How are rent rolls valued in Australia?

What exactly is being valued when you value a rent roll?

A rent roll is the set of property management agreements an agency holds, the records needed to service them, and the management income those agreements produce. It is a business asset, not real property: what the managed homes would sell for tells you nothing about it.

Trust money sits outside it. In Victoria an estate agent must have a trust account for money received from clients, such as rent and fees paid in advance. In NSW, clients' funds held in trust cannot be used for any purpose other than for that client. A trust balance is never part of a rent roll's value.

The fees depend on paperwork. In NSW, for example, an agent is not entitled to be paid for its services, or to recover expenses, unless a written agency agreement meeting the requirements has been signed by both parties and a copy served on the client within 48 hours after the client signs. A valuer counts the fees the signed agreements support.

Why does the purpose of the valuation come first?

For tax and most transaction work the standard is market value: the price a willing but not anxious buyer and seller, both fully informed, would agree at the valuation date. The engagement then fixes what is being valued, because each of these is a different number:

• ·The managements alone, where a roll is sold as an asset and the seller keeps its own liabilities
• ·The whole agency business, where the rent roll sits beside a sales business, staff and premises
• ·All the shares in the agency company, which needs a bridge from business value to equity value
• ·One owner's parcel of shares, where a shareholders' agreement may set its own basis of value

Which income is a rent roll valued on?

Three figures often get called a roll's income: a run rate from the rent roll schedule, the fees actually received over the last twelve months, and the latest month multiplied by twelve. They are rarely equal, and a large gap usually points to vacancies, arrears, fee discounts or recent losses.

The base is the recurring management fee income that the managements on the roll at the valuation date will earn over a year, excluding GST and reconciled to the trust accounting records. Letting, renewal and inspection fees are separated, because they depend on events such as tenancy turnover.

Illustration only, not a market multiple. Hypothetical, rounded figures.

Which adjustments does a valuer make to that income?

Each adjustment uses what was known or reasonably foreseeable at the valuation date. The ATO lists reliance on post-valuation date information among the common issues it sees in valuations.

• ·Fees are measured on rent expected to be collected, so long vacancies and persistent arrears reduce the base
• ·Managements won or lost during the year are restated to the roll as it stands at the valuation date
• ·Principal-owned and related-party managements are tested for a market fee and for whether they would stay with a buyer
• ·Managements recently bought from another agency are checked for retention terms still running
• ·Commercial and short-stay managements are separated, because their fees, workload and losses differ

Why does the cost of servicing the roll matter?

A rent roll is worth what its income is worth after the managements have been looked after: property managers, leasing and trust accounting staff, software, vehicles, insurance and the licensee's supervision time. Two rolls with the same income can differ widely in value if one is spread across distant suburbs or turns over tenancies often.

Market value uses the costs a typical buyer would carry. A neighbouring agency with spare capacity may pay more, but that extra is value to that particular buyer, not market value.

Which methods are used, and how are they checked?

For a sale of the managements, the market approach usually leads: completed, arm's length sales of comparable rolls with known dates, restated onto the same income base and adjusted for location, fee rate, size, property mix and deal terms. An asking price, or a multiple with no stated income base, is a lead, not evidence.

The income approach is the cross-check: net management income after servicing cost, capitalised at a rate that reflects its risk or projected forward with an explicit allowance for managements lost each year, then discounted. The ATO recommends a secondary or cross-check method where possible. Attrition is counted once, in the projection or in the evidence, never in both.

What do we need from you?

Most of this comes straight out of your trust accounting system. Documents are exchanged after engagement.

• ·A rent roll schedule at the valuation date
• ·Twelve to twenty-four months of management fee income, split by fee type and excluding GST
• ·A monthly record of managements gained and lost, with the reason for each loss
• ·Managed properties currently listed for sale or under notice
• ·A sample of signed management agreements and recent trust account audit reports
• ·Staff roles, pay and the managements each property manager looks after
• ·Any heads of agreement or draft contract, including retention terms

What does a rent roll valuation cost?

Every valuation is a fixed fee, agreed in writing before work starts, and it does not change with the value concluded. The band is set by the annual revenue, excluding GST, of what is being valued: for a rent roll on its own, the roll's annual management income; for a whole agency, or shares or units in it, the agency's total annual turnover. Exactly $3 million is Medium; exactly $10 million is Large.

Add-ons are $495 per retrospective (past) valuation date and $795 per additional entity. Delivery time starts once payment and all required information have been received.