Well, the mathematics is pretty compelling. A good quality lettings business with most of its landlords on full management contracts will typically sell for around 1.5 times turnover. If you move the management book into your premises nearby, you will benefit from considerable cost savings and economies of scale. You will save on marketing costs, Rightmove, rent, business rates, IT, compliance and HR.
Adam Walker
It will probably also be possible to make considerable savings on staff costs. Your negotiators can probably cope with handling a few extra lettings each month and whilst one property manager working alone might struggle to manage more than a hundred properties, a property manager working as part of a larger team can handle twice this many.
Sell your BTL portfolio, remortgage the house, sell the Ferrari… it’s a great time to buy a lettings book.
Taking all this into account, a letting book with fee income of £500,000 per annum would typically make a profit of only £75,000 (15 per cent) if run as a standalone business. However, if it is incorporated into another business, this will jump to around £250,000 (50 per cent). So if you buy this book in for £750,000 (1.5 times turnover), then you will get your money back in three years. What other investment gives you a return on capital of 33 per cent? It almost sounds too good to be true.
No guarantees!
Well, success is not guaranteed and there are risks. The first problem is that you will become liable for any compliance issues the moment you complete the purchase. So, if there is a problem, it is you that will be liable for the fine, not the seller. It is therefore vital that someone with the necessary experience conducts thorough due diligence on the book before you buy it.
A £750,000 letting book could potentially have several million pounds-worth of fines and liabilities and believe me there are some pretty horrible businesses out there, some of which are so dreadful that no-one in their right mind should buy them.
An experienced due diligence consultant should, however, be able to assess within a few hours whether the business that you are looking at is of a good quality.
The second risk is losing the landlords. In my experience, this is quite rare. Managed landlords tend to be very loyal to their letting agents and unless you do something really stupid to offend them such as not paying their rent on time, most will stick with you. Retention rates of 95 per cent+ in the twelve months after completion are pretty usual. It may also be possible to negotiate a purchase on the basis that some of the purchase price is held back for 12 months and is forfeit if more than a certain percentage of landlords are lost.
The third risk is that you will become embroiled in staffing issues. In order to get a 50 per cent net profit, you may need to make some staff redundant but their rights may be protected under the TUPE Regulations. This is a complex area of the law and you will need to take advice from an expert in employment law. The problems can usually be overcome but you may need to factor in significant redundancy costs as part of the purchase price. You may also be compelled to make your own staff redundant so that they can compete in a fair competition for the jobs available with the employees from the company that you are buying.
Excess baggage
The final problem is that letting books often come with baggage that you do not want. The seller may want you to take over the lease on their shop and you will need to resist this or factor in a sum of money to pay for the cost of disposal. The business may have a sales department. You will not pay much money for this at the moment but you will need to decide whether to close it down post-completion or continue to run it.
There are challenges and success is not guaranteed but in my very considerable experience, the great majority of people who buy a good quality managed letting book within their existing patch are happy with their acquisition and do achieve 25-35 per cent return on capital or more.
So, what are you waiting for? Sell your buy to let portfolio, remortgage your house, sell the Ferrari and buy a letting book because now is a great time to buy and 33 per cent return on capital will not be available for ever. Adam Walker is a business transfer agent and management consultant who has specialised in the property sector for more than twenty-five years.
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