Why and When to Sell
|Copyright 2014 by Virgo Publishing.|
|By: Jack Guttman|
|Posted on: 02/01/2002|
We have all heard the saying, "Buy low and sell high." But if investing is this easy, why don't we always take advantage of economic cycles, interest rates, locations, etc., and make serious returns every time we sell? Self-storage owners, like those of other real estate and financial investments, seek to maximize the return on their investments. They evaluate the risk, take a position, make the acquisition, watch their investments mature, and decide whether to keep or sell them. Though the answer to the question of when to sell is not always simple, there are some obvious times an owner should list his property for sale.
Whenever we have an illness or personal problem that would prohibit us from active participation in our business, and we don't have a contingency plan for managing the business in our absence, we should consider selling. This would also apply when we seek to relocate or retire to another part of the country. Self-storage is not a passive investment like stocks. We need to be present at our stores often, using a hands-on approach to customers' needs and daily responsibilities.
Let's face it. In markets such as Atlanta, Las Vegas or Memphis, Tenn., there are more and more new facilities built every year. The national companies as well as inexperienced, first-time investor groups are building some of them.
If we have a 5-year-old store with occupancy that has consistently hovered around 90 percent, and we have maximized our rents and operated as efficiently as possible, we are making the most of our investment. The only effect another facility in our market area would have would be a negative one. It would likely reduce our annual income and increase vacancy. This would diminish our property value, and our ability to regain our position could take several years.
Another reason to consider facility sale would be if we made some mistakes developing our project. Perhaps we're in a poor location or have the wrong unit mix. Maybe our construction costs are too high, our fixed costs are higher than we imagined or our competitors' rents are drastically lower than ours. As a result of these and other faults, our store never achieved the occupancy we anticipated, and we have not maximized our investment. Instead, we have been suffering losses monthly. Unless a recovery plan has been implemented and our efforts are working, we should consider selling our storage facility to at least recover our initial investment rather than lose the entire property.
Losing a Marketing Advantage
It's possible for a competitor to build a new facility in a better location than ours and take away our consumer traffic. This can also occur by losing a Yellow Pages position to a competitor who then places an aggressive advertising and promotions package. This is more than a signal--it marks an increased cost of doing business, and we need to evaluate the long-term effects and cost.
Offer Too Good...
We may have received an unsolicited offer to purchase our facility or an expression of interest from a qualified buyer. They have made us an offer we can't refuse. The price they have offered is equal to or more than we could expect to receive if we had an orderly sale. We should perhaps consider a sale and reinvest the proceeds through a tax-free exchange.
All of us are interested in making money through investing in self-storage properties. If we have a stabilized store with high occupancy, our rents are at the top of the market, and we have placed the best assumable financing, perhaps we have maximized our investment and should reap our profits while we can. Certainly no one will fault us for buying low and selling high.
Demographic or Physical Changes
The buildings we renovated or converted to self-storage may have been in the best location when we got into the business several years ago. They were on the main street, near neighborhoods and businesses. But now, the new freeway has been built and our visibility is totally or partially blocked. Or the demographics of the neighborhood have changed so much our customers have to travel through an area in which they do not feel safe. Selling the property before the real occupancy significantly decreases is a wise idea.
It is possible the time has come for us to renew our permanent loan, and we are looking at high interest rates or terms that are not attractive from the lending community. What if we can't refinance at acceptable terms? What if there are not enough proceeds, too many points, interest-rate challenges or personal liabilty? The alternative is to sell.
The future is full of uncertainty. There are probably more negatives than positives on the horizon. Some include economic slowdown or recession, increased competition, new investments from REITs, financial-liquidity problems, market volatility, lack of investor interest and a drop in consumer spending. It may have been easy to get into the self-storage business, but knowing when to sell may be difficult. The reality is a self-storage owner, like any investor, should keep his options open and time his transactions so he can indeed buy low and sell high.
Jack Guttman is the managing partner of Coldwell Banker Commercial, NERA, based in Fairfield, Conn. He has sold more than $100 million in self-storage facilities and has closed more than 14 sales in the last two years, mostly in the Northeast. He specializes in the sale of self-storage and retail properties and is also the owner of 25 self-storage facilities. Coldwell Banker, one of the largest commercial real estate brokerage companies in the country, has more than 400 offices throughout the United States. For more information, call 718.401.4700.