One of the fastest ways to expand your real estate business is to purchase a rent roll. However, settling the deal can be a longer and more involved process than expected. We’ve identified three things which every rent roll purchaser needs to be aware of.
It’s important not to rush this kind of transaction because there are several areas where due diligence and a thorough approach are essential to prevent costly mistakes.
Take a look at three key elements to be aware of, then reach out to an experienced rent roll broker.
1. Heads of Agreement
This sets the commercial terms for your entire deal. Your ‘Heads of Agreement’ provides a framework of the proposed terms of the agreement between you and the vendor. The solicitor will then draft a contract to reflect these terms.
The Heads of Agreement will cover:
What the exchange will include, e.g number of properties, staff who will transition to your business as part of the sale, back-end systems, etc.
The methodology of the valuation; some solicitors or brokers may refer to historical data while others prefer to use current information. The way a rent roll’s value is calculated can vary greatly so it's essential to confirm how it will be figured out early in the negotiation stages.
Find out more: What is the best way to value a rent roll?
Make sure the solicitor writing the sale contract is experienced in rent roll transactions. They must stick to the conditions stipulated in the Heads of Agreement and not try to find areas where things will be re-negotiated.
Find out more: 7 things a valuer looks for in a rent roll valuation.
2. Factor in timelines
The exchange of a rent roll is complex and there are many details to review. For starters, you can expect due diligence to take around 30 days. If you have non-compliant properties on your books, this will add to the timeline.
There is always more back and forth than you expect and unanticipated questions and issues always crop up. Having the assistance of expert operators will help to smooth out the process and will minimise the time required, but you’ll need to step back and let them work at the right pace.
In general, we find the rent roll exchange process takes at least 60 - 90 days. Don’t forget to factor in the retention period of between three to six months, this is the time between the sale and when the final value of the rent roll is established.
3. Finance can be tricky
Rent rolls are classed as an intangible asset and finance approval is not complete until contracts are signed.
Banks will want to see detailed financial information about the rent roll and may require up to 45 days to issue final approval. They may also ask for your business to undergo a valuation and credit review to confirm you’re steady enough to take on the loan for a rent roll.
Unlike with a standard home loan, there is no pre-approval process for rent roll finance. It all becomes a balancing act because finance can only be secured after contracts are signed.
To add to this, the previously mentioned retention period allows for the price to ‘settle’ based on whether or not some rental property owners leave due to the exchange taking place. So it is difficult to know the exact amount you will pay until the end of the process.
Work with a rent roll transition specialist
Taking a methodical approach to purchase a rent roll will pay off, especially if you have the right team to guide you. Enlist the help of a specialist team including your rent roll broker, accountant and lawyer. Pace yourself and take things step by step.
The end goal is a purchase which adds to the value and profits of your business. Having the right support and advice will get you there.