We can’t help but use every January newsletter as a call to action for the old-fashioned art of goals and budgets. We are huge believers in this discipline. In our opinion, you can’t get to your goals if you don’t have a realistic road map – kind of like driving cross country without a GPS system. There’s no real excuse for not having this plan, as it costs no money to develop. Some of the best business plans in U.S. history were forged with pen and paper (Lincoln wrote the Gettysburg Address on the bank of an envelope on a train). So if you have not yet put together your Plan for 2015, then get on that today. You’ll be amazed how much better you do on hitting your goals when you identify them and how to attain them in action steps. AND HAVE A HAPPY NEW YEAR!
Memo From Frank & Dave
Do You Negotiate A Lower Price Now Or Later?
When the seller of a self-storage facility won’t budge on price – and the price is still too high – the buyer enters into one of the great unknowns: do you hold firm and continue to try and negotiate on the front end, or do you tie the property up under contract, with the sole intent of renegotiating it during the due diligence period? It’s not an easy answer. Here are some points to consider.
How close are you on price?
If you are off by 10% or so, then it may be possible to renegotiate successfully during due diligence once the facility is under contract, but if you’re talking 50% then you’re probably crazy. If you are trying to pay $600,000 and the seller’s price is a firm $1.5 million, then you are better off continuing to negotiate a significantly lower price on the front end, so that you don’t waste your time.
How much money is the seller walking away with?
Sometimes your success in renegotiating the price is based on how much the seller is actually going to net, after all costs and loan repayment, from the sale. If the price is $500,000 and they own it free and clear, then they have plenty of room to negotiate and still walk away with significant money. If, however, they owe $450,000 on a mortgage, then they will definitely have a limit – and $440,000 is definitely not going to happen in all likelihood, as they will have to bring money to the table to close.
Will you have a reasonable excuse?
In a successful renegotiation, you typically need to have a reasonable reason to ask for the lower amount. Does this deal have some funky area like property condition, or vacancy, or sketchy location? Those would give you some ammunition as to why you need the reduction. But if the property is perfect, it will be hard to justify your request.
The power of bonding
Probably the most important factor in successful renegotiation is “bonding”. This is the natural relationship that forms between buyers and sellers during continued contact via the due diligence period. Sometimes bonding is the single factor that will cause the seller to lower the price – literally, just because they like you. So that’s one advantage you have from renegotiation over plain negotiation on the front end; because initially you have no “bond”.
The power of the seller “already spending the money”
Another reason that renegotiation sometimes works is that the seller, during the due diligence period, has already “mentally spent the money”. Many sellers (and don’t think that you won’t be among them) make a list of what they want to buy with their sales proceeds, and they then count down the time to closing to go on that shopping spree. If you then suddenly pull the rug out from under them wanting a lower price, they sometimes will comply because they are so eager to buy that list of items. It’s just uan nature.
Don’t wait until the last minute
One way to lower your chances of a successful renegotiation is to spring it on the owner about 10 minutes before the end of the due diligence period. That’s offensive and makes it look like it was simply a trap that you engineered to box them into a corner. Instead, approach them about a week ahead of the end, so that you both have plenty of time to consider the issue and discuss it.
It can go both ways
One thing that happens in deals sometimes is that you find, during due diligence, that the property is worth far more than you initially thought, and there is no reason to renegotiate. Remember that it goes both ways – the deal can also be lost through re-opening the door on price – and you may be making a mistake once you know all the facts. We are strong advocates of “win/win” deal making, and that precludes trying to take advantage of the seller. We probably renegotiate only 25% of our deals, and even then only when it is needed.
There’s no right or wrong answer to the age old question of “negotiate on the front end or renegotiate later” to hit your target price. At least you now know the issues to consider in making your decision.
Will Self-Storage Ever Be A Global Industry?
Self-storage is a huge real estate sector in the United States, with over 50,000 self-storage facilities and three times the size of Manhattan under roof nationwide. But it’s a very small industry globally. Is it possible that self-storage will become a growth industry globally in the years ahead? To get a better perspective on this, it’s important to understand why it works here and what the challenges are in other countries.
America has 79% of the world’s self-storage space
That’s a huge number. The U.S. has a bigger share of this one real estate category than any other real estate niche. Why is that? It’s because Americans are huge consumers – we buy a lot of stuff. Look inside any U.S. storage unit and you’ll see everything from Christmas Tree ornaments to books and records. We have a national obsession with acquiring things. So it would make sense that for any country to be a player for self-storage, it has to have a population that has the income to spend on material items. That means that self-storage can only exist in developed countries.
Most developed countries do not share our love for amassing items
England, for example, has been a developed country well ahead of the U.S. by hundreds of years. In fact, the earliest self-storage facilities in the modern world began in England, as a way for wealthy aristocrats going into the military to warehouse their goods. You would think, as a result, that the English would have a large self-storage industry. They are, in fact, the second largest self-storage market outside of North America. However, the truth is that there are only 975 self-storage facilities in the U.K. compared to the 50,000 in the U.S. Even more alarming is that only 3% of the U.K. population has a self-storage unit – a fraction of the U.S. statistics. How can this be? Plain and simple, the average consumer in the U.K. just does not own that much stuff. That’s also why the U.S. occupancy rate is only 70% vs. the U.S. rate of around 85%+.
Available land is another issue
And even if other countries had a more materialistic culture, they would be hampered with buildable land. In the U.S., we have plenty of room for real estate development, and self-storage facilities require a big footprint. However, in many European countries, as well as Asia, land is at a premium. Finding a buildable site in London (the U.K.’s largest storage market) is about as difficult as San Francisco. And Tokyo has the tightest real estate market in perhaps the world. This means that you cannot build a self-storage facility at a cost that would be profitable to operate.
And then there’s the automobile
If those problems are not big enough, then consider the lack of automobiles outside the U.S. Not only is a large part of self-storage revolve around classic and collector cars, but it’s hard to utilize self-storage without a means of transportation to and from your locker. Imagine trying to bring the Christmas Tree ornaments from your self-storage unit to your home via a subway. Americans love cars and own more than any other country, and that’s a huge boon to self-storage domestically.
While self-storage is a solid investment and niche in U.S. real estate, it is not that dominant outside of our borders. Cultural and economic differences hold the industry back, and may do so for years to come. So the U.S. is in no danger of losing its role as the leaders of self-storage in the world.
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