The mistaken value of periodic vs fixed term management agreements
A common question we continue to get asked by clients is whether managements on fixed term tenancies are worth more than those on a periodic agreement? Unfortunately, the answer is not that simple.
There is considerably more to this than meets the eye and after conducting a high number of valuations, we feel it is beneficial to share how these are interpreted from a valuation perspective.
In traditional portfolio valuations, we tend to see a mix of periodic and fixed term agreements. Whilst some agencies are very focused towards having Management Agreements signed for 1 or 2 years in advance, the reality is we rarely value a portfolio where 100% are on fixed term contracts.
A large factor contributing to this is Landlords don’t believe they need to sign a new Management Agreement because a periodic agreement is still valid and no less binding than that of a fixed term agreement.
Put simply, the agents are performing their duties and receiving remuneration for their service. Therefore, the income generated from a periodic Management Agreement is identical to that of a fixed term agreement.
With this in mind, as the income is identical for both types of agreements, from a multiple per dollar of fees perspective only, they’re treated the same.
During the risk assessment phase of the valuation, a portfolio with a high percentage of periodic agreements is identified to be potentially more at risk than those on fixed term agreements at the time of sale.
It also must be noted that depending on which state you’re operating from, even those agreements that are on fixed term arrangements can be terminated with no penalty provision on 28 days notice.
There will always be a percentage of landlords that want the flexibility to terminate their agreement if their circumstances change.
In our experience, the valuations we have undertaken that have a high percentage of periodic agreements and the value is rarely impacted. The working relationship between landlord and agent is such, that the necessity to sign a new Management Agreement isn’t required. It is for this reason, we believe the issue of assigning or signing new Management Agreements at the point of sale is highly misunderstood.
The days of assigning periodic agreements are nearing an end. In most cases it proves difficult to get finance approved because banks see the risk of loss of managements far greater without a fixed term agreement.
At the end of the day, if a landlord is not happy with the service they receive they can break it, so the responsibility comes back to the service of the agency to mitigate their loss of management.
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