Smart Questions for Buyers to Ask
What is the net profit of the business?
As Management Rights businesses are sold on the basis of a multiple of net profit it is important to ascertain the true net profit of the business.
Net profit is calculated on the basis of income less operating expenses, but expenditure such as the Managers drawings, bank interest and income tax are not included in the calculation.
Your sale contract requires that the net profit for a specific period is declared and it is important that you engage an accountant specialising in Management Rights to verify the declared net profit during the due diligence period.
When looking at the profit and loss figures provided by the seller your accountant will look closely at any “additional” income included and report to you accordingly. For example, if a large amount of income in any one year has been obtained by providing maintenance services this may not be sustainable on an on-going basis.
How many owners are in the letting pool?
The letting pool is the name given to the group of owners using the letting services. The name is misleading in that it implies that income is pooled and paid to the unit owners equally. But Management Rights works on an individual accounting basis. Rent is receipted through the Trust Account and applied to the individual owner’s account. Every owner receives the income for his or her unit less Managers commissions and any expenses incurred. These payments are usually made on a monthly basis hence the term “month end”.
It is important to know how many units are in the letting pool, but it is also important to ask about the others. Are they resident owner units, lock ups (owned by owners who visit periodically) or are they let by outside real estate agents.
The number of outside letting agents is often a very good indication of how well the business is run. There is often a reason why these units are not in the pool and there is always opportunity to re-gain these units at a later date.
Your accountant will also verify the number of owners who own more than one unit in the complex during the account verification process.
How long have the agreements left to run?
Management Rights agreements are for a specific term. A Standard Module agreement has a maximum term of ten years whilst an Accommodation Module has a maximum term of twenty-five years. When the agreement is assigned to you, you are purchasing the agreement as it stands at the date of settlement.
Obviously having a reasonable period of certainty is important, but it is equally important to understand the process of applying to the Body Corporate to “top up” the agreement. Ensuring that this is done in a timely manner will protect the value of your investment.
How much is the Body Corporate remuneration?
When inspecting a Management Rights business find out the current Body Corporate salary, ask if it is increased on a yearly basis, by how much and which month this occurs. It is a good idea to assess how much each unit owner contributes to the annual income received.
What are the caretaking duties?
Every Caretaking Agreement is different and in some instances the Manager’s duties are outlined on a daily, weekly and monthly basis. Ask questions about your responsibilities for such things as pool maintenance, security and removal of rubbish. In some instances outside contractors are engaged to perform certain services, in others these services may be the Manager’s responsibility.
Check also the arrangements for reimbursement of expenses incurred in providing these services. It is quite normal for the Body Corporate to pay for a regular skip bin for rubbish collection or, alternatively if the Manager is required to personally remove rubbish, you will find there is provision for fuel and tip fees associated with the removal.
Are there set office hours?
Again, check the Agreements as there is a wide range of expectation. Many agreements state “such hours as are required to perform the service”, others may state specific hours qualified by “or at such hours as agreed by the Body Corporate from time to time”. Some agreements may state specifically that you must be contactable at all times, in which case phone diversion and notification of mobile phone contact may suffice.
Is the office on title or common property?
The Manager’s unit is on title which you own whilst the common property is shared by all owners and controlled by the Body Corporate. Some Management Rights are created with the office/reception area on your title. Others have an office/reception area on common property.
If the office is on common property you need to establish your right to use the office. You should have “exclusive use” under your Agreements or the Body Corporate By-Laws.
What does buying "off the plan" mean?
Buying “off the plan” means buying before the complex is finished, sometimes even before building has commenced. Buying this type of Management Rights requires business development skills and an “off the plan” purchase may not be suitable for first time Managers.
If you are making this consideration we suggest you research carefully.
- Know your builder. If possible inspect other completed developments and talk to the managers.
- Check the terms of sale for the units and Management Rights. Developers are required to provide full disclosure.
- Ask what sales people are saying to potential purchasers and beware of marketing that overstates potential return. You will be the one in the “hot seat” if expectations are shattered.
- Be aware that there are likely to be teething problems during the development and you will be required to manage through these difficulties.
- Check the purchasing formula. Usually the number of units ultimately sold to investors will impact on the purchase price. A staged development will normally be purchased by tranche payments.