HOW LOW WILL THE SELLER GO? By Frank Rolfe

HOW LOW WILL THE SELLER GO?

When buying a self-storage property, you always want to get the best deal you can. And a big part of that is how low a price the seller will accept. Are there any signs of what direction that will go? How can you guess how low a seller will go?

How long has it been on the market?

One sign of the flexibility of the seller is how long the property has been on the market. Simply put, the longer it has been for sale the more desperate the seller is to get a reasonable offer. The reason that storage facilities sit unsold can be varied, from being tied up and dropped many times during due diligence or financing to simply being overpriced and unable to find a single offer. Regardless, the amount of time it has been sitting unsold is a good indicator of the desperation of the seller, who has probably lost confidence over time.

How long have they owned it?

The length they have owned it is of importance because it gives you a rough idea of what they paid and how much they will profit from the sale. If somebody has owned the storage property for only a couple years, then they probably paid a price somewhat close to what they’re selling it for and have less room to negotiate than the seller who has owned it for 20 years and paid a fraction of the current value. If the seller is asking $900,000 and paid $800,000 for it, then they will fight for every dollar because even a $50,000 reduction is half of their net profit.

Is there any debt on it?

Equally important to how long they’ve owned it is how much debt there is on the property – or is there any debt at all? Here’s how that plays out. If a seller prices the storage facility at $1,200,000 and has a $900,000 mortgage then they will be less flexible on the price than the seller that has zero debt, as one has a potential of $300,000 in their pocket after closing and the other $1,200,000. While you might associate debt with the number of years they’ve owned it, the reality is that some people refinance the property at one point and no longer own it debt-free. Similarly, some more recent owners might have paid all cash.

What condition is it in?

While many buyers look forward to “turn-around” projects, there are limitations to that and one is the property condition and the risk and cost of bringing it back to life. Deals that need a ton of work often frightens off most buyers, and that makes the seller much more desperate. Sometimes the problems are more than on the surface and you won’t learn about the condition issues until you are in the middle of due diligence. In those cases, you’ll have to renegotiate the price and once again the question will come up “how low will they go”?

How complete are the financials on the property?

It’s really hard to sell a storage property when you don’t have at least three years of functional numbers. Why? Because most lenders want to see that to make a loan. While some sellers can print that off their computer, others keep the books by hand with a pencil and others have no books at all. When you can’t get a loan on a property, the buyer can never close. After the seller has had their deal dropped over and over due to inability to get financing, the start to freak out and wonder if they will ever be able to find a buyer who can get a loan. Of course, this issue potentially pays an additional dividend in that the seller may agree to carry the financing. When a seller has a property that suffers from poor accounting it can sometimes lead to the double-feature of low price and seller carry. And, of course, you can cure the financials problem within a few years if you just start using professional software – it’s basically a long-term opportunity for a short-term problem.

Conclusion

Understanding the common drivers to lower prices can put you at an advantage when negotiating for a storage property. These tips will get you started, but the most important item is to listen to the seller and watch for clues as to when you have reached their bottom dollar.

By Frank Rolfe

Frank Rolfe has been an active self-storage investor for around two decades, with self-storage units in many states throughout the U.S. His nuts and bolts knowledge of what makes for a successful self-storage facility has led to a three-decade career without a single failed property.