Money on the Buy
|Copyright 2014 by Virgo Publishing.|
|By: Scott Duffy|
|Posted on: 11/01/2004|
Today’s competitive environment can be tough on those looking to buy self-storage properties. Many are eager to take advantage of low interest rates and the industry’s bright future, though in some areas, viable facilities are few and far between. Employing a combination of resources can be the best solution:
One familiar rule of thumb in real estate is you will make one offer for every 10 properties you consider. If you’re lucky, one of those offers will be countered or even accepted. Of course, the danger is that as capital pours in and cap rates continue to fall, frustrated buyers are tempted to place riskier bets on lower-quality stores. This enticement must be resisted at all costs. It is far better to demonstrate discipline than to rush into a dubious deal. Remember, in real estate, you “make your money on the buy.”
Keep a Cool Head
The sellers’ market is forcing us back to the basics. Today, more than ever, finding the right deal depends on doing your homework in an objective and dispassionate way. Sure, it’s exciting when you finally find a property you like and begin framing an offer. But this is not the time to let your judgment be clouded by a desire to close the deal. Instead, with your enthusiasm tightly leashed, maintain a laser-sharp focus on the fundamentals: current income and your estimated operating costs. Then focus on the following:
Evaluate these financials in great detail. Is your offer enough to make the deal work? Have you built in a cushion so you can continue paying your investors during difficult times?
Remember to remain unemotional. Avoid falling in love with any one property, no matter how much it may fi t your search image. When emotions become involved, the dangers go far beyond paying more than a facility is worth. They include such risks as purchasing a property with serious, even fundamental, flaws or rushing into a market that is already overbuilt.
The Dirty Details
You can avoid common mistakes by concentrating on frequently overlooked issues:
1. Deferred Maintenance—Don’t ignore maintenance problems, such as outdated roofs and broken doors. Sooner or later, these items will have to be rectified, reducing your returns.
2. Property-Tax Increases—These can be triggered by the purchase of the property.
3. Yellow Pages Advertising—In certain markets, Yellow Pages ads can be very expensive. Check to make sure this expense is reflected accurately in the figures. Also make sure a facility has paid for its current advertising in full, as some sellers will have prepaid only a portion of their bill. The second and often considerably larger payment will become an unexpected expense for you down the road. Also ensure the ad hasn’t been cancelled by the seller anticipating his exit. You may not realize you have lost this crucial advertising until the publication deadline has passed.
4. The Sellers’ Numbers—Never rely on figures provided by the seller. Review all the numbers you can get your hands on in exhaustive detail. You may discover, for example, that the owner/operator has never drawn a salary. This produces a payroll savings you will be unable to duplicate. If the seller assures you that you’ll be able to raise rents without difficulty, ask one simple question: “If that’s so, why haven’t you raised them already?”
5. Due Diligence—Never consider closing on a property until you have conducted a thorough due-diligence effort. Once you’ve bought the property, it’s too late for second thoughts.
Concentrating on these and a thousand other issues will help you determine your target property’s ability to generate and sustain income. This objective perspective will be invaluable during negotiations with the seller and potential lenders. Best of all, it will help you meet your most important goal—protecting your investors.
In the months ahead, those searching for the right store will need all the patience they can muster. As you push ahead with your search, it may help to remember the ancient adage “caveat emptor” (let the buyer beware). Have you ever decided to pass on a property and later discovered you’d made the right choice? Or have you experienced buyer’s remorse? Often, the best deals are those you walk away from with your checkbook unopened. Feel free to drop me a line and share how you may have “made money on the buy.”
Scott Duffy is the founder and principal of Self Storage Capital Group Inc., an emerging owner and operator of public self-storage facilities based in Santa Monica, Calif. Mr. Duffy is an entrepreneur and investor whose background includes more than 15 years of management experience with media and technology firms, including FOX Sports, CBS Sportsline and NBC Internet. He has also worked with bestselling authors and speakers Anthony Robbins and Jim Rohn, conducting workshops throughout the United States and Canada in sales training, customer service and personal development. For more information, e-mail email@example.com.