We all hate spending money, but sometimes the cost is offset by having greater confidence in your deal – all the way to the point of having the guts to pull the trigger and sign the closing documents. And the source of much of this confidence are third-party reports. While many of these are bank requirements, others are simply the smart way to proceed even with seller financing. So what are these third-party reports that are a big part of buying any self-storage facility?
The Mandatory Ones
There are two reports that every storage buyer must obtain before closing. These are non-negotiable and if you fail to get these report you may end up regretting it to the tune of losing your entire down payment and even more.
- The survey
This is the document that tells you all about the land you’re buying, as well as the storage facility located on it. Surveys come in different levels of detail, with a “boundary” being the most basic and an ALTA survey the most advanced. Every buyer MUST obtain a minimum of a boundary survey – and these should also increase the location of all permanent improvements and roads, as well as all easements. You need to know that the buildings are on your property (yes, we’ve seen it where the buildings are partly on the neighbor’s land) and that there’s no giant freeway easement going right through the middle of the tract (seen that one, too).
- The Phase I environmental report
This is the critical analysis of your property that lets you know if it’s polluted or not. If it’s OK you’ll get a report that says that it’s environmentally clean. But if the report says that the property is environmentally contaminated, then you’ll have to either cancel the deal or do further research and see what the plan and cost would be to clean it. The reason this report is so important is that, without it, the property might be unclean and the cost to make it right could literally be millions of dollars – all of which would come out of your pocket.
The Optional Ones
- The appraisal
In this report, the appraiser gives their opinion as the value of the property. They reach this conclusion after analyzing three factors: 1) the value based on income 2) replacement cost and 3) comparable sales. While this sounds important, the problem is that historically these appraisals have not always been 100% accurate due to the potential conflict between the bank and the appraiser. If the bank says “I’m hiring you to do this appraisal and the bank is counting on this report coming in at $1 million” then the appraiser is tainted and will probably come in at the $1 million the bank desires. When there is seller financing involved, you don’t have to do an appraisal unless you want to. And, in that case, your estimate of value may be more accurate than theirs will be.
- The property condition report
This is typically a report that only a bank can love, as it’s often more detail than you need and a cost that could be spent on making the repairs you already know need to be completed. That’s not to say that you should not have someone check out the storage facility from end to end, but the property condition report will include such obvious items as street and sidewalk repairs, and there’s a bunch of overkill typically. If your lender is the seller, then this report it typically not required.
Reports are an important part of any purchase, and there are some that you must obtain and others that may be optional. Understand the details of any report before you take on that obligation and also make sure you understand the requirements of the lender.