5 Things to Consider When Selling Your Property

It has been a long time coming, but we are beginning to see transaction volume increase as the overall value of self storage properties has returned to a respectful level where both buyers and sellers are agreeing on a fair price. As the market continues to improve, the prospect of selling your facility may become a more feasible option and it is important to make sure you are fully prepared. I want to share with you five topics that I feel are important to consider when selling your facility. These ideas are sometimes less obvious than other issues that are involved in the selling process but they can have a dramatic impact on the success of your transaction.

1. The Price Is Right

Once you decide that you are ready to sell, you are essentially inviting potential buyers to make offers on the property. The listing price notifies potential buyers that an offer in the range of the asking price will get serious consideration. The value of the property today is determined by several factors, the most important being the amount of net operating income that is generated on a trailing 12 month basis. Additionally, location, age, curb appeal, the ability to expand, and certainly competition, both existing and planned, have an effect on the value and pricing of your property.

It is important to understand that the selling or listing process does not create the value; the value of the property is already there and is created by the net operating income and cash flow from the property. A broker's job is to find a buyer that recognizes the existing value of the property and has the ability to purchase the property. A broker should also assist the seller in navigating through the complex marketing and negotiation process that takes place in each transaction. Buyers are sophisticated and their lenders are even more cautious, so finding a "greater fool" that will pay a substantial premium above the market value is not only unproductive but it can have serious negative impacts on the property's marketability.

2. Overpricing is NOT Harmless

The current market has the luxury of many large, organized and sophisticated buyers along with sellers who are clamoring to capitalize on the current low capital gains tax and the relatively high prices being paid in today's recovering market. However, that does not mean that properties can be sold at any price. In fact, they cannot! Most serious buyers of self storage facilities are current self storage owners or experienced real estate investors. They understand how self storage facilities are being valued in today's market and they will not overpay for a property.

Pricing a property too high usually causes several negative things to happen. First and most importantly, many buyers won't bother to look at the property seriously. They will simply discuss the opportunity with your broker and never respond to the offering. Most buyers have at least a few stories to tell about wasting time on properties that are overpriced. Prospects generally won't request the detailed information on the property because their experience tells them that the seller is NOT serious. I'm familiar with one seller that has had his property on the market for years at a 25% to 50% premium to the market. In the course of his efforts to sell the property he has seen his rates and occupancy decline due to overbuilding in the market. Serious buyers or brokers will not bother to look at the property because they know that the owner constantly has it overpriced. This seller has recently reduced the price, but in my discussions with qualified buyers, they have indicated that there is "something wrong" and they've skipped it altogether. My point is that overpricing can put a stigma on the property that may last for a very long time.

Pricing a property too high usually causes several negative things to happen. First and most importantly, many buyers won't bother to look at the property seriously. They will simply discuss the opportunity with your broker and never respond to the offering. Most buyers have at least a few stories to tell about wasting time on properties that are overpriced. Prospects generally won't request the detailed information on the property because their experience tells them that the seller is NOT serious. I'm familiar with one seller that has had his property on the market for years at a 25% to 50% premium to the market. In the course of his efforts to sell the property he has seen his rates and occupancy decline due to overbuilding in the market. Serious buyers or brokers will not bother to look at the property because they know that the owner constantly has it overpriced. This seller has recently reduced the price, but in my discussions with qualified buyers, they have indicated that there is "something wrong" and they've skipped it altogether. My point is that overpricing can put a stigma on the property that may last for a very long time.

Another problem with pricing a property too high is that, contrary to your intuition, it may actually invite low-ball offers, not higher offers. The reasonable buyers are simply not going to waste their time making an offer. Most buyers are serious about wanting to own and operate good projects and they don't want to engage in an unproductive negotiation with an unrealistic seller. Buyers have a formula or model for which they value and purchase properties. The deal has to produce a profit for not only the seller, but it also must have upside potential for the buyer. However, there are some buyers who consider the negotiation process a sport. They will often make an offer at a substantial discount, rather than at a reasonable price, because the property is overpriced. This potential buyer knows that he won't have to compete with the majority of the reasonable buyers (because they aren't looking due the overpricing of the property) and if the seller is in distress or a panic because he hasn't seen any sensible offers he just might sign the discounted deal. If the buyer gets no response he simply moves on to his next deal. Furthermore, he also knows that if the seller becomes interested in this offer, he might be able to improve his deal before closing because the seller has no other reasonable option. All in all it is not a good situation for the seller.

3. Exposure Sells

As a general rule, we believe that the more potential buyers that see information on a property, the more likely a seller is to find the highest price. While we naturally know a lot of buyers in the marketplace, we are certainly not conceited enough to believe that we know every last one of them. In fact we are constantly surprised at the number of properties that sell to buyers who are new to us and the industry. These buyers are responding to the Market Monitor, our magazine ads, the Just Listed email, the tradeshow both and more frequently, our website, www.argus-selfstorage.com. We believe that good marketing means presenting a listed property to as many potential buyers as possible, not just our industry "friends." A seller deserves to see all the potential offers, not just the offer that a broker develops from his own list of prospects. Many other brokers feel this broader marketing is just an additional cost (all that exposure does cost money) and it also creates a hassle for them to respond. In short, broader marketing exposure helps to ensure that we find the best buyer rather than just a buyer.

4. Keep Your Manager Informed

Many owners feel that they must keep their managers in the dark about a proposed sale. While there may be some limited instances where this is the appropriate course of action, in most cases it is usually counterproductive. First, most managers will quickly figure out what is going on and will react negatively to not being fully informed. If the manager feels they are being treated unfairly by the owner, they may very well begin pursuing other opportunities or even leave abruptly. An offer of a bonus upon closing of the sale in the event that the manager is not retained by the new owner or severance (or both) is a fair and productive way to ensure that the manager stays on through the selling process. It tends to put the manager on the same team as the owner. Managers know that sales of properties happen and they will respect your decision to sell if they are treated fairly. Secondly, because of the manager's intimate knowledge of the property, they can often be very helpful in the selling process. In most circumstances, a positive manager can add credibility to the property's performance. Most buyers of properties are in the market for good managers and they actually want to hire the existing managers rather than disrupt the operation. Since most managers want to keep their job, there is significant incentive for them to be positive about the project. More often than not, a manager can be an owner's greatest ally in selling a property.

5. Your Broker Works for You, Not Themselves

There are some brokers who will take a listing at any price, even listings that are drastically overpriced. This may not be in the seller's best interest as this article has shown. A broker acting in their own interest won't spend much time or money marketing the property. They are hoping that they find or encourage the predatory buyer to make an offer and convince you to take a lower offer in order to get the deal done. Some brokers believe that a listing, regardless of price, is all they really need because they don't plan on putting much effort into marketing it. This is just a version of the old sales slogan, "throw it against the wall and see what sticks."

The real estate community has a tradition of one broker representing the seller and often times (in fact, most of the time) another broker representing the buyer. These brokers then split the commission paid by the seller, i.e. essentially "cooperating" with regard to the commission. We have encountered properties listed by brokers who won't agree to cooperate with other brokers. The reason is, of course, that these brokers don't want to share the commission and don't want to be bothered by offers from other brokers representing potential buyers. At Argus, we believe that not allowing for cooperation limits the number of potential offers and invites brokers to favor their buyer friends without fear of an uncontrolled competing offer coming from another broker. Thus, we believe that any broker you choose should be required to cooperate with other brokers. Not only does cooperation increase your potential market size, it also protects the seller by exposing all potential offers. In our opinion, there is no benefit to the seller by listing a facility with a broker who does not cooperate.

Whether you are thinking about selling or just planning for the future, I hope that you will consider these tips as you develop your strategy. Working with a solid, experienced broker who understands the nuances of the market can have a big impact on the success of a transaction.

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