Past-Due Rent in Self-Storage and Its Effect on Facility Sales: Who Keeps It? Buyer or Seller?

Consummating a self-storage real estate deal is tough. Besides agreeing on the most salient transaction terms such as price, earnest money and financing, there are less prominent details to sort out, such as the issue of past-due rent. Here are a few approaches to resolving this challenge.

November 2, 2011

5 Min Read
Past-Due Rent in Self-Storage and Its Effect on Facility Sales: Who Keeps It? Buyer or Seller?

By Chris Hitler

I wish buying and selling real estate was easier. Many self-storage owners and investors feel this way during the process of acquiring or disposing of a property. Consummating a real estate deal is tough. Besides agreeing on the most salient transaction terms such as price, earnest money and financing, there are less prominent details to sort out, such as the issue of past-due rent. Who gets to keep it, the buyer or the seller?

There are a few approaches to resolving this challenge. The first two offer a clean break at closing. The other options focus on fairness while sacrificing transparency and expediency.

  • The buyer gives the seller a credit in a fixed amount at closing. The benefits of this approach are transparency and definitiveness. Both buyer and seller know exactly what will be credited at closing. The downside is the high potential of unfairness. One side gets compensated more than is actually collected.

  • The buyer gives the seller a percentage of past-due rent at closing. Although this approach is not quite as definitive as the previous (i.e., knowing exactly what will be credited to the seller), transparency is good. The buyer and seller know how the credit will be calculated, and this method reduces the risk of the seller being credited too much or not enough.

  • The buyer passes all collected past-due rent on to the seller. In this scenario, the seller gets only what has been paid. Unfortunately, the buyer has no incentive to collect the past-due rent since it will be given to the seller. Furthermore, the buyer may consider every tenant current as of the day of closing, simply choosing to ignore past transgressions and thus eliminating the chance for the seller to collect anything.

  • The buyer passes on to seller past-due rent collected within the first 30 days after closing. The buyer then keeps anything collected after the 30 days is up. Although the buyer has an incentive to collect past-due rent, this incentive may not necessarily help the seller because the buyer may wait until the 30 days are up before trying to collect.

There are numerous other approaches, and none are perfect. They all have benefits and tradeoffs. One way to mitigate the amount of past-due rent, assuming tenants are on a first-of-the-month rent-payment schedule, is to be strategic about the timing of the closing. A closing soon after the first of the month could mean a high percentage of tenants who still owe rent. A closing toward the end of the month will help to reduce the percentage of tenants who owe.  

Avoiding Past-Due Rent

The more fundamental mitigating approach and, frankly, just good business practice is to consistently stay on top of tenants and not let them fall behind on their rent. Here are some pointers:

  • Contact them. Send letters, postcards, e-mails and text messages and get on the phone. Having a sense of urgency can be contagious with your tenants.

  • Be empathetic but firm. A willingness to listen goes a long way toward getting your rent paid vs. some other bill. However, that empathy should be coupled with conciseness about the amount owed and the consequences of not paying rent on time.

  • Follow through on consequences. Rather than waive late fees, make tenants pay them. Also, use your lien rights and conduct auctions if tenants fail to meet their contractual obligations.

Maximizing Auction Results

Fortunately, steps one and two above go a long way toward keeping tenants current in their rent. However, if you are forced to conduct a lien sale, you might as well take steps to maximize each units auction price. Here are some key steps:

  • Advertise the event.  The price at which a unit sells directly correlates with the number of auction buyers. Post a sign at the facility, put a notice on your website and, most important, advertise on a storage-auction marketing website where thousands of savvy buyers have begun to look for lien sales.

  • Provide some advance notice. Posting an auction ad the day before the event will not help your cause. Buyers need time to organize their schedule, so get the advertising in place at least one to two weeks in advance.

  • Post pictures. Buyers prefer knowing what to expect from a unit. Photos allow them to assess the type of vehicle required to haul away the goods and ensure they have enough cash in their pocket to appropriately bid on the unit.

  • Provide content details. Although pictures are invaluable, it may be difficult to discern things such as product features, brand names and general property condition. The more descriptive details you can provide the better.

  • Be transparent. Notify buyers when a particular unit sale or an entire auction event is canceled. Many attendees are professionals, and showing up to an auction unnecessarily wastes their time and money. Fortunately, a good auction-marketing website can send notifications to buyers automatically.

Staying on top of receivables is a critical task for any self-storage owner. It can ensure you get the maximum amount in your pocket when it comes time to hand over the reins of your business to a new owner. It will also reduce the chance that a deal trips up over an issue like past-due rent.

Chris Hitler is an experienced self-storage owner and broker for the Argus Self Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Hitler also launched with the aim to help self-storage operators attract more buyers to their lien-sale auctions. To reach him, call 312.404.7933.

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