It’s a great time to be a self-storage buyer, poised to take advantage of the highest returns we’ve seen in years. There are some good facilities on the market at low prices (in terms of cap rates), and many properties are being valued unrealistically. There are even a few properties that may be available from foreclosure. Let’s explore the current real estate market, when it will be the right time to buy self-storage, and the right steps to making a good purchase.
The reality is we haven’t seen this market fully unwind yet. The number of foreclosures in self-storage is very small. Lately, we’ve been working with banks and loan servicers on troubled assets and found that, for the most part, the number of problem loans is also relatively small. However, some of the REITs and larger partnerships are facing large loan expirations in the next few months.
In the past, the banker’s credo was, “Your first loss is your best loss,” meaning it was better to foreclose than to wait for a property’s value to further decline. In this early stage of the game, it appears banks and commercial mortgage-backed security servicers may be willing to make significant concessions to avoid foreclosure, keeping them from writing off the loan and recording the loss on their books.
Thus, it’s not yet clear if the foreclosure mode will produce good buys in the immediate future. The banks are unsure of values, or they may believe the government’s Troubled Assets Relief Program may be a better buyer in the end.
There are a number of sellers in the market right now. Not unlike the banks, many of them are holding out for high prices that don’t reflect the market. These sellers may be relying on old appraisals from 2007 or thinking the listing price is as low as they’ll go. Some, however, may be desperate to sell, forcing flexibility. That said, a tortuous negotiation may be at hand where the asking and sale price are determined.
For buyers to be effective in a market as unsettled as this one, they should think about the listed property they would like to own. Try to buy quality properties, not just those that are cheap. Whatever criteria you use to assess value (location, type of construction, demographics, excess land, etc.), stick to them when evaluating properties. This keeps you from buying something you don’t really want.
Closing the Deal
The next step in buying a property is meeting with a banker or mortgage broker who specializes in self-storage to ensure there is money to borrow. You can’t simply assume there will be money available for a purchase. We’re seeing short amortizations and terms, and rigorous value underwriting—12 months trailing income, 60 percent to 70 percent max loan-to-value ratios, full recourse, real net worth.
In this market, having your financing relationships tied down is probably the single most important thing you can do, for yourself and to convince the seller you have the capacity to do the deal. It will make negotiations easier and the deal close faster. Once you have this data, you can run your numbers and develop values you think are appropriate.
We’re seeing deals in cap-rate ranges anywhere from 9 percent to 11 percent, and more in some instances. Give yourself a little room because the current market is so unique and volatile that there are very few sales for which an exact cap rate is easily determined.
Choose your properties and rank them according to preference, then start calling the listing brokers for more information. When talking to a broker, tell him all you can about your experience and financial capacity and let him know you’ve studied the information and are a serious buyer.
Next, visit the property, reviewing everything available. Ask questions, and then make a formal offer in writing. Ask to meet the broker (and owner, if possible) so you can explain how you arrived at the offering price. Both will appreciate you being forthcoming about your methodology and may even see that either the market has changed or their original valuation was off the mark.
These are difficult decisions for a seller, too, as many owners have strong emotional ties to a property. Therefore, give the seller a reasonable time frame to agree to the deal, a reasonable due diligence time frame in the contract, and as short of a closing as possible to get the loan done. Very likely, the owner will counter with a higher price (this should be expected).
If you get a reasonable counter, then counter back. You may, however, decide you are too far apart on price to counter, in which case, you should say, “I really like the property and would like to buy it, but this is the price I can pay.”
Tell him you will leave the offer open for another week or two if he changes his mind. The seller may reconcile the reality of selling the property at your price or choose to not sell it at all. If he doesn’t want to sell, move on to the next property on your list. Always have a property on your list so your desire to do a deal doesn’t compromise your financial or quality goals.
Michael L. McCune is the 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 self-storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE.