Should you buy an Insolvent Rent Roll?
It's been a rough and tough old 9 - 10 months that’s for sure. One thing is if sellers want to sell in this market then they’re fair dinkum. Buyers are finding it frustrating as it takes longer to get your funding approval in place, however these are uncertain times and everyone just has to be a little more patient.
I’m finding it an interesting market at the moment with a wave of activity in the last 6 months of the 2020 calendar year, but everyone needed a break come Christmas and it was a little quieter than normal for this summer holiday period than previous years.
So when March 31st rolls around, what does it mean for businesses that a heavily reliant on JobKeeper? Will we see more distressed rent rolls coming on to the market in the months preceding? Last year and 2019 I was appointed on 5 Receiver & Manager, Voluntary Administration or Voluntary Liquidation appointments. These were a variety of financial pain, mismanagement and also fraud. So are we going to see more of it in the coming months or years with lessor sales activity due to missing overseas buyers, significant rental decreases in some areas or suburbs, or too much reliance on JobSeeker? I would say yes, because with a very tight sales market and less stock coupled with pressure on decreasing rents and already pressure on management commission rates, this only spells trouble for those that don't already have a rent roll 100% covering their fixed costs. Of course it doesn't mean everyone in this position will resort to drastic measures, however if you don't have a plan to reduce overheads, improve commission rates and sundry fees or increase sales income, then a small percentage that spoil it for everyone else will resort to illegal measures.
Should you buy a rent roll in an Insolvency Event?
Don't assume everyone will think it's a bargain - Everyone is after a bargain when a rent roll or agency is in an insolvency event. Be bold with your pricing but don't think it's only worth 1 times or 1.5 times. The first stage of a sale is about short lists, and price will be a big factor. Bigger the better.
Who has made the appointment? - If it's bank appointed then the motivation to achieve a much higher price will be stronger. If it’s a voluntary appointment then most often the business is in risk of trading insolvent, therefore the insolvency practitioner maybe looking for a quicker result with fear of landlords exiting.
What will the Insolvency Practitioner look for? - Capability of the agency or purchaser as well as price is very important, as the purchaser will need to roll up their sleeves and get dirty with lots of hard work. So be prepared to prove you have the team and experience to take over managing the rent roll. The appointed firm wants to get in and get out
Opportunity – Possibly landlords have had poor service whilst their property has been managed by the outgoing agency. This is a great opportunity to deliver good service and improve commissions and fees for the long term.
Take on the challenge - Hard work will reward in a growing asset which will be worth a lot more than what you've paid for in the long run. Lastly, when considering purchasing a distressed rent roll make sure you conduct proper due diligence. Please check the following;
bonds - if bonds are missing then they will be protected by Fair Trading as long as a receipt was issued. It'll again require some time and effort rectifying what's missing
ingoing reports - make sure there is one for each property file. If there isn't then make sure your team is prepared for lots of inspections when you take possession
existing lease
proper tenancy applications
when was the last rent increase? - has this rent roll been keeping up with the market? If not then this is a plus as your landlord will appreciate the uplift
when was the last routine inspection done?
Wexted Advisors recently released a handy and insightful tool on those businesses considering an Insolvency appointment. Please take some time to read if you feel this is appropriate for you.
