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Protected Letting Pool - yet little buyer interest - Industry News

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Protected Letting Pool - yet little buyer interest

Published: 30 March 2008.

Contributed by Terry McMiles of Terry McMiles

I am prompted to ask this question as I currently have a Management Rights Business for sale which has a totally protected letting pool. This business has a spacious and private 2 bedroom plus office on title residence and the balance of the Complex, apart from Managers exclusive use Kitchen, storage rooms and Laundry, is made up of 19 Studio Motel suites all owned by Investors. These are quite spacious 4 star studio suites , but whilst they all contain a microwave and fridge, they do not have a kitchen sink and are Council approved as short stay Motel suites and cannot be used as permanent accommodation.

This means that the letting pool is totally protected and will never be lost. I would have thought that this would be considered a huge plus for Management Rights where the danger of losing part of your letting pool is always at the back of every Managers mind. Loss of units to the pool means loss of revenue which converts to loss of your Capital Investment.

However, despite what I see as the huge advantage that this Management Rights business has over others, I have not been bowled over with enquiry and I am wondering why?

I have often suggested that the Multiplyer is by no means the most important factor to consider when buying Management Rights, but what premium should be added to a multiplyer if there is a NIL risk in losing the letting pool? Or are buyers no longer worried about losses to the letting pool and comfortable with fluctuations that may occur over time?

I look forward to comment from experienced managers, I really would like to hear what others in the Industry think.

As a matter of further interest, the asking price of the Complex is $1,350,000 ; it is an easy 2 person business, employs staff, and the asking price multiplyer is under times 5.

Sounds good to me for a business with no downside risk.

Contributed by Terry Mc Miles, Independent Gold Coast Broker.

Reply from: Nick Buick

7:05pm Saturday, 29 March 2008

Out of curiosity, what is the link to this listing Terry?

Reply from: Terry McMiles

8:29pm Saturday, 29 March 2008

Hi Nick,
The Property Manager I/D is 3554530 and a full description of the Complex is on my site www.terrymcmiles.com if you go to Buying Enquiries first, then Management Rights and then click onto the photo of the Noosa Complex at $1,350,000

Reply from: Bob the Builder

8:36pm Saturday, 29 March 2008

Hi Terry,
Nice free teaser for this property.

In response to your question as to why people are not enquiring, there is a multitude of reasons and the multiplier is only one of them.

With only 19 units and for sale at $1.35 suggests that either units are not generating income Or the manager's unit is overpriced - which is very, very common OR the location has no future or, or, or.

Quick qustion, would you like to have a holiday in a unit where you have to wash your "veges" in the bathroom sink? I think prospective purchasers will consider this and more and that the income will not be able to be maintained with such poor facilites.

The multiplier is important but not the only reason

Reply from: Nick Buick

8:48pm Saturday, 29 March 2008

Heh - yeh it is a nice teaser ;). But to be fair - when we conduct a weekly review of the site's traffic I often wonder why some listings attact so much response while other, seemingly similar listings, are overlooked buy users. It is interesting to get an insight into what motivates a potential buyer.
I'm curious as to what other factors you (and any other managers wishing to chime in) apply weight to when reviewing listings?

Reply from: Terry McMiles

9:57pm Saturday, 29 March 2008

Hey Bob the Builder, don't be a Cynic . . . . it was a fair dinkum question. Although I of course will welcome any enquiry that may come from the posting. Thanks for starting the ball rolling.
Because I don't give income details until prospective buyers have signed a confidentiality agreement there is no way that enquiry isn't there because 1) Unit is too dear (I don't believe it is) or 2) Return to investors is low (it isn't in relation to capital expenditure) . . . people don't have the information to reach those conclusions before enquiring. And my point was that enquiry was low even on a seemingly no downside risk investment.
You may have a point in regard to the washing of your vegies . . . perhaps I haven't pointed out clearly enough the clientele base that this business has. It isn't a holiday destination unit for a family, it is a 1 to 3 night convenient stopover spot for Salespeople/travellers/bus groups etc looking for value for money accommodation close to Noosa. It is different to most Management Rights complexes in its clientele base and perhaps I need to highlight this more. It operates as a Motel.
Thanks for your input Bob, I'll try to point out the differences and unique advantages more and maybe that will liven up the enquiry on what I think is a great business.
If you're building new Complexes Bob the Builder, and have Management Rights for sale, please give me a call . . . . always looking for new ideas, and feedback from experienced people to better promote my Clients properties.
Regards
Terry

Reply from: James

3:38pm Sunday, 30 March 2008

Hi terry from a buyer prospective if I don't see net income stated I will move on I have a group of investors who look at mr and freehold freehold being our preffered choice

we look at hundreds daily and don't have time to waste signing NDA to find out it was something that we wouldn't have bought in the first place knowing the return.

anyway makes us think you have something to hide if can not state the net income.

Reply from: Terry McMiles

11:29am Tuesday, 01 April 2008

Hello James,
I can understand your point of view from a buyers perspective, but I hold an alternate view that the nett income that a manager earns from his business should not be something that is available for anyone to find out just by looking up a website.

My approach is to give extensive information (but without actual figures) on my website so that genuine buyers are able to decide if the business is interesting to them. If so, they can then get a full financial report (not just a couple of figures) after signing a confidentiality report. Genuine buyers seem quite happy to do that and it saves both buyers and sellers wasted time with unnecessary inspections.

Certainly nothing to hide, quite the contrary position, you'll have a lot more information on which to base a decision to inspect or not.
When you have a chance, look up www.terrymcmiles.com , go to buying enquiries, then to management rights and see how it works. I think you will be pleasantly surprised.

Terry

Reply from: Phil

3:16pm Tuesday, 01 April 2008

Hi,

I love how sales people dont think the multiple is not the main issue, This might have been right 1 year ago but with interest rates up over 3 times allready this year and expected to go again, the multiple is a major concern.

Look at noosa you have places down a side street with a tiny letting pool wanting over 5 and others overlooking beaches and rivers wanting 4.5; dosent make sense.

If you are really keen on selling, be realistic with business lending getting close to 10% shortly the intelligent seller will realise that if interest rates go up multiples have to come down.

Reply from: Bob the Builder

6:59pm Tuesday, 01 April 2008

Totally agree with Phil,
Vendors need to be aware that it is a new world now and interest rates will determine the multiplier. Having a high multiplier and a high unit price will send the potential purchaser away.
It seems that because a property in one area achieved a multiplier of 'x' amount last year, then every property thereafter will have the same multiplier. This cannot be case now. Last year was very different to this year. Every property needs to have multiplier based upon that property and not upon history.
Mike Phipps from Suncorp has written an excellent article on this very topic.

Reply from: Terry McMiles

8:15am Wednesday, 02 April 2008

Hello Phil,
I certainly do not think that the multiplyer is the main issue when buying management rights. Just one of the factors to be taken into account.
I can agree with you though that multiplyers are likely to be lower in times of higher interest rates. It would be hard for anyone to argue against that logic.
Buyers should remember that the multiplyer rate is not set in concrete at a particular figure and it is arrived at by negotiation between a willing buyer and a willing seller. So as a buyer, once you have found a business that ticks the boxes for you, the multiplyer is what you end up negotiating on.
Some businesses will sell at high multiplyers, some at low, depending on what the other factors are. This will continue to be the case.
My original posting on this subject was about how the fact that a letting pool could never be lost (one of the other factors) would affect the multiplyer. It should be a big plus.
High interest rates are another factor which willing buyers will also take into account when negotiating price. However this factor is a temporary negative rather than the permanent positive of no loss to the letting pool.
Buying Management Rights is not like buying a set priced product where you have to take it or leave it. Sales take place as a result of negotiation, so hopefully when you agree upon a price, both parties after considering all factors, are comfortable with the result.
Terry

Reply from: Nick Buick

2:32pm Friday, 04 April 2008

Please note: We've contacted Mike Phipps for a copy of his article which we'll include in this month's newsletter for those of you interested.

Reply from: Phil

11:35am Saturday, 05 April 2008

Hi Again,

Yes I agree multiples are not the main issue, when we bought management rights we were more interested in the Mgrs apt and the nett., which then was below 4. We sold ours privatly to managers we had on site. We continue to look at whats available and were down in the sunshine coast last month.
Multiples are not the main issue but it cetainly is a big one. Especially when you look at the P & L statements that are being handed out. We saw some doozies.

I feel sorry for any new people entering the market and not knowing what to question. They put an offer in and have the due dilligence done to find that certain incomes are one offs or should not be included and certain expenses are the same.

So they have paid there accountant, solicitor ect and find oh there 20 to 30 grand down from what the P & l says.

Sure everything is negotiable but what a waste of time when the figure's arent.

And last point Terry re advertising without the nett, all I do then is go to another site and find the same property with the nett advertised, with your motel it's obvious which one it is.

Give you credit though for using this forum as a another advertising alternative.

P.S Some one should start a forum about P & ls and what to look for.

Reply from: Nick Buick

11:01am Sunday, 06 April 2008

As promised:
http://www.thepropertymanager.com.au/content/cms/news/3555286/

Reply from: Terry McMiles

8:42pm Sunday, 06 April 2008

Hi all,
Re Phil's 5th April posting, I really do emphasise to sellers the importance of getting the figures to be true and accurate. It is a total waste of everyones time to have "dodgy" figures.
I always question any figures that don't look right and I am pretty confident that figures in reports prepared by me are pretty close to "spot on".

I think that Phil's suggestion about P&L's and what to look for is a good idea. Maybe Phil could start it. Anything that results in buyers being more confident about transparency in the industry will be good for the industry.

And Nick, re Max Phipps article
1) I wonder what number of sales were in the statistics samples, and
2) I wonder if Max or anyone else has updated figures - those being now a couple of years out of date.

On reading the sequence of postings after the original article, there doesn't appear to be too much that we all don't concur on . . . . just me not putting figures on website but preferring to give more info to genuine qualified and interested buyers.

Everyone has their own particular "beef" , but I think we are all trying to make the industry better for both buyers and sellers.
And a forum for communication such as you provide can only help.

Reply from: Glenn Millar

8:46am Thursday, 17 April 2008

This property has been withdrawn from the market due to the lack of buyers in this price range. Price is the main driver on sales at present as as always. properly priced properties are still selling

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