A few things can happen during the retention period following a rent roll exchange to impact the final price. Here’s what to be prepared for.
Buying a rent roll is not without its complexities, and while you will spend a lot of time focused on due diligence, negotiation and transition planning, what happens immediately after the purchase has the potential to make or break the value of the asset.
The retention period, in particular, can trigger a range of scenarios which impact the value of the roll and can even lead to legal action. This is because this period gives rental property owners the opportunity to move to new management or sell their investment.
If you are the seller and you haven’t prepared for this in the contract, you risk having to refund some of the purchaser’s money. If you are the purchaser, you risk the time and money required to recoup a loss. It is important to note there is a cap (usually up to 20%) and the purchaser is exposed over the capped amount.
Here are a few scenarios I have seen unfold during the retention period. At a low level, these aren’t something to go into battle for. If they happen at high volume, the income and the value of a rent roll will be severely impacted, and this is where things become complex.
1. The rental property owner sells through the buyer
If a property owner decides to sell during the retention period and chooses the purchasing agency to handle the sale, the property is considered to have delivered fair value. In this case, it remains part of the rent roll and is counted towards the final tally at the end of the retention period, so there won’t be a financial adjustment on price.
While the buyer may lose ongoing management income, the value gained through the sales commission makes this a fair trade and a straightforward inclusion. It’s usually considered a fair outcome for all parties.
There should still be a clause to clarify this in the contract, just in case the seller wants to push for a piece of the pie.
2. The rental property owner sells through a third party
Here’s where things start to get murky. If the rental property owner decides to sell the property through an entirely separate real estate agency - neither the buyer nor the seller - this creates a grey area.
The buyer is still managing the property under the terms of the retention period, and paying for it as part of the rent roll purchase. However, they won’t receive a management fee, or commission when the property sells.
Under standard logic, this property should not be counted in the final tally after the retention period. Unfortunately, many contracts fail to specifically exclude this scenario. Disputes can and do arise, and they often end up in court.
The fix is to prevent the confusion in the first place and create a clear clause in the contract to cover a sale managed by an external party.
3. The rental property owner moves into the property
If the property owner decides to stop leasing the property and move in during the retention period, the situation mirrors scenario 2. The buyer is technically managing the property for a short period, but there is very limited long-term value for them.
I have seen situations where the property is still counted in the final tally because of a lack of clarity in the contract. Again, it highlights the importance of creating clauses explaining what will happen if a PUM ceases to be incoming-generating during the retention period.
4. The rental property owner appoints a new agency
This scenario is much clearer. If the property owner moves the property to a new agency - not the vendor or purchaser - during the retention period, it is considered terminated and should not be included in the final tally.
In some cases, the vendor may substitute this lost property with another of comparable value, but this depends on the terms of the agreement and their existing rent roll structure.
Whether you are buying or selling, your lawyer should discuss this scenario with you while the contract is being drawn up, but it’s up to you to ensure the fine print matches your best interests.
Don’t be caught off guard
Details, details, details. When you buy or sell a rent roll, you need to consider every possible retention period scenario and include it in the contract. This way, you will avoid ending up with less than you expect or dealing with the stress of a trip to court to try to reclaim lost value.
A well-written contract today is far cheaper than a legal battle tomorrow. Reach out to BDH Solutions for help protecting your interests with a clear, tailored agreement outlining what counts, what doesn’t and how to resolve ‘grey area’ issues.