Self Storage Investing - Making an Offer
Last week we explored how to analyze a self storage facility and figure out if its a deal. If you missed it, you can review that information here:
Now that you know how to value self storage properties, you should feel comfortable making an offer once you find a deal. Normally with a storage facility, you are going to want to draft an offer rather than use the state/county form that a mom and pop agent will try to use. That said, the state/county form will often suffice for small Mom and Pop properties especially if they are not generating a lot of revenue at the time. You can always attach storage specific addendum to their form to ensure that you are getting the best deal possible. Here are a few common special clauses to consider:
Purchase price allocation:
When you draft the purchase offer, you will ALWAYS want to allocate as much of the purchase price as possible to “Non Real Property”. Say for example you are buying a facility for $400,000. The seller paid $10,000 for property taxes last year. In conducting your analysis, you note that the property is assessed for $200,000. As such, you can expect that buying the property for twice that assessed value will result in your property taxes doubling in the near future. Of course you can try to explain this to the seller and use that anticipated tax burden to suppress the price you can pay for the property but that may or may not get you to where you need to be. And even if it did, the following strategy should always be used. Rather than buying the real estate for $400,000, you should stipulate in your purchase offer that you are buying the real estate for $200,000 and the business, trade name, customer list, seller's good will, website, phone number etc for $200,000. None of these assets are subjected to property tax and, as such, your property taxes are much less likely to be effected when your take ownership. Note that the allocation that you agree to with the seller will have income tax consequences for both of you. You'd be wise to consult your accountant or tax attorney during the process.
Pro-rations of rent:
The contract I use has specific language that skew the pro-rations of rent slightly in our favor. Essentially, we ask that any rent unpaid (but less than 30 days past due) be treated as "collected" for pro-ration purposes. This can amount to several thousand dollars of extra income to us depending on the size of the facility. We also ensure that the unpaid rents (greater than 30 days) are assigned to us so that we can work to collect those past due funds. Many state/county purchase contract forms will not adequately address this aspect. After all, the forms are for buying real estate and we are buying real estate PLUS other business assets so it pays to work with a fully flushed out contract!
Be sure to have seller agree to not turn off utilities until you transfer into your name so as to avoid any “downtime” or “turn on fees” When I present an offer, I like to build in wiggle room (We will talk more about negotiation next time!) but also lead with something like “I'm not a big fan of a whole lot of back and forth so I analyzed this from every angle I could think of in order to bring you the best offer I could...”
I like also like to make multiple offers. They are an “all cash “offer, a conventional financing offer and a seller financing offer. If seller financing, I make sure they know that there is flexibility on price as well as terms. Often times sellers will be stuck on price and if the other terms of the deal are attractive enough for you, you might be able to give them the price they are looking for. As an example, if I can afford to buy a property for $200K using private money at 12%, I may very well be able to pay the seller $250K if they hold paper at 5%.
Last point on contracts, real estate laws very from state to state so you will want to have an attorney review your contract and guide you through the process.
I hope you are finding some value in my storage musings and would love it if you'd post comments or questions below. And please be sure to subscribe below so you don't miss out when the next post goes live!