Questions to Consider Before You Jump on Board to Sell Your Facility
by Michael Johnson
What should an owner look for when he/she is interested in selling?
The owner should seek the advice and feedback of a self-storage broker on pricing conditions based on the current market. Brokers can walk an owner through the marketing process and explain what goes into selling a self-storage facility. Other items an owner should look for include estimated closing costs and an overall timeline. After getting this information, owners should consider if it fits within his or her investment goals and expectations.
When should an owner sell?
This answer comes down to many individual characteristics. Several market factors can make it an attractive time for an owner to sell. A few examples of these market factors are favorable cap rates, interest rates and supply/demand within the facilities sub-market. When cap rates are low, prices are high. When interest rates are low, there are more buyers willing to take advantage of the lower cost of capital. However, the majority of sellers are often forced to sell because of life events, such as relocation, health problems and divorce.
What are the peak conditions for selling?
Several factors determine peak conditions for selling (also known as a seller’s market).
High demand combined with a shallow inventory of properties for sale. In this type of environment, there are more buyers than sellers. Many of the large operators and REITs have been aggressively buying in the top 50 MSAs to build up scale/efficiencies in those markets.
Low cap rates and financing readily available with rock-bottom interest rates.
Historical occupancy and NOI growth with little new construction within five miles.
Buyers using pro forma underwriting standards to determine the value.
Do you need to be fully stabilized when you sell?
Short answer: No. At certain times in the market cycle, buyers give the owner credit for unleased units. However, it is more advantageous for an owner to be stabilized when he or she decides to sell. This is an income-based business, meaning the higher the income, the higher the purchase price.
How do you get your facility ready to sell?
When getting a facility ready to sell, it is important for owners to focus on three areas that can pay off in the long run:
Owners should look at their rent roll to determine how long it has been since raising prices for both existing tenants and street rates. This is an easy way to pick up additional income. A five to 10 percent increase every 12 months is standard. Getting delinquent tenants current on their rent or getting them to move out is also important to maximize revenue.
Owners should take the time to identify and clean up expenses. Have real estate taxes been appealed? Are marketing costs in line with market averages? It is important to identify personal expenses such as cell phone, car and health insurance payments. Owners who can identify their facility expenses make their income statement more appealing.
Improving facility appearance
Quality sells, so an owner should focus on the general aesthetics of the facility. In residential real estate, it’s called “curb appeal” and it’s no less important with your facility. Dusting hallways, cleaning doors, cutting grass and removing weeds are a few small things that make a difference in the overall appearance. Repairing lights, replacing damaged doors and adding a fresh coat of paint are larger items the seller should focus on. A coat of paint goes a long way.
How do you structure a deal?
Owners should consider working with a professional self-storage broker who has a proven track record selling storage facilities. Brokers can use their expertise to help structure a deal with the highest price and best terms. An experienced broker who specializes in this unique market has a database of qualified, interested buyers.
How can you buy in a seller’s market?
Over the past decade, the self-storage industry has evolved dramatically, and keeping up with the change can be difficult for some facilities/operators. Even though prices can be at all-time highs in a seller’s market, buyers take advantage of their large amounts of capital with low interest rates. Buyers tend to look for value-add opportunities to increase their bottom line. A few examples include raising prices on existing tenants, investing in online marketing and expanding the facility to add more units. Buyers who understand the operating fundamentals of the business can effectively purchase properties in both seller’s and buyer’s markets.
How can you sell in a buyer’s market?
Prices in a buyer’s market often suffer due to economic conditions and less favorable financing terms. Of course, all owners prefer to sell for the highest price possible. Whether it is a life event or other factor causing an owner to sell in a less-favorable buyer’s market, it is important that he or she focus on the following:
By keeping apprised of competitor pricing, owners can ensure their units are being rented at a price the market bears. The value of the property directly relates to the income the facility produces.
Owners should complete any minor deferred maintenance items and make the property as presentable as possible. Owners should let potential buyers know of any outstanding maintenance items on the front-end, so they do not have a reason to reduce their offer during their due diligence.
Owners should seek out a professional storage broker who will give them pricing feedback based on current market conditions. There are more properties for sale than purchasers in a buyer’s market, so
it is important not to have unrealistic pricing expectations.
Is it better to build or buy?
This is always a popular question. Loans are readily available for people looking to build a new facility or acquire an existing facility. Both options have their own pros and cons. Take a closer look below to help determine which may be a better fit.
Ground-up construction gives you the benefit of creating and customizing everything from start to finish, or from the initial design to the way the property is managed. Overall, it is a riskier investment to build new because you will be starting at zero percent occupancy with expensive carrying costs and negative cash flow. However, there is greater profit to be made on the back-end when the property is stabilized. The overall timeline of building new is another potential drawback. Finding the right land, getting permits and approvals, having design work done and experiencing unexpected site conditions and other unforeseen issues can delay the project.
The immediate cash flow from a stabilized facility is a major benefit for individuals looking for a turnkey investment. A potential con for buying an existing property is the time it can take to find that opportunity that fits all of the individualized investment criteria—size, price, location, cap rate, etc. The success of the self-storage industry has been well-publicized for some time now, and competition is very strong from the self-storage REITs and other large private equity group that have been able to pay more than the average investor can because of their lower borrowing costs.