When you go to college, there are certain items you must have obtained to graduate – such as successful completion of certain classes and attendance of a certain number of units. And buying a self-storage facility includes these same necessities, although in the form of third-party reports. But these reports are expensive and time-consuming to obtain. So which reports do you really need and which are optional?
What does the bank say?
The group that dictates the third-party reports on a storage facility purchase is traditionally the lender. They will have very strong feelings as to what affirmations they want regarding survey, title, environmental concerns, structural integrity and other factors. Whether you agree or not, the bank is not going to make the loan unless you follow their directive. And since different banks have different opinions, it often makes no sense to try to proceed with any reports until the lender has given you their feedback.
Here are the essential ones regardless of the lender:
For most lenders, these are the basic reports that they all share the requirement for:
- Phase I Environmental Report. This report makes sure that the property is free from environmental pollution and the resulting cost of clean-up. Since the remediation of pollution can cost potentially millions of dollars, you would never want to buy a property without this most important report.
- Survey. This essential report defines the real estate you are buying. These come in various levels of detail from boundary to ALTA (described below) but you simply can’t buy a storage property without a survey – nobody would even consider doing that.
- Certificate of Zoning. Provided by the city’s zoning department typically, this item tells the buyer what the land is zoned for, whether the current use is legal conforming, legal non-conforming (grandfathered) or illegal. This assures that you know exactly what you’re getting into.
- Title Report. The purpose here is to make sure that you truly are the owner of the property post-closing and that you bought it from the rightful owner. This is typically performed through the title company, which also warrants title.
Here are some that can be skipped sometimes using seller financing
Sometimes you can get around certain reports if the storage owner is willing to seller finance the sale to you.
- ALTA Survey. This is a highly-detailed version of the simple boundary survey – so detailed, in fact, that it includes such items as where the utility lines are and how deep they are underground. Some banks require this level of specificity, but it is extremely costly. There are other versions that give more detail than a simple boundary, but are not as expensive, such as showing some level of improvements such as all building and road locations.
- Appraisal. This is the report in which an “expert” gives you their opinion of the value of the property. The problem with these reports is that the “expert” often is not actually worthy of giving a true estimate of value and will simply rubber-stamp the price you are paying to please you and the lender. Since a self-storage facility is an income property, the value is in many ways tied to a simple cap rate calculation based on net income. If you are confident in your analytical skills on buying the storage property then an appraisal may not be necessary. The seller rarely requires one when self-financing.
- Property Condition Report. This is a larger version of the inspection report you do when you buy a single-family home. While it’s always good to have as much detailed information as you can on a property, these are typically pretty costly and much of what it says you can obtain yourself in much less expensive diligence methods.
In all cases, you don’t want to be “penny wise and pound foolish” – in other words, if you can afford these reports and believe they will help you make a better investment then you are certainly welcome to perform them even if they are not required by a lender.
Remember that some of these are for your own protection and you might do them even if not required
In all cases, you don’t want to be “penny wise and pound foolish” – in other words, if you can afford these reports and believe they will help you make a better investment then you are certainly welcome to perform them even if they are not required by a lender. You can never have too much information, that’s a fact. But while some reports are mandatory, others are optional to you as a buyer, and you need to make your own decision on which will steer you into a better investment and which are simply a waste of capital that could be better spent on marketing and items that will make you money.
Third-party reports can be an essential tool to buying a successful self-storage facility. But they come in many types and costs and you have to be a smart shopper to conserve your cash for other items that might propel you to faster and higher success.