Real estate negotiations have never been more advantageous for savvy buyers. For the first time in a long time, some sellers are accepting significant price reductions. The coronavirus pandemic has significantly reduced the number of new developments being made in sectors like hotels, retail plazas and offices, which means there are a lot fewer commercial land buyers in the market.
Still, just because the market may be favorable, it doesn’t mean you’ll automatically get a great deal. If you’re looking to acquire land for a self-storage development, you need a strategic approach to the negotiation process. Here are three key steps and some specific tips to help ensure a smooth, profitable purchase.
Step 1: Initial Offer
Everyone knows the basic process for a real estate deal. The seller asks for X dollars, and a buyer offers Y. Negotiations begin. It sounds simple, but the trick is to get things moving in your favor. There are many strategies to consider. My advice is to take a measured approach.
Of course, one tactic is to offer the seller a much lower price than what he’s asking, in hopes that he’ll meet you somewhere in the middle. You can also assume a wait-and-see attitude if he doesn’t respond favorably to your offer. If what the seller is asking is outside your budget, you may not have much choice.
But the key to winning any negotiation is information. The more research you conduct before making your initial offer, the better off you’ll be. At a minimum, make sure you evaluate:
- Zoning lot-coverage requirements
- Zoning favorability for self-storge
- Boundary survey or topography for the parcel
- 100-year flood limits
- Demand and zoning requirements
If you receive details for any of these items from the seller or his agent, get them in writing. It can be in an email or right in the sales-marketing material. Either way, you’ll see just how valuable it is to have these things in writing down the line.
Step 2: Maneuvering
If the seller rejects your first offer or comes back with an unacceptable counteroffer, it isn’t always prudent to quickly increase your bid. This is where the art of preparation and negotiation can tip things in your favor. Spend some time maneuvering.
For example, if the seller declines your original offer, let him know why it was a good offer and give him another opportunity to accept. The more you can explain the reasoning behind your proposal, the better. If he rejects it a second time, ask what he can do to make the deal more attractive for you. Once he “bids” against himself, you can make a written counteroffer. Even if he chooses not to improve his offering, at least he’ll understand your reasoning and will be more likely to accept your counter.
Option time period. An important consideration in a self-storage land purchase is the total option time you get before you must purchase the property. This is the period you’re allotted for due diligence, designs, approvals, bidding and banking. It’s a key point in the negotiation, as you want as much time as possible and the seller wants to close as quickly as he can.
Give and take is an important part of negotiating, so a smart buyer tactic is to figure out the worst-case timeline, then add a couple of months, possibly even time for additional extensions. Once you know your baseline, you have room to negotiate a favorable option time frame. One way to get a longer one is to put up additional money for the deposit or purchase price if your proposed timeline is accepted.
Deposit. Another important point on which to focus in a self-storage land negotiation is the ability to reclaim your deposit if you don’t ultimately buy the property. During due diligence, you can typically get your deposit back with no explanation. That period is often 60 days, but some sellers want it to be only 30. It makes sense then to ask for 90 days, so you can compromise at 60 days if that’s a sticking point.
The last thing you want is to be required to buy the land or lose your deposit if your project doesn’t get approved by the city. Put a stipulation in your offer that if you don’t get approved for X square feet of self-storage, you get your deposit back and don’t have to buy. If you have to negotiate on this point, perhaps agree to lose part of your deposit; but never buy land you can’t use.
Step 3: Renegotiation
The third step in self-storage land negotiation comes after the contract is signed but before the due-diligence period has expired. When you made your initial offer, you did so based on certain information. In many cases, the facts won’t match what was originally presented or assumed, which gives you an opportunity to renegotiate. The seller doesn’t have to accept your request for a price reduction, and you don’t have to buy the property. The goal is to find a win-win! Here are some examples from recent negotiations in which I was involved:
Wetlands. On one large site, the wetlands had been delineated 15 years earlier and drawn on a boundary survey map, which indicated there were 6 acres of non-wetlands. When we conducted due diligence, we found only 5 acres. We gave the seller a hand sketch of our proposed 70,000-square-foot self-storage facility, overlaying the new delineation, so he could visualize the impact of the discrepancy. We ultimately got him to come down on the price, from $900,000 to $600,000.
Bad soil. It’s important to confirm the quality of the soil. You need to complete soil borings and a geotechnical report during the due-diligence period. I’ve seen sites with buried debris, fill or bad soils that had to be removed. Sites with ledge, clay or soils with little bearing capacity can incur unanticipated costs that reach into the hundreds of thousands of dollars.
At one property, we discovered a 2-by-4-foot area of poor soils that had to be removed and replaced with good gravel. The extra cost was going to be $85,000. We presented the information to the seller on our contractor’s letterhead, along with a copy of the borings and geotechnical report.
Generally, the more detailed, written proof you can provide, the better it helps the seller understand that any other buyer will have the same concerns. He may then agree to a price reduction. In this case, we’d already negotiated the price to rock bottom, and the seller said, “No more.” However, we didn’t give up. As it turned out, he owned additional land to the rear of the property, and he agreed to let us move the poor soils to his abutting site. Trucking material is expensive, so we saved more than $20,000 this way.
Water and sewer. I’ve lost count of how many times I’ve been told there’s a water and sewer line right in front of the property only to find this isn’t true. A water main that has to be extended 100 feet down the road to get to the site and another 100 feet along the frontage is a significant expense. During one recent transaction, the water main wasn’t directly in front of the property as stated, but on the other side of a four-lane road! Our contractor provided us with a detailed letter estimating extra cost at $50,000. The seller agreed to pay half.
Easements. On another project, we discovered a 45-foot utility easement along one property line. There was also a 15-foot, side-yard building setback, which meant 30 feet of lost buildable area. We asked the utility company if it would eliminate the easement since it wasn’t in use and not likely to be used in the future. It responded by saying it could take many months or longer to research and formally respond to our inquiry. We shared the research with the seller and negotiated a significant reduction for the loss of land.
We didn’t stop there. The site plan included a 75-foot-wide, climate-control building with 30 feet of the structure over the easement. The plans noted that if the easement wasn’t abandoned, we’d construct a building with a width of only 45 feet. Lo and behold, six months after our formal request, the utility agreed to abandon the easement at no cost. The phase-two building where the easement once was is now under construction.
When buying land for a self-storage development, research during the due-diligence period will generally lead to good opportunities. I’ve rarely seen a property review yield no fodder for negotiation. You can often find $100,000 or more in savings. You have nothing to lose! The worst thing the seller can say is “no.” Happy haggling!
Marc Goodin is president of Storage Authority LLC, a self-storage franchise, and the owner of three self-storage facilities that he personally designed, built and manages. He’s been helping others in the industry for more than 25 years. To reach him, call 941.254.3055 or email [email protected]. You can also purchase his books on facility development and marketing in the Inside Self-Storage Store.