerge leaner and stronger from the experience.

The challenge for the buyer is to predict the future performance of a rent roll that is for sale; how much the downturn will impact results, and how prices will be supported by the increased supply of buyers looking to replace decreased sales income with rent roll income.

Business valuation is never a precise science. All valuations are opinions and the only true test of value is an arms-length sale in the market-place after a thorough marketing program.

Vendor Finance is now becoming more popular

With the banks continuing to be cautious lending money to cash flow business (such as rent rolls), we are seeing more sales where the owner leaves in some money for the purchaser. This makes good sense for both parties- the buyer benefits from the seller’s continuing interest and support in the success of the business and the seller gets a higher interest rate and less risk by investing in a business they know and understands.

Analysis of the commission rates of a rent roll

Most trust management systems will provide a potential purchaser of a rent roll with a management statistics report.

Generally this will show the statistical information of the portfolio or the rent roll, such an average rent, gross fees, letting fees, number of properties managed, number of landlord, arrears etc. It is important for a potential purchaser however, to obtain the actual commission rate charged for each property managed to review whether there is a variation in the rent commission charged across the rent roll.

The value of the rent roll is in part based on the commission charged. That said there should be a price variation or lesser multiplier paid on a rent roll where there are a number of fees charged at 4 or 5%. It is too hard to increase the commission rate to 6-8% as owners will resist this increase. Therefore as a conclusion, the higher the commission charged, the higher the multiplier a buyer will pay.

If you own a rent roll, start the process to increase your commission rate over time and to do this in conjunction with increasing your rent. It will be hard for the landlord to resist pay a higher commission if at the same time they are getting a rent increase.

Top 10 Exit Planning Mistakes

We have compiled a list of the common mistakes business owners make when they exit their businesses.

1. Bad timing – judging the best time to sell is important to maximise the price received.

2. Not being proactive – waiting for the perfect deal is like waiting to win the Lottery– it is highly unlikely.

3. Not considering all your options – Discuss with your broker the potential target market and the sale options.

4. Being distracted – do what you do best – run the company. Let the professionals market your
business and negotiate the best deal.

5. Not knowing your value – what is your business worth now?

6. Where to next? – An important part of exit planning is answering that question. As soon as you start to think about selling, act on it as you are likely to be distracted and take your eye of the ball and stop running the business with all your energy.

7. Tax implications? – Your accountant should be part of your team implementing your exit plan.

8. It takes time – selling a business is much more complex than selling a house so allow plenty of time. Information has to be assembled, multi-pronged marketing strategies need to be implemented, legislative and tax implications need to be understood, and almost certainly there will be unexpectedroadblocks and challenges before settlement.

9. Hard work ahead- do not get overwhelmed with the task ahead. If you have an experienced team handling the process they will smooth the way and sort the problems.

 10. Ensure your listed price is correct- Agents spend a life time educating their clients about value- when you are selling head your own advice.

Does the length of time of properties managed on a rent roll influence value?

Over the past few months we have had a number of real estate agents looking to sell their rent rolls. Their primary question is- how much do you think the rent roll is worth?

One needs to consider a number of factors in valuing rent rolls; not the least the length of time each property has been managed by the agency.  A rent roll that has only been operational for a few years isn’t considered a mature rent roll, not having built good loyalty with the clients of the rent roll.

Generally speaking, these property owners are first time or new investors who invariably have geared their investment and are influenced by the economic conditions, vacancies and level of commission & fees charged. If the property is vacant for a few weeks the agent could find the listing is vulnerable and those property owners leaving to go to another agency.

That said, rent rolls with this profile and dynamic are worth less than a rent roll where property owners have been with the agency and built a relationship with the agency over time.  The value of rent rolls that have a mature client base is more valuable than those without.

Preparing your rent roll for sale

Make sure that you know your business- what are the state of the rent roll files?

If you are selling a rent roll then do a self audit of the files to ensure

·         all the authorities are updated and have the correct entities name on the authority

·         ensure that leases to all the properties are signed

·         the condition reports are up to date

·         the bond lodgement registers up to date

Above all ensure that what’s in the file matches the computer records.

www.bdhsolutions.com.au

What restrictions should the vendor offer when selling a rent roll?

A purchaser expects that the vendor selling a rent roll should offer and entered into the contract of sale with a restrictive covenant clause. This clause should preclude the vendor from having any interaction with the landlords of the rent roll sold for;

a.        A period of up to 3 years.

b.      An area of up to 10 kilometres from the vendor’s office.

c.       In the capacity of director, shareholder, branch manager or consultant.

The vendor should be further restricted from soliciting or assisting others to solicit the landlords and should be restricted from providing any material to enable someone to solicit the landlords.

How long should the retention period be when selling a rent roll?

Naturally the vendor will want shortest time and the lowest amount and the purchaser will want the

longest time and the highest amount.  So therefore what is reasonable?

I am suggesting that an amount of 10-15% of the purchaser price to be held in Trust as the retention sum for a period of up to and no more than 6 months. In most of the transaction that have been negotiated, the retention period has been 4 months.

The interest on the retained amount shall be divided between vendor and purchaser.