By Bill Alter
In today’s real estate market, the days of caveat emptor (buyer beware) are over. Many consider it more important to be cautious when selling a self-storage property than when buying one.
The buyer's due diligence consists of numerous inspections, audits and third-party reports to verify the property is a suitable investment and exactly what he thought it was when he wrote his offer. It begins with the verification of the financial information that was initially provided, but it doesn’t end there.
If you’re the seller, your role in selling the property is to disclose information and assist the buyer as much as possible. Here’s how to support the due-diligence effort and set yourself up for a successful sale.
Inform Your Managers
Before your property even goes on the market, you must decide whether to inform your managers of what's about to happen. Sellers are often divided on the subject. Those who choose not to inform their staff are either afraid their managers will begin looking for other employment or they don’t want to unnecessarily upset them. I come down on the side of full disclosure for several reasons.
First, you can’t expect to keep your managers in the dark for very long when countless buyers, brokers, lenders, appraisers, insurance representatives and engineers are visiting the property pretending to be interested in renting units and never actually doing so. The fact is your managers will figure it out sooner or later, and it’s best that the news come from you. Also, doing so at the beginning of the marketing process allows you to enlist managers’ help in accomplishing a sale by making sure the property is presented in its best possible light.
You can assure your employees that the majority of buyers typically keep the staff. Explain that if they’re not retained, you’ll provide a severance package that’ll allow them time to secure new employment. It’s much better to have your managers on your “sales team” than to keep them ignorant and run the risk they could actually harm a potential sale.
Instruct your managers to direct any and all questions from buyers concerning financial aspects of the property to you or your broker. They should be completely honest when answering questions concerning the physical aspects of the property.
Address the Property’s Physical Condition
Unless your property is new, the buyer shouldn’t expect it to be in like-new condition. Therefore, it may not be necessary to spend very much on maintenance issues and the facility’s physical condition prior to sale. Simply 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 property.
Here’s the general rule: If something will add to occupancy or justify a higher rent, it should’ve been addressed long ago. It probably wouldn’t be cost-effective to address those issues now because value is a function of current income, not what the income might be if you repainted all the doors or installed new landscaping. Spending a lot of money now on issues like these probably won’t translate into a substantially higher sales price because it takes time for these improvement expenses to appear as increased revenue.
The most economical way to achieve optimal value for your property is to simply ensure it’s clean. The most you should do is add a sealcoat on the asphalt. The bottom line is your property’s income is achieved either because of its appearance or in spite of it. Many buyers look specifically for properties that can be upgraded so they have a better chance of improving the income than they would if they bought a newer property in perfect condition.
Have a Contract Ready
Negotiating contracts can be time-consuming and expensive. Be prepared to respond to any offer you receive with a contract prepared in advance by your attorney or broker, one with which you are familiar. The contract should allow for minor changes to fit the particular counter offer you’re making to the buyer, and you should request that the buyer use it if negotiations are to continue.
Your contract will include a list of items to be delivered to the buyer for review during the contingency period. Those items should be gathered and prepared in advance for quick transfer to the buyer. This will minimize the length of time required for due diligence. The following are typically included:
- The previous 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 Site Assessment
- Building plans, if available
- Service agreements and contracts including those for Yellow Pages, insurance, computer service and any other agreements with outside companies
- Preliminary title report
- Copy of loan documents for the current financing
If you don’t have the ALTA Survey and environmental report, get them done before marketing begins, with an understanding with each respective engineer that the reports will be updated for the benefit of the buyer for a nominal charge. If you have an old survey, environmental report or the title work from your acquisition of the property, it would be wise to pull them out and review them carefully. Doing this will refresh your memory and prepare you for possible questions from the buyer.
Prepare for Financing
You should know whether your sale will require the buyer to assume your current financing or secure a new loan. You may want to require your buyer to demonstrate his ability to actually obtain the funding needed to close the deal. This would allow you to accept a lower offer if it’s all-cash or the buyer can prove his ability to get a loan.
You or your broker should contact several prospective lenders so you’re prepared to provide whatever documentation a lender may require 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’s an existing loan that can or must be assumed, know what it takes to accomplish that and be prepared to share the information with the buyer. The process of assuming a securitized loan is very difficult these days. Find out what’s involved and make sure your buyer knows. If there’s an existing loan that must be paid off, know what it’ll cost to do that, if anything, and be prepared to deal with that as well.
If you’re thinking about selling your self-storage property, do your own due diligence first. Talk to your staff, consider maintenance and upgrades, and have a contract and financing options prepared well in advance. Taking the initiative on these matters will not only attract a higher-quality buyer, it will ensure the entire sales process is easier for everyone.
Bill Alter has been a self-storage facility sales specialist with Rein & Grossoehme Commercial Real Estate since 1986. He’s been responsible for the sale of 140 facilities totaling more than 7,500,000 square feet and $300 million. To reach him, call 602.315.0771; e-mail [email protected]. For more information, visit www.rgcre.com.