Buying self-storage? Beware of not having experienced representation in the acquisition process. Whether buying one store or 100, the principles of prudent acquisition processes and decisions are the same. Armed with good information and analysis, you’ll be able to negotiate on a more level playing field.
The process of acquiring self-storage can be broken down into seven components:
- Deciding if this is the right asset class for your investments
- Locating assets for acquisition
- Solid legal representation
- Getting good preliminary information up front
- A fair and equitable contract
- Sound underwriting
- Thorough due diligence
When you allow the seller’s broker to also represent you, called “double ending” or “transaction broker,” you’ve created a situation where the fox is counting the hens in the pen. There are 10 reasons you must insist on having your best interests represented:
1. Many listing brokers don’t want you to be represented and they’ll stack the odds against you.
Sellers’ brokers start with hitting you right in the wallet. If they’re not willing to share their commission 50/50, they’ve essentially created a financial penalty for you to be represented. These brokers know if a buyer is properly represented, there is a good chance the deal won’t close—and they’re relying on you not verifying and analyzing the details.
2. Many listing brokers take listings that are totally overpriced hoping to find an uneducated, unrepresented or desperate buyer.
Until recently, a small inventory of self-storage properties has been for sale. Since listing brokers need product to sell, they’ll often take a listing knowing it’s overpriced. With so many buyers in the market, they figure someone won’t do their homework and may overpay or buy a troubled property.
3. Many listing brokers don’t want you to have information about the property that tells the truth.
Sellers’ brokers are compelled by disclosure laws to tell you the truth or make accurate representations about a property. If they don’t ask for certain information, they can truthfully represent they didn’t know about a defect, flaw or inaccurate data. You will see legal disclaimers on nearly every listing saying the broker can’t be held liable or responsible for providing accurate information. This is a “don’t ask, don’t tell” strategy designed to protect the broker and the seller, not you.
4. Many listing brokers tell the seller only what they want to hear.
A listing broker may tell the seller anything they want to hear just to get the listing—and then he’ll take a caveat emptor stand. The broker may know full well the property is a dog, the market stinks or much better assets are for sale, but they don’t get paid unless they have a listing, so they keep mum.
5. Many sellers think that because an “AAA-plus” property in an “AAA-plus market” sold for a 7 percent cap rate, their property is worth the same.
Don’t be misled that all storage is created equal with equal risks. Fifty empty units with gravel drives, no fence, no security and located 100 miles from Fargo, N.D., is not the same value as a fully tenanted 85,000-square-foot property in Manhattan or San Diego on a dollar-for-dollar basis. The quality of tenants and income plays a substantial role in the determination of cap rates. Beware of properties that don’t sell with broker after broker, and just keep getting re-listed.
6. Many sellers want you to take all the risk and do all the work to justify their price.
A recently contracted property offered at the same cap rate as fully tenanted properties at stabilized occupancy leaves the buyer with 100 percent of the risk. A good buyer’s representative will create a deal with fair and honest methods to mitigate these risks.
7. Real deals rarely need to be placed in the hands of brokers.
The right store in the right location with the right price is highly sought after by quick-closing, all-cash buyers. When I was a director of acquisitions, a seller could simply call our office and get our best price and quick close by negotiating principal-to-principal transactions. Many sellers will test the waters and troll for an uneducated, unrepresented fish who will overpay for a property. Most sellers know that institutional buyers—ready, willing and able closers—will be there if nobody bites on the over-inflated price.
8. Many sellers and their brokers will create unrealistic time frames to prevent you from doing your homework.
Recently, a property was offered for sale where the seller (represented by a broker) produced handwritten ledgers claiming the site was in the process of becoming computerized. He offered no historical income or expense data, and was adamant about a 30-day due diligence period. We brought a sophisticated check writer to the table who required a reasonable due-diligence period in which to get an appraisal, engineering report and books and records inspection. The seller refused to accept a 60-day inspection period. That was nearly a year ago, and the property is still for sale. What message does this send? An unrepresented, uneducated buyer with a wad of cash may end up overpaying for the property.
9. Beware of lipstick on a pig.
Consider this recent scenario: A 3-year-old property, 60 percent physically occupied and 45 percent economically occupied, is for sale on pro forma occupancy at a low cap rate. What to do? Run don’t walk away from this deal! Most sophisticated and honest sellers will cure this problem if due to management, but more than likely it’s a location or market issue.
10. Never be bullied into a contract or closing. Be willing to walk away from any deal and let another sucker take the fall.
Beware of sellers or brokers that requires offers be submitted on their forms. The free marketplace should dictate the buyer be empowered with making an offer on his own terms. If a seller is too cheap or lazy to hire counsel to represent him, take heed—he may have cut a lot of other corners.
Don’t accept unrealistic inspection periods or close dates. Sixty days for the inspection period should be sufficient to get committee approval for your loan. No listing broker worth his salt would represent a property without looking at most of the same financial information and documents a sophisticated buyer would examine.
A good seller’s broker will have an up-to-date package that includes historical and current property data. He will not waste his seller’s time by letting buyers tie up a property without prudent financial underwriting data available before contract or even letter of intent.
These are just a few of the pitfalls that experienced buyer representation will help you avoid. Make sure the professional you choose has been responsible for at least 50 closings on the buyer’s behalf. Remember, a broker paid by the seller represents the seller, not the transaction. Hire and pay for you own representation to protect your interests. Just because the listing broker wasn’t a good enough salesperson to negotiate a commission that could be split between seller’s and buyer’s representation shouldn’t stop you from having your best interests protected.
You can bet the self-storage listing brokers are going to be hopping mad when they read this article, because they know the free ride is over if buyers get competent, professional representation. As a seller’s broker, they’ll hate doing business with a buyer’s representative who is 100 percent on the up and up and has done his homework. So what? Let them sweat a little.
RK Kliebenstein is president of Coast-To-Coast Storage, providing feasibility studies and market analyses for self-storage projects, in addition to financing and consulting with self-storage owners. This article is an edited excerpt from his book How To Invest in Self- Storage, scheduled for a second release soon. The book is available at www.amazon.com and www.askrk.com. For more information, call 877.622.5508; e-mail firstname.lastname@example.org.