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
Often, brokers hear a potential seller say, “I will sell if I can get my price.” In essence, this means he is not really a seller. This owner either wants an excuse not to sell or is simply deferring what should be a rational decision to the erratic notions of the market.
A potential seller must truly be serious about engaging in the selling process. As we shall see later, putting your property on the market without the serious intent to sell can actually hurt the property and your ultimate ability to sell it effectively.
What’s It Worth?
You’ll have to find out what your property is worth in the market before you decide to sell it. Don’t forget, the market determines what the project will sell for, not the seller. The potential seller can determine whether or not he will sell for the market price, but he cannot change the market. This is particularly true in difficult markets like we are currently experiencing.
Although a property could sell significantly above the market price, most real estate professionals would agree that they’ve never seen such a sale, particularly in a relatively small market like self-storage. Pricing the property incorrectly means one of two things:
- Either you lose money because the price is too low, or
- You lose money because the price is too high and it won’t sell!
In soft markets we often find “predatory buyers” who spot sellers with properties well priced above reason and then make a lowball offer, leaving it causally “on the table” for the seller to ponder. They know that the property will not sell at the high price, but if the seller winds up in a difficult situation (expiring loan, for example) and is forced to sell to the only offer on the table, he will regret not listing it at a market price.
Think about hiring an appraiser or an experienced broker to target the market value of your site, which is almost always determined by using the income approach. Did you know that your actual trailing 12-month income will determine 95 percent of the variables in the value?
As a general rule, the bigger the buying audience, the higher the offers. This means widespread marketing and presenting a listed property to as many potential buyers as possible. A seller deserves to see all the potential offers, not just ones a broker develops from his own list of prospects. However, some brokers feel this broader marketing is just an additional cost and also creates a “hassle” for them to respond to questions submitted by “uninvited” prospects. In short, broader exposure ensures your broker finds the best buyer rather than just a buyer.
Keep Managers Informed
Many owners feel that they must keep their manager in the dark about a proposed sale. While this may be appropriate in some instances, in most cases it is usually counter-productive. First, most managers will quickly figure out what is going on and will not react positively to being kept in the dark. Some may begin pursuing other opportunities or even leave abruptly.
An offer of a bonus upon closing of the sale in the event that the manager is not retained by the new owner or severance is a fair and productive way to assure the manager stays on through the selling process. It tends to put the manager on the same “team” as the owner. Managers know that sales of properties happen and will respect your decision to sell if they are treated fairly. Secondly, because of their intimate knowledge of the property, managers can often be very helpful in the selling process. In most circumstances, a positive manager can add credibility to the property’s performance.
Most buyers of properties are in the market for good managers and actually want to hire the existing manager rather than disrupt the operation. More often than not, a manager can be an owner’s greatest ally in selling a property.
If you follow the practices of good selling guidelines, you can expect to sell a property at a market price and in a reasonable time. Of course, the definition of reasonable time may vary based on the number of buyers in the market. Regardless, consider your motives and be prepared for the realities of today’s market.
Michael L. McCune is president of the Argus Self Storage Sales Network, a self-storage real estate brokerage and development company based in Denver. Argus also operates www.selfstorage.com, a marketing medium for owners in the self-storage industry. For more information, call 800.55.STORE.