By RK Kliebenstein
In the past, due diligence has largely been for the benefit of the self-storage buyer in determining the soundness of a property for sale. But after hearing recent horror stories about sales that did not close, I think sellers, too, can benefit from the process.
There are thousands of purported buyers of self-storage out there, and most of them are honest and capable. But a property listed for sale is also likely to attract the attention of many unqualified “investors.” The lower the price and the higher the leverage (lower down payment or equity required), the greater the likelihood that you will attract ill-equipped prospects. With hundreds of inquiries, how do you know which to take seriously?
There are several signs that a buyer may not be real. Read on for tips to help qualify true self-storage investors.
Caveat Venditor: No-Money Buyers
To begin, you want to avoid the hundreds of buyers who have attended seminars about buying properties with no money out of pocket, who want to purchase your property without putting any skin in the game. These “investors” are asking sellers to enter lease/master lease/lease-to-own deals. Caveat venditor (let the seller beware)!
On a recent listing I placed on LoopNet, I was bombarded with inquiries from just such a seminar group, receiving more than 100 calls from recent graduates who presented themselves as investors, affiliates or principals. None of them had actually closed any deals, and not one had any self-storage experience. What they knew about the industry they had learned from the presenter, who probably made more money selling seminars than owning or operating self-storage. He told them what to say to sellers, and the party line was identical, almost verbatim.
How to Qualify Your Buyer
Early in the negotiations, find out who you’re dealing with. True qualified investors are always able and usually pleased to present their credentials. Some will have printed brochures. Others have websites that indicate recently closed transactions. Some have established brands and multiple locations. All of these are good signs that buyers are legitimate. Beware those who dance around the question or are unwilling to provide information. Do not press too hard at this stage, as lookers are not necessarily buyers.
Once you have negotiated a Letter of Intent, it’s time to qualify your buyer. It’s at this stage that you may have to spend money, so you’re entitled to know with whom you’re doing business. If you’re going to take your property off the market, you have the right to ensure the buyer is valid.
First, ask for proof of funds. This is usually a letter (on bank letterhead, with a contact name and telephone number) that indicates the buyer has funds sufficient to close. If a letter is not available, you may ask for bank statements or brokerage account statements that verify the availability of funds. Watch out for very recent deposits, or many quick-in/quick-out transactions. (Note: A letter from a loan broker or equity source is not a verification that the buyer can close. If that’s all there is, then the equity broker must provide a verifiable list of closed transactions and financial statements.)
Second, ask for a financial statement, which will tell you a lot about your buyer. Make sure it’s dated and signed. The buyer may be a bankruptcy remote or single asset entity formed specifically for the purchase. That likely means the buying entity has no history or assets. With that in mind, you’ll have to research the principals’ ability to close.In the absence of a financial statement, ask for a title-company reference and verify the buyer has closed transactions; also verify the date and size of these purchases. Six months is the maximum time lapse since a closing, and the deal size should be similar to the transaction at hand. Remember, it’s easy to create a fictitious title company, so make sure the company is licensed in the state of the transition and you are dealing with the branch at the licensed address.