The process of acquiring or selling a self-storage facility is complex and can often be confusing, competitive and outright frustrating. It isn’t something the average owner has to think about very often; and anyone new to the marketplace won’t know what to expect. With this in mind, here’s some insight to help buyers and sellers work through the critical parts of a real estate transaction and ensure a more successful outcome.
Pricing Is Critical
The first and most important component of a self-storage purchase or sale is pricing, of course, so let’s spend a few minutes on it. In the world of transactional real estate, the market usually has a relatively narrow band of property values. If market prices were any higher, there wouldn’t be any buyers; if it were lower, there wouldn’t be any sellers. Another way to say this is there are more sellers at high prices and more buyers at low prices, but only a few who are willing to deal at the right market price.
The range is also quite narrow because buyers are disciplined. They often understand the capital markets and have been involved in several transactions, giving them an advantage over a one-time seller. Sellers won’t let go of their asset for less than fair market value and seek a price that’ll allow them to reinvest and achieve comparable returns.
Facilities differ in many ways: size, age, location, market, construction and so on. We must have a method of comparing properties for sale that takes all these differences into account. In real estate, we use capitalization rates to try to compare the unleveraged cash-on-cash return on the sale price from one property to the next. This makes sense, as what any buyer really wants is a return on invested capital. Thus, we can compare the price of a $1.375M property with a net operating income (NOI) of $110,000 to a $10.709M property with an NOI of $589,000. The first property has an unleveraged return of 8 percent, whereas the higher priced one has an unleveraged return of only 5.5 percent.
All things being equal, which would you choose? You’d buy the property with the higher return, of course! However, in self-storage, all things are not equal, and buyers must factor risk and quality into the pricing equation. In this instance, it’s possible the first property is near a military base that’s about to close, while the second is the only storage facility for 10 miles and a recent moratorium has been placed on new development. It’s this difference in risk and quality (and buyer perception) that widens the range of market prices. It sets required returns and can vary widely from one market to the next.
Today, most self-storage facilities sell for unleveraged returns of 5.5 percent to 8 percent. In other words, the average facility probably sells for, say, a 6 percent return, and a not-so-good property sells for a higher return to compensate for the risk and lack of quality. The opposite is also true: The better projects command the buyer to accept less return. In self-storage, pricing almost always fits into this narrow band of returns buyers and sellers mutually accept in making a deal.
Buyers and sellers need to educate themselves to ensure their expectations regarding price are in line with the market:
Sellers: You need to understand that overpricing is not harmless and you should list your property within 3 percent to 5 percent of what you’re willing to transact. Overpriced properties don’t attract the most aggressive or qualified buyers, and they often end up with a market reputation that lasts for several years. Overpricing also has a negative long-term impact on the value of the property and can make an illiquid asset (all real estate) even more so.
Buyers: You should understand that making lowball offers will offend sellers and make purchasing a property more difficult in the future. Your reputation will precede you! After all, self-storage is a relatively small industry. To be taken seriously, an offer should be within 2 percent to 7 percent of the asking price. Buyers are often selected not only based on pricing, but on terms, reputation and experience.
Preparation Is Key
Buying and selling a self-storage property is no small task, and whichever side of the fence you’re on, you need to prepare before entering the process to ensure success.
Sellers: Make sure your property shows well and presents in a professional manner. For example, all deferred maintenance should be complete, accounts receivable should be at a reasonable level (5 percent or less), auction units should be processed, all unrentable units should be fixed and put back into service, trash should be picked up, weeds should be sprayed, and the site should be thoroughly clean. It also may be prudent to paint the office and bathrooms and sealcoat the driveways. These basic steps will go a long way when getting the highest value for your property.
Buyers: Narrow your search to a few markets you’ve researched, studied and understand. This will allow you to be more aggressive in valuation and submit a qualified, competitive offer. Again, offers aren’t solely evaluated on price but also with regard to terms, inspection period, closing time, experience, reputation, etc. Line up your financing and hire a third-party management company before making an offer, so you can underwrite the acquisition in a timely and appropriate manner. In this highly competitive market, you must be ready to react quickly when an opportunity presents itself.
Today more than ever, having experienced advisors and counsel can make or break a deal. You’ll have a meaningfully higher success rate if you’re represented by an experienced, knowledgeable and reputable self-storage broker. This person will assist you in understanding the submarket of the property and provide market data (sales comparisons, underwriting assistance, new-development info, market-rate financing quotes, etc.), which will allow you to be more realistic and efficient in your efforts. It’s also prudent to engage an experienced real estate attorney and credible third-party management company to evaluate the broker’s underwriting and provide guidance about market timeframes and deal structures.
The self-storage industry continues to evolve, and there are conditions in the market that are attractive for both buyers and sellers. However, just because it’s a “good” market for buying and selling doesn’t mean everyone should. The process will continue to become more competitive and challenging, so be clear about your personal objectives before proceeding.
Ben Vestal is president of the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to buyers and sellers via an extensive marketing platform for self-storage properties. Property listings and informational resources can be found at www.argus-selfstorage.com. For more information, call 800.55.STORE; e-mail [email protected].