The Impact of Self-Storage Auctions: Improving Operating Income, Increasing Facility Value
|Copyright 2014 by Virgo Publishing.|
|Posted on: 04/20/2011|
By Chris Hitler
There are many ways to enhance your self-storage facility’s net operating income (NOI), including raising prices or lowering expenses. However, the recent popularity of reality TV shows such as “Storage Wars” and “Auction Hunters” has given self-storage operators a new tool to improve their NOI—capturing lost revenue from non-paying tenants.
Historically, the most important outcome of the lien sale was to have the unit emptied so it could be rented to a new customer. Most operators recognize auctions likely won’t generate much cash. Fortunately, these reality shows have changed the game for storage operators by creating a wave of treasure-seekers looking for bargains.
In the past, a 10-by-20 unit full of boxes, clothes, furniture and other personal items may have netted $10 to $50 at auction. Today, an operator can expect anywhere from $200 to $1,000 or more for that same unit. Better auctions are not only important because more cash ends up in your pocket, but they also increase your NOI, which is the most critical valuation factor when it comes time to sell your property.
Before exploring how you can tap into this trend and get more buyers to your auctions, let’s review the impact of successful lien sales on property valuation. NOI is the basis for roughly 70 percent to 99 percent of a property’s value. Most buyers appraise properties based on a multiple of NOI, and then make some adjustments, such as a deferred-maintenance allowance. Valuation multiples generally range from 10 to 13 times NOI, so every dollar improvement has a $10 to $13 dollar impact on a property’s value.
Let’s look at an example. Assume an operator has five to 10 delinquent tenants who should’ve paid $5,000 in rent and other fees. Let’s also assume the operator never gets any bidders at his auctions, forcing him to give the stuff away to the local “junk guy.” The accompanying chart illustrates the valuation impact of failing to realize that rental income.
Even if this property’s value has a relatively low multiple of 10 percent (i.e., high cap rate), the operator is still missing out on $50,000 in value when it comes time to sell. The impact is even higher if the property justifies a lower cap rate.
Get the Word Out
So now that you understand the valuation impact of better lien-sale performance, let’s explore concrete steps you can take to have more success at your auctions. Just like any product or service, people will only buy―or, in the case of auctions, attend―if they know about it. Simply relying on your public notice to reach potential auction buyers is not nearly enough. You have to market these events.
Some operators like to post signs on their local community boards and around their facility. Serious auction buyers are willing to travel great distances—three or more hours—for sales. Consequently, they probably won’t read the local newspaper or see the signs where you posted your public notice.
Another tactic is to capture e-mail addresses of buyers who attend your auctions, then notify them of your sales. Unfortunately, this approach only markets to current buyers and doesn’t help you attract new ones.
One more option is to hire an auctioneer. Good auctioneers have a database of buyers they invite to their auctions. But accessing their network of buyers does come with a price. Auctioneers can charge anywhere from 20 percent to 40 percent of the revenue generated.
The most cost-effective tactic is to list your sale on an auction website. There are several quality resources on the Web. Posting your auction can help you increase buyer attendance upward of four times, with bids increasing as high as 10 times.
Tips for Better Auctions
Drawing people to your event isn’t the only essential element to a successful auction. Here are a few other tips to ensure increased revenue.
The bigger the sale the better. If possible, run one large auction vs. a few small ones. Buyers are willing to travel farther for sales with more units because there’s a higher probability of purchase.
Reference the auction. Include a reference to the auction website in your public notice. This gives you a mechanism to notify the public if the sale gets canceled and reduces your reliance on the newspaper to notify buyers of future sales.
Treat the process and buyers respectively. Buyers talk to each other. Many are professionals and know the owners who “stage” units to make them seem better than they actually are. If buyers sense the facility owner is gaming the process, they’ll tell others, and your attendance will suffer in the long run.
Ultimately, the auction process is a tool of last resort. Owners should try to collect rent rather than host auctions. However, if your delinquent tenants leave you no choice but to conduct a lien sale, you might as well be successful and get as many buyers as possible to attend. Not only will it put more money back in your pocket, it will give you a better valuation when it’s time to sell your property.
Chris Hitler is an experienced self-storage owner and broker for the Argus Self Storage Sales Network. He launched RummageMarketplace.com with the aim to help the self-storage industry attract more buyers to lien-sale auctions. To reach him, call 312.404.7933.