What is a retention period when it comes to a rent roll transition and how does it relate to you as the vendor or buyer?
With all the highs and lows of the real estate market, building a rent roll makes sense. It forms the ‘bread and butter’ foundation of your business so you can rely on income should the market you’re in go off the boil.
A rent roll is an asset for more than cash flow and there may come a time when you decide to sell it and head in a different direction.
The process of selling a rent roll involves several steps. First, you need to be prepared and have everything organised, with all the information nicely presented. Once you have found a buyer, there will be some negotiation involved.
Part of the process includes coming to an agreement about the retention period.
What is a retention period in a rent roll transaction?
A retention period in a rent roll transaction is put in place to protect both the vendor and the buyer from the loss of landlords in the time right after settlement.
When a rent roll is handed from one agency to another, landlords will be contacted to be notified of the change and given the opportunity to review the new property manager. Generally speaking, most landlords will be accepting of the shift. However, it is common for around five per cent of landlords to seek a different property manager after the sale.
This means the buyer is paying for landlords who will immediately stop using their services.
Because it is impossible to gauge exactly how many landlords will transition with a rent roll sale, the contract usually includes a buffer period from the end of settlement. During this period, 10 to 20 per cent of the sale price is held [by a third party] for a period of at least three to six months.
Once the allocated time has passed, the rent roll is reassessed and the value of the properties no longer being managed is subtracted. The leftover funds are distributed between the vendor and buyer accordingly.
The importance of a retention period
Most landlords are on autopilot and rely on their property manager to take care of their investment property. So long as there are no problems, they don’t think about switching.
Upon receiving notification their property is soon to be under the management of another provider, many landlords find themselves prompted to review the way their property is managed. Some may decide to seek a better deal. Others may use the notification as the trigger they were waiting for to take action and sell.
In some cases, a landlord who wishes to stay with the vendor may be able to do so. This depends on the vendor’s next steps and the clauses within the selling contract.
The retention period gives landlords time to get to know the new provider and make a decision. As a buyer, you would of course be motivated to show your landlords how you will serve them and why they should stick with you. As a vendor, you’ll want to sell to a reputable agency so you don’t end up missing out on part of the sale money.
After the retention period
After agreeing to purchase a rent roll, the buyer puts down a 10 per cent deposit. Of the remaining 90 per cent, 15 per cent is put aside as retention funded settlement money.
Once the retention period is complete, the final payment will be calculated based on how many landlords remain.
As the vendor, you don’t have the right to intervene after the sale contract is final. You can’t attract landlords back to your business during the retention period, usually because of a no-compete/restraint of trade clause.
Understanding retention periods can be confusing. It makes sense to work with consultants and legal professionals who have extensive experience in this area. They will be able to advise you and help you get this area of the contract right.