When looking to grow your real estate business, undoubtedly, one of the options that you’ve considered is buying a rent roll. With the potential to offer a level of financial security, in-house sales leads, and the potential to build equity, rent rolls may seem appealing to real estate professionals. However, like many large-scale decisions in business, there are some disadvantages to consider and risks to manage.
Hidden liabilities
Conducting a comprehensive review and due diligence of the rent roll is crucial to identify any hidden liabilities or legal issues. For example, if the previous property management agency still needs to meet its legal obligations, you could inherit potential legal problems.
Even with a review of each property, there can be the potential to inherit underlying liabilities that don’t make themselves immediately apparent. This potentially opens your firm up to claims regarding personal injury, and more.
Regulatory compliance
The property management industry is subject to various regulations, and non-compliance can lead to fines and legal issues. Ensuring that the acquired rent roll meets all legal requirements is essential.
Real-world pitfalls — an example of hidden liabilities
At Barrack Broking, we pride ourselves on providing the best coverage, strategy, and assistance when an insurance claim is made. Unfortunately, we come across situations where rent rolls bring hidden liabilities. One such event occurred when a real estate client took a property as part of a rent roll from another agency.
In this situation, there were no notable mentions regarding the property’s history from the discharging agent, with no apparent need to probe — after all, the discharging agent had over a decade of property management experience under their belt. Within the property’s history, the tenant complained to the previous agent about a loose wardrobe door. After getting the property owner’s approval to fix the door, the previous agent coordinated the repair and closed the case.
With this all occurring months before the property management changed hands, there were no obvious reasons to look further at a seemingly ‘open and closed’ maintenance request in the property’s history; there were no notes on the handover of the property, there were no outstanding maintenance requests passed over and the tenant did not make mention of any continued maintenance issues.
Fast forward a few months later, the very first time our client learned of any issue was when they were served a personal injury claim from the tenant’s lawyer. This issue arose seemingly out of the blue; our client had performed an entry condition report and did not see the wardrobe as an issue, and again, the tenant did not note any issue regarding the wardrobe on the report. Further, our client holds an industry best practice policy regarding maintenance requirements and conducts planned routine inspections every 16 weeks for all properties under management and extensive exit and entry reports.
So, what happened to our clients? Understandably, having a personal injury claim arrive on their desk was upsetting and diverted resources to dealing with the matter. Thankfully, in this instance, the outcome was favourable, assisted by the extensive supporting documents and emails held as evidence against wrongdoing. Shortly after the incident was resolved the tenant moved out, however, this does showcase the potential pitfalls of purchasing rent rolls and the risks that present themselves as managing agents in the real estate industry.
How to help protect your business against unnecessary risk
What may seem like an instant cash flow injection to your real estate firm could also be an instant injection of liability. Even with thorough due diligence before buying a rent roll, hidden issues can still present themselves months after you acquire the roll.
Identifying, understanding, and minimising risk in your real estate business is the first step to helping protect yourself. The second is mitigating your risk through risk management strategies and an effective insurance solution.
If you need help identifying the risks associated with your real estate business and help source the coverage you need to protect your assets, give the Barrack team a call today.
