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Selling Self-Storage in a Soft Real Estate Market

Michael L. McCune Comments

In these difficult times, many self-storage owners are giving some thought to selling their property rather than waiting out the market. Real estate prices hit a high in early 2007 and have been on a gradual decline since. One of the most frequent questions we hear is, “What will happen to cap rates and to values in the future?”

A historical look would tell you that over the last couple of decades cap rates were more likely to have been in the nine to 10 range than the six to eight range. Remember, a rise in cap rates from a seven to nine (or two points) will reduce the value of the property by 28.6 percent. Not a happy circumstance, especially if the project had a loan of 75 percent and all the equity was, therefore, completely depleted.

Clearly it’s impossible to accurately project cap rates or values too far into the future, but the historical patterns and current trend may argue for a decline in the near term. Thus, it may depend on how long you want to wait whether you sell or hold, or alternatively how long until your loan comes due.

Those decisions are for you to make, but in these times it may well be a more difficult decision not to sell than to sell. This is true because a sale is final and you know exactly what is in your future, whereas holding may provide future profits or losses, keeping you in the game.

If you have a “selling mindset,” below are important considerations for you to review. This is a time to be realistic about your intentions; if you are not fully committed to the selling process, it’s unlikely you’ll achieve satisfactory results.

Are You Really a Seller?

An old Englishman once said, “Parting is such sweet sorrow.” Nothing could be truer when it comes time to sell your self-storage facility. The decision is not only the largest decision that you will likely make in the economic life of the project, but also one of the most important you may make personally.

Many believe this decision is purely one of economics and a rational process, as described above. However, as any real estate broker can tell you, emotions play a very significant role in the decision to sell. For this reason, the first and most important decision is to determine if you really are a seller.

A seller is someone whose rational reason to sell is stronger than his emotional desire to hold the property. Some of the rationale may be that the owner:

  • Wants to retire and enjoy life
  • Anticipates estate-tax problems
  • Sees severe overbuilding on the horizon
  • Has a desire to diversify assets for greater security
  • Simply wants to capitalize on a good market
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