Navigating the Purchase of Non-Performing Notes for Self-Storage Properties Today

Investing in non-performing notes (NPNs) for self-storage properties can be a complex endeavor, particularly when a property is struggling to meet its mortgage obligations. This strategy offers an alternative path for investors, but it comes with its own set of challenges and considerations. Here’s an updated guide to help you navigate these waters without falling prey to common pitfalls.

Understanding the Root Cause of Failure

Before considering the purchase of a non-performing note, it's crucial to delve into the reasons behind the property's financial distress. Was the initial purchase price too steep, or did the previous owner miscalculate operational costs and revenue potential? Sometimes, external factors such as market saturation or outdated facilities may be beyond your control and could continue to impact the property negatively even after acquisition. A thorough analysis is essential to ensure you're not inheriting insurmountable issues.

Assessing the Lender's Reluctance to Foreclose

Banks or financial institutions often have compelling reasons for opting not to foreclose on a distressed property. Environmental risks, such as contamination, are significant concerns that can deter lenders due to the potential for hefty cleanup costs and legal liabilities. It's imperative to conduct a comprehensive environmental assessment (e.g., a Phase I Environmental Site Assessment) before proceeding. Additionally, uncovering any secondary liens or encumbrances early on with the help of a title company can prevent unwelcome surprises down the line.

Evaluating the Financials: Does the Deal Still Add Up?

Sometimes, a borrower may manage to bring their loan current, avoiding foreclosure. In such cases, the investment must still make sense financially for you as the note buyer. Acquiring the note at a substantial discount can lead to attractive yields, but ensure the investment aligns with your long-term goals and risk tolerance. Paying near face value for a note in hopes of a windfall can lead to disappointment if the borrower refinances or sells the property prematurely.

Foreclosure Resistance from Borrowers

A key risk in purchasing non-performing notes is the potential for the borrower to contest the foreclosure process. Legal battles can drain resources and delay resolutions, with outcomes often uncertain. To mitigate this risk, consider negotiating a deed in lieu of foreclosure with the borrower, which can provide a more straightforward path to taking ownership of the property while possibly offering the borrower some form of relief.

Analyzing the Deal's Attractiveness

Given the inherent risks associated with non-performing notes, the deal must offer significant upside to be worthwhile. Look for opportunities where the discount on the note provides a cushion against potential setbacks and enhances the potential for a robust return on investment. While the allure of quick profits is tempting, the focus should be on securing a deal that promises substantial rewards for the risks undertaken.

Conclusion: Proceed with Caution and Diligence

The market for non-performing notes on self-storage properties presents unique opportunities for savvy investors. However, success requires a deep understanding of the underlying challenges, comprehensive due diligence, and a strategic approach to mitigate risks. By carefully evaluating each potential deal and taking proactive steps to protect your investment, you can navigate this complex landscape and uncover valuable opportunities to expand your investment portfolio.

Frank Rolfe has been an active self-storage investor for around two decades, with self-storage units in many states throughout the U.S. His nuts and bolts knowledge of what makes for a successful self-storage facility has led to a three-decade career without a single failed property.