You have received dozens of unsolicited calls over the years from so called “buyers” and brokers wanting to buy or list your facility. You’ve read other articles like this so you know the market has turned, cap rates are increasing, financing is difficult and there are fewer qualified buyers. You’re thinking about selling but waiting for the right time. In spite of a difficult market you’ve decided now is the time to sell your self-storage facility. Now what?
The first thing to do is decide whether you are selling your property yourself or enlisting the help of a broker. All the recommendations and suggestions made here assume you are hiring a broker, so if you are selling your property yourself you should transfer all the responsibilities I have assigned to the broker to yourself as you read through this article.
If you decide to use a broker to represent you, be sure to select the right broker. By that I mean somebody who knows the self-storage business and your local market in particular. This will be somebody with a track record of helping other owners market and sell their self-storage facilities. There are a lot of risks in this market. Don’t let your choice of brokers become another one.
The right broker will establish realistic expectations of what the property will ultimately sell for and set an appropriate asking price to increase the likelihood that you achieve that goal. By setting the asking price too high you run the risk of not selling at all, thus missing the opportunity to achieve optimum value. By setting the asking price too low you risk leaving of money on the table. Most important, you must understand current market conditions and know if values are trending up or down. With this knowledge, you should be prepared to set a price that is “ahead” of the trend, whichever direction it is going.
The right broker will advise you as to which, if any, deferred maintenance issues should be dealt with before placing the property on the market. Unless your property is new, the buyer should not expect it to be in “like-new” condition. Therefore, it may not be necessary to spend much improving the property’s physical condition prior to sale. You should take the time to replace burned-out light bulbs, fix minor damage to doors and metal building corners, replace faded or missing unit numbers and generally clean up the appearance of the property.
If some aspect of your property’s condition might enhance the marketability of units or the amount of rent that can be charged for them, it should have been addressed long ago. It would probably not be cost-effective to address it now. In other words, property value is mostly a function of current income not what the income could be if you repainted all the doors, installed new landscaping or remodeled the office. Spending a lot now on issues like these will probably not translate into a substantially higher sales price because it takes time for these kinds of improvement expenses to translate into increased revenue.
The most cost-effective way to achieve optimal value for your property is simply to be sure it is clean. The most you should have to do is apply a seal coat if the asphalt is showing signs of deterioration.
The bottom line is that your property’s income is achieved either because of or in spite of its appearance. There are many buyers who look specifically for properties that can be improved because they believe that by purchasing such a property they have a better chance of growing the income than they would if they purchased a newer property in perfect condition.
Inform Your Managers
Sellers are divided on the subject of whether to inform their onsite managers the property is for sale. Those who choose not to inform management are either afraid the managers will begin looking for other employment or simply don’t want to unnecessarily upset them. You can’t expect to keep your manager in the dark for long when countless buyers, brokers, lenders, appraisers, insurance representatives and engineers visit the property pretending to be interested in renting units and never actually do so. The fact is that your manager will figure it out sooner or later, and it’s best that it comes from you.
Also, by informing your managers at the beginning of the marketing process you can enlist their help in accomplishing a sale by making sure the property is presented in its best possible light. You can also assure your managers that a majority of buyers will want to keep them, and if they are not retained, you will provide them with a severance package that will allow them time to secure new employment.
It is much better to have your managers on your “sales team” than to keep them in the dark and run the risk that they could actually harm a potential sale. You should, however, tell your managers to direct any and all prospective buyer’s questions concerning the financial aspect of the property to you or your broker. You should also instruct your managers to be completely honest when answering questions concerning the physical aspects of the property.
Prepare for Due Diligence
Negotiating contracts can be time-consuming and expensive. You should be prepared to respond to any offer you receive with a contract prepared in advance by your attorney or broker. That contract should allow for minor changes to be made to fit the particular counter offer you make to the buyer, and you should request the buyer use that contract if negotiations are to continue.
The contract will contain a list of items to be delivered to the buyer for review during the contingency period. Those items should be prepared in advance and delivered to the buyer quickly in order to minimize the length of time required for due diligence. The following items are typically included:
- Last two years and year-to-date income and expense statements
- Most recent real estate tax bill and notice of valuation
- Current rent roll
- Most recent ALTA Survey and Phase I environmental report
- Building plans, if available
- Service agreements and contracts
- Preliminary title report
- Copy of loan documents for the existing financing
Prepare for Financing
You should know whether your sale will require the buyer to secure new financing. With all the turmoil in financial markets today, require your buyer to demonstrate his ability to actually obtain the financing needed to close the deal. You may want to accept a lower offer if it’s all cash or if the buyer can prove his ability to get a loan.
You or your broker should contact a number of prospective lenders so you are prepared to provide whatever documentation a lender may require in order to process the buyer’s loan application as quickly as possible. The probability of a smooth and timely closing will be improved if you can provide your buyer with specific lenders’ names and phone numbers.
If there is an exiting loan that can or must be assumed, be prepared to share that information with the buyer. Assuming a securitized loan is also difficult these days. Find out what is involved and make sure your buyer is informed. If there is an existing loan that will have to be paid off, be prepared to deal with that as well.
Although there may have never been a better time to sell a storage property, it is still important to map the process and follow the plan.
Bill Alter has been a self-storage facility sales specialist with Rein & Grossoehme Commercial Real Estate since 1986. He has been responsible for the sale of nearly 100 facilities totaling more than 5.5 million square feet and more than $175 million. To reach him, call 602.315.0771; e-mail [email protected].