Self Storage Investing Newsletter

We get calls all the time from people who think that cap rates are getting lower. They get this information from brokers who want to convince them that their listing is a great deal. As a general rule, the person least likely to give you accurate data is a real estate broker. They are extremely biased, as they get paid a commission if they get you to buy their listing. We live in a time of potential interest rate acceleration. The quantitative easing program of the U.S. government – which has been buying $85 billion of month of government securities – caused rates to rise by 1.5 point simply by scaling back $10 billion per month. With a new $10 billion cutback announced, where do you think rates will go? Since cap rates normally have to rise with interest rates (in order to attract buyers) can you guess which direction cap rates are going to go in the near future? Only sellers and brokers think that cap rates are heading down (and sales prices up). You can’t blame them – they get paid to tell you that.

When you put a self-storage facility under contract, the only data you have to go on is that which the seller provides you. But what happens if, during due diligence, you find out there are problems that were not disclosed. The answer is: you re-negotiate the contract. So how do you successfully re-negotiate a self-storage facility contract?

If it’s significant, do it right away

When you have spotted a fundamental flaw in the deal, the best thing you can do is to immediately present it to the seller and, assuming that it can be solved with a price reduction, either get the price concession or kill the deal. Don’t waste your time on a deal that has a deal killing problem until it’s been discussed and cured.

If it’s not a deal killer, do it all at once but near the end of the exam period

If the problem is not a potential deal killer, but could still have an impact on your desire to pursue the deal, then you need to save these smaller problems until near the end of the examination period. Why not confront the seller immediately with each one? Because nothing makes a seller more upset than getting constant, nagging calls for continual price reductions. It reminds them of an outdoor flea market, haggling for a souvenir. There’s a better strategy.

List the problems, and support those with three bids

If you want to get a good price concession, you need to present the information in a manner that will be attractive to your seller. The best way is to not only give them an itemized list of issues, but also back those up with three written bids to repair each item. The seller will be impressed with the amount of work you put in to get those three bids, plus they will assume that you must be correct about needing that fixed, since three contractors identified the problem and priced the needed repairs.

Never sum the total requested

Never present the seller with the sum of the proposed bids and concession. The key is to get them to agree on each, line item by line item. Human nature is that they will not be able to figure out the total as you go, and they always underestimate it (maybe it’s wishful thinking). If the seller knew what the total would be, they would fight you on every line item. Instead, they commit on each item and then can’t retract it when they finally add up the total.

Have a walk-away price

Before you even begin renegotiating, you need to establish a walk-away price – the absolutely maximum price that you will pay for the property. You must never cross over that line. The seller will feel the push-back as you approach that limit. You will exude it in your speech and body language. This will help the seller to limit his negotiations.

Actually walk-away if the seller refuses

If the seller refuses to negotiate within your walk-away price, then you must walk away. You have to quit. Tell the seller that you really appreciate their time and effort, but the deal just will not work for you at that price. But be sure and leave the door open for further contact and conversation, as that is often exactly what happens. We have had many a seller call back the next day, or the following week, or even the following month, and agree to our terms. And the only way to achieve this goal was to walk away.

Conclusion

Self-storage facility deals can be re-negotiated. It happens every day. But you need to follow these rules if you want to be successful at it. We’ve been negotiating and re-negotiating deals for 30 years, and have had a high level of success using this methodology.

One of the big advantages of self-storage investing is the collections method. If you don’t get paid rent, you simply auction off the contents of the storage locker (based on all applicable laws, of course). This has given self-storage owners an above-average collections rate, as you basically hold the tenant hostage: “either pay the rent or lose your stuff’. While A&E’s “Storage Wars” would suggest that all self-storage locker contents are highly valuable, this is, of course, not the case. But what’s not shown on the show is the power of “sentimental attachment”. That 1960’s box of Christmas tree ornaments might not be worth $10 at auction. However, it belonged to your Grandmother, and you consider it priceless. So don’t think that all storage units are like those shown in “Storage Wars”. But it’s a safe bet that most contain items that are highly valuable in sentiment and nostalgia – family heirlooms – and the tenant is going to pay rather than lose them. And, for the self-storage owner, that’s 90% of the battle.

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