In a market where demand for self storage properties greatly outweighs the supply of available facilities, you’re often forced to compete against many other willing and able buyers. At that point, your offer needs to be as attractive as possible in order to be selected, or at least be considered for a counteroffer by a seller.
This begs the question: What makes an offer most attractive? While the truth is that the answer differs for every potential seller, it does help to think of this question from the seller’s perspective. Key priorities from the seller’s perspective might be: price, time to close, number and type of contingencies, and financial stability of the buyer, among others.
The perfect self storage buyer, as seen by a seller, is someone who offers the highest price, has cash or financing up front, is capable of closing the transaction quickly, and has the fewest contingencies. Let’s review.
Highest Offer Price
Price is the most common factor to consider when making an offer – the higher the price, the more money the seller is going to walk away with at the settlement table. However, when considering the price being offered, you must also consider the price allocations being proposed from the buyer. For example; what percentage is allocated to the land, improvements, goodwill, etc. Different allocations have different tax ramifications for both parties involved in the transaction, especially with respect to depreciation of land improvements. The most attractive buyer will have the highest offer price and the allocation will not be structured to give the buying party a tax advantage or put the selling party at a tax disadvantage.
When it comes to financing, this is where a self storage buyer can use some preparation to gain an advantage over other potential buyers. In any large transaction, it is rare to see someone paying all cash. But, the more cash you’re willing to put down will affect the type of loan you can get, which in turn can affect your standing as a buyer for that particular self storage property.
A traditional loan on a commercial property requires a 20-25% down payment. However, there are other loans, such as SBA loans, that can require a lower down payment. The drawback to these can be that they take longer to complete. In a competitive market, that can be a deal killer – especially if there are multiple offers on the table. A larger down payment, in addition to allowing you to get a better loan, also protects you as a buyer in case the bank required appraisal does not come back as high as your offer on the property.
Financial Knowledge to Close the Deal Quickly
There are more nuances and complexities when it comes to getting the final loan approval. Many potential buyers come to the table without a letter from their bank or any proof of financial capability to complete the transaction. Clearly that is a negative for that buyer from the seller’s perspective. Since most banks offer some sort of pre-approval letter and term sheets, it is recommended that you work with your bank to get a pre-approval document before you place an offer on a self storage property. Doing so makes you a more attractive buyer immediately. Offers that come with additional documentation from the bank are considered stronger than those without. So why not come to the self storage broker prepared with that already in your pocket? It could mean the difference between your offer being accepted or rejected outright if other buyers have this documentation already.
Another way to show financial strength is through down payments. Down payments can show the financial abilities of a potential buyer to a seller. Most down payments for commercial transactions have two parts:
• An initial “good faith” deposit that is refundable usually through the due diligence period;
• A second deposit after the due diligence (or some other pre-determined milestone) is complete, at which point all escrow monies become non-refundable to the buyer.
The escrow monies are guaranteed for the seller to walk away with no matter what happens. There are instances when the buyer is not able to close the transaction at the settlement table for any number of reasons, which presents an obvious risk to the buyer. A higher escrow amount can be a telltale sign of how much risk the buyer is willing to take on, and consequently how serious that buyer is. This in turn presents itself as much lower risk to the seller.
“Time is of the essence” is a common phrase to see in a purchase and sale agreement (PSA). And in almost all cases, the shorter the timeline to complete the entire purchase the better. Due diligence might be shorter for a buyer with more experience, and who knows exactly what to look for, while the type of payment method used affects the duration of financing contingency. To be a more attractive self storage buyer, make sure you have the fastest loan approval that you can get, and do research ahead of time that will shorten the amount of time required to complete due diligence.
When negotiating the final purchase and sale agreement (PSA) for real estate, contingencies represent the reasons for a buyer to walk away from the transaction without penalty. Contingencies are in place to protect the buyer, but often at the risk of the seller’s time. Some of these are based on the property, such as title or inspection contingencies; while some are based on the buyer, such as mortgage or other financial contingencies.
From a legal perspective, more contingencies offer more protection to the potential buyer.
From the seller’s perspective, contingencies are possibilities for his or her real estate to be tied up for weeks or months without having anything to show for it, or having to reduce the price to finally close the deal.
These scenarios are not uncommon and sellers try to avoid them as much as possible. The type of contingencies you put in the PSA as a buyer offer a window into your mindset going into the transaction. If the seller thinks there are too many contingencies, it could send a signal that your purchasing power is limited. If there are many contingencies with relation to the due diligence, then it could signal that the process could be fastidious and bordering on excessive. Clearly neither of these look attractive to the seller, and will throw up a red flag in his or her mind. The most attractive self storage buyer has very few contingencies that the seller needs to worry about. You need to decide up front which contingencies are most important to you and how many you are willing to “risk” without killing the transaction.
These certainly aren’t all the factors that are important to a seller when looking at a prospective buyer. But they are important ones to educate yourself on and be aware of when considering placing an offer on a self storage property. Not only that, but each buyer will be different. Every buyer will bring his or her own situations and experiences to the table. The principles we’ve discussed hold true in many situations that can arise in a self storage transaction. Before submitting an offer, talk to the seller or the seller’s broker and find out what they feel the most important factors are when selecting a buyer. Then tailor your offer accordingly. Taking their wants and needs into consideration before submitting an offer will make you a more attractive buyer to any seller out there.
If you are a buyer and looking to purchase your first or tenth self storage property, our team of dedicated brokerage advisors are here and ready to assist you with the process. You can contact us or give us a call directly at 717-779-0804 to learn more.