Due Diligence for Self-Storage Sellers: Verifying Buyers' Ability to Close the Deal

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Danger Signs

Here is a list of red flags that might indicate your buyer is unable to close the deal:

  • Asks for less than the traditional down payment/equity
  • Refuses to provide a financial statement or proof of funds
  • Unable to provide a verifiable track record of closed or owned properties
  • Unable to provide a list of principals, if not single ownership/control
  • Unwillingness to provide verifiable information
  • Lot’s of flash, no cash
  • Inability to immediately place earnest money (three days max) and verify the source of earnest money is a party to the transaction (not borrowed)
  • Inexperienced in self-storage ownership or management
  • Buyer’s broker is not experienced in self-storage transactions
  • Google results are not favorable (recent bankruptcy or litigation)
  • Makes the sale sound too easy (no appraisals necessary or very short due-diligence period)
  • Doesn’t conduct thorough buyer due diligence

Nothing Like a Good Reputation

Most credible investors are happy to let you speak with a recent seller with whom they closed a transaction. The seller can tell you how the transaction went, what kind of “hitches” occurred, and if there were delays. Most valid buyers have a history of successful transactions with their investors if they’re not acting solely on their own behalf. The buyer’s broker may have closed a couple of large transactions and can verify the buyer.

Remember, offices can be rented, and it’s easy to create a façade. A reputation is built over time, so look at the buyer’s history. The longer he has been successful (and that success can be confirmed), the more likely he is going to complete the purchase at hand. Do not listen to his boast and brag―look at the facts.

Buyers used to be able to get standby loans and letters of credit from their bank to offer proof they could close, and the banks could easily and quickly produce them. In today’s challenging market, banks are hard-pressed to provide those kinds of assurances. Deals are taking longer than ever to close and are more complicated. Banks, investors and financiers require more time and due diligence than ever before. Be aware of those facts, and patient in your transaction. If a legitimate buyer needs an extension and has a valid reason, you may want to grant one rather than lose him.

If you’re carrying paper, you’ve become a lender, and your requirements to provide financing should be as stringent as the bank’s. If you don’t have as much to lend as the bank, you may want to be even more careful! Remember, banks rarely lend their own money; they borrow money from their depositors or the Feds. It is always easier to lose other peoples’ money than your own.

There are lots of examples of deals gone bad and sellers left holding a bag of broken promises. If you’re desperate to sell, you may not have the luxury of evaluating the buyer. A smart buyer will know this and take advantage of you. If you’re about to lose the property to a bank, many investors would rather deal with the bank and will wait for a foreclosure.

Fraud or Friend?

There are numerous frauds in the marketplace who have never closed a self-storage transaction and do not have the ability to close. They have tattered and torn histories with bankruptcies, and a trail of investors behind them who may have lost millions of dollars. They’re in the market tying up properties. Ensure you’re not dealing with one of them. Do some seller due diligence and protect your sale.

RK Kliebenstein is a self-storage consultant with more than 25 years of experience. He has negotiated the purchase of nearly a billion dollars worth of storage properties on behalf of his clients or employers. He is the author of “How to Invest in Self-Storage.” To reach him, e-mail rk@askrk.com .

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