17 Oct 2013
Words Tim Admin

What to look for when you are buying management rights

In this fourth article in the series I will look at an issue that should be considered by any potential purchaser of management rights and that is the likely retention or loss of units from the letting pool. Fortunately history shows that most letting pool numbers remain fairly constant with any fluctuations being relatively minor. Certainly in the current economic times I have seen very few problems in that regard. In previous years though, some managers found the number of units in their letting pool decreasing as owners cancelled letting appointments and moved into their units or sold to owner occupiers. The problem seemed to be magnified when housing affordability reached record levels with low interest rates and low prices where many people renting properties and previously unable to purchase a unit found they were able to. The multiplier on which a management rights business is purchased should reflect the risks of buying the business, and it is important to factor in the potential loss of units from the letting pool, particularly in the case of small to medium sized permanent complexes where the trend in the past seemed to be more pronounced. Curiously a factor I have observed is that the better the job that the manager does, the more likely that owner occupiers are to buy in the complex or even move into what was previously their investment unit. It is ironic to suggest that managers doing a better job than others stand to be disadvantaged by that, but that can be the case. How can buyers protect themselves? Investigate the purchase thoroughly. Management rights are sold on the basis of past income levels. There is no guarantee that that level will continue. The standard contract does not contain any protections in that regard and it is extremely unusual to include provisions about minimum numbers in the letting pool (except when buying off the plan). This is one of the risks of buying management rights. Investigate that risk. Ask the current manager and/ or the accountant who does the verification of financial records to tell you how many units were in the letting pool at the beginning of the year, during the year and at the end of the year. Is the trend downward? Buyers should assess the likelihood of more owner occupiers. Are the units large and spacious in a good area or are they too small for the average owner occupier? Generally complexes in noisy locations such as near a major road or train line will attract tenants rather than owner occupiers. Buyers should factor these risks into the purchase price they offer and tell the agent and the current manager why they are doing that. If there has been a trend of units leaving a pool, or if you have justified reasons to suspect there will be, a lower multiplier may be justified. Alternatively, ask for a condition in the contract to allow for a reduction in the purchase price if the number of units in the letting pool at settlement is less than the requisite level.