Understanding the Auction Process
Self-storage facilities that have reached foreclosure often end up at auction, where the lender seeks a fresh start with a new owner. Auctions are designed to provide a quick sale to the highest bidder, aiming to recoup as much of the loan as possible. While the bank might achieve higher returns by listing the property traditionally, the time and cost involved make the auction route more appealing, even if it’s not always in the lender's best financial interest.
Theory vs. Reality
In theory, auctions create a streamlined path to a high price in a short timeframe. In practice, however, the process comes with constraints. Many potential buyers are hesitant due to limited time to secure financing and the unusual requirement of completing due diligence beforehand. This setup often results in lower prices for the bank, as most buyers can’t act quickly enough. Auctions proceed despite these drawbacks because the bank’s priority is to transfer ownership and minimize ongoing loss, even if it means selling below market value.
Risks to Keep in Mind
Two primary risks often deter buyers at auction: (1) overpaying due to incomplete due diligence and (2) failing to close within the tight 30-day deadline. Buyers must perform full property inspections and financial analysis before bidding, even though they’re not yet guaranteed the property. Missing key details about zoning, occupancy rates, or environmental issues could lead to costly surprises. Should you win the bid and later discover issues, backing out will still mean losing your deposit, typically 10% of the bid amount. The second risk is the short window for closing. Arranging a bank loan within 30 days is challenging, and going with an all-cash option requires readily available funds.
Opportunities Through Limited Competition
The barriers and risks involved at auction create opportunities for those prepared to navigate them. Limited competition can mean lower prices, sometimes with only a single bidder. Auctions can be one of the best places to find undervalued properties, often in need of management improvements or physical repairs. For those who can quickly address these issues, there’s often an immediate increase in income potential, with some properties doubling in value within a year.
Final Thoughts
Auctions can offer some of the best deals in the self-storage sector for investors with the right approach. But to make it work, be prepared to conduct thorough due diligence before bidding and ensure you can close swiftly. With a well-planned strategy, buying at auction can be a rewarding path to a great investment.