Unfortunately the sale of a rent roll is so much more complex. And extends well beyond the actual day of settlement. And that’s why, when it’s time for you to sell your business, the choice of buyer is so hugely important.
Most people focus on the Multiple in pricing a rent roll. It’s the agreed number applied to the management fees to determine the price. And it’s applied to the rent roll at time of contract, then again on the actual properties that go across at settlement. Then there’s a further calculation at the end of the retention period (commonly 90 days) where the seller can be out of pocket for post-settlement losses.
So let’s say a sale is agreed and contracts signed at a Multiple of $3.30 on a rent roll that shows $100,000 in annual management fees (50 properties at $2000 each). The seller thinks they’re getting $330,000. But when five landlords get notice of the transfer they jump ship – they don’t like the buyers – so settlement is on $90,000 of fees. Forty-five landlords remain for a settled sum of $297,000.
Unfortunately during the following 90 days of retention there’s further “slippage”. Landlords aren’t happy with what they’re seeing in the new agency. They terminate without blaming the buyers’ lack of service or any fault. But the buyer, and the way they run their PM service, is the unwritten reason they’re going elsewhere. Let’s say it’s another 10 landlords. Suddenly there’s 35 left of the original 50 properties and the seller’s net price is reduced to just $231,000.
Yep, almost $100,000 lost on the transaction and this isn’t some extreme example – this scenario is entirely possible under the terms of the typical rent roll contract. I spoke with an agent recently who experienced exactly that. The “effective” Multiple in this disaster sale ends up at a miserable $2.31. Could there have been a more suitable buyer? Maybe at an initial Multiple of $3.20 but a better ‘fit’ for the landlords?
Other than a really rare occasion, (maybe an older seller who romanticises about a young couple repeating their family’s journey in the home), it’s unusual for anyone to care who buys their house. The price is the price. Maybe there’s some argy bargy and a small adjustment over the building and pest. But otherwise the seller knows what they’re getting. Selling a rent roll couldn’t be more different!
Will your landlords ‘gel’ with this buyer and their PM team? Have they got a good reputation, a brand and culture that aligns with yours? They’re never going to tick every box and at some point you need to choose the buyer who’s the best match for your clients, with a combination of those things AND the best offer on a Multiple and other sale conditions.
But the Multiple, and that initial rent roll price, are rarely the most important consideration when you sell.
I’d love to have a confidential chat with you about your rent roll or agency plans. Please call me on 0423 332 022.