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 youre 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, its time to qualify your buyer. Its at this stage that you may have to spend money, so youre entitled to know with whom youre doing business. If youre 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 thats 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 its 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, youll 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, its 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.
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
- Lots 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
- Buyers 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)
- Doesnt 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 theyre not acting solely on their own behalf. The buyers broker may have closed a couple of large transactions and can verify the buyer.
Remember, offices can be rented, and its easy to create a façade. A reputation is built over time, so look at the buyers 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 braglook 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 todays 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 youre carrying paper, youve become a lender, and your requirements to provide financing should be as stringent as the banks. If you dont 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 youre 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 youre 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. Theyre in the market tying up properties. Ensure youre 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 [email protected] .