You can’t be a self-storage facility owner unless you buy one. And you can’t buy one without putting one under contract to purchase. So what’s holding you back? In this Self-Storage University podcast we’re going to discuss the common blockades to you taking this step, and how to overcome this anxiety and have greater confidence in the process and your actions.
Episode 42: Overcoming The Fear of Progress Transcript
Behold the turtle, it only makes progress when it sticks its neck out. This is Frank Rolfe, the Self Storage University Podcast, we're gonna be talking about making progress by overcoming your fear. Now, what is your fear in buying a self-storage facility? Well, let's first start off with the basic, for many people have simply putting a property under contract. Now, why would you have fear of putting something under contract? Well, let's first analyze. At what point, you should have fear when you put a self-storage facility under contract, you should have fear of moving forward when you start incurring third-party report costs, face when environmental surveys appraisals. These things cost thousands of dollars. They came out of quickly, so certainly, I can understand the fear of that, absolutely. Or if your earnest money goes hard and you can't get it refunded to you, once again, okay, that makes sense to me, why be afraid of that. Also, if you are approaching the point where you have to start making lots of costs, paying bills to lenders, lenders have lots of upfront cost, that could be a scary moment, I'd be afraid to do that, because if I start paying the lender, I don't buy the self-storage facility, I lose all my lender money that I spent, so that I can see that happening.
And then of course, the final, most fearful moments when you actually have to close on the deal, sign the contract, turn over your cash-down payment, enter into that mortgage obligation, that's all really scary stuff. But you know, none of those things were scary on the front end, right, those are all things to come along after you sign the contract, so as far as having an aversion or fear of deciding the contract, there's no reason you would do that. Now, there are some times in which you would not wanna sign a contract, that's for sure. First off would be if it has no due diligence provision, you have to have the ability to do due diligence to see if that property will perform as you expect, and if it won't, then you certainly don't wanna buy it, so you gotta have a due diligence provision and that allows you to have so many days to analyze the property, if you like it, you can proceed, and then if you don't like it, you can drop it. Another one is a financing contingency, you've gotta have the ability to get a loan on the property, unless you're going to buy it for cash, then you definitely have to have the ability to go to lenders and find a lender who wants to make the deal happen and obtain debt from them, so you've gotta have a contingency for financing.
You also have to have a small amount of earnest money, because your earnest money is typically at risk regardless of what anyone tells you, whenever you put up money in any format, in any contract, you may not get it back is potentially gonna be that way. And typically, RV parks, earnest money is 1% of purchase price, if it's higher than that, if you're taking 10% or 20% you would never want to do something like that tied to... For money under that basis, yeah, that would scare almost anyone. Finally, you don't wanna have what is called buyer-specific performance. Buyers specific performance says, "If you forgot for whatever reason to cancel the deal during your due diligence provision and your financing provision, you would be forced to buy it." And you don't want to ever be in that situation, but as long as you have all four of those items putting the deal under contract should not be stressful to you, not initially anyway, it should be more stressful as time goes on and you start actually incurring cost. So how do you get over that fear? How do you go ahead and get around the idea that you will have to move forward at some point regarding the costs associated in buying the property, so how do you do that? How do you get over that fear?
Well, first off, there's two things, everyone, you have to know what you're doing, so if you don't know how a self-storage property works, you gotta learn about it, you have to read everything you humanly can, because knowledge is absolutely key, so you're never gonna feel good about buying a soft storage facility, unless you know how the self-storage industry works, and you are able to probably analyze that deal to make sense based on expense ratios and revenues and future forecast that you are in a good position. But I think it's also equally important that in any deal you analyze, you look at it in one of three tranches, the first one being best case, if you bought the property at the price they want, how much money can you make? Is it a little or is it a ton? Is it impressive or is it not impressive, that's your best case deal. And in the best case situation, what's happened is you are going to hit all of your targets successfully, and that's what makes it best case. Do you do everything perfect? It's like the perfect lap and the Ford versus Ferrari movie. Next, you have your realistic case, your realistic case is not that you hit everything perfectly, but that you definitely do some things right, but just not everything.
So if you thought you could get the occupancy from 65% to 95%, realistic might say, "Well, what if I don't get there? How about I just split the difference? Let's say I get to 80%. How would those numbers work out?" And then you have your worst case scenario, this is what would happen if nothing went your way, this is where you'd be, if you were unable to increase the revenue at all, you might even remodel it, if you lost a little revenue. Could you still pay the bills, could you still cover your mortgage, are you completely financially ruined? Once you've maintain the best, they're realistic, in the worst case scenario, then you wanna stand back and see where you're at. I would never wanna buy a deal where I could not survive or handle the worst case scenario. I would also never want to buy a deal which I would be ecstatic at the best case scenario, and that I wouldn't be at least happy at the realistic case scenario. Sam Zell has written a large book on this very thought, called it, Am I Being Too Subtle. He's been the largest owner of office buildings, apartments and mobile home parks in the United States.
His entire career in life have been based on the concept of risk and reward. Basically, if you read the book, I'll give you the quick synopsis here in just a few sentences, and it's some rather Letty books by 200 pages long, and almost as this, "If a deal has high levels of reward and low levels of risk, you should definitely buy it. If it has high levels of risk and low levels of reward, you should never buy it, and if it has high levels of risk and high levels of reward, then you should really give it a lot of thought." You don't wanna take on risk that does not have a commensurate amount of gain. Now, when you lay out your best case, worst case and realistic case scenarios, you will suddenly see whether or not you do have that healthy relationship between risk and reward. When you analyze things in that manner, when you look at the whole range of possibilities and you know that you can survive the worst, to be ecstatic at the vest and fine with the real, it will help give you more confidence, "It's okay to go forward." You will no longer than fear signing the deal, you're no longer fear closing or fear putting your money on those third party reports, but you have to structure it in that manner, you have to know what you're doing, and then you have to stand back like a scientist to why lab coat will make through these decision.
The buying any form of real estate is very, very serious stuff, no one takes that light-heartedly, and if you're gonna do what you need to put in a lot of thought because it could very, very much change your life. But there's something terribly wrong and taking no action, 'cause you're just afraid of the whole process, if you're afraid of the process, if you can't tie something up under contract, you will never be able to buy anything, so you gotta understand what is holding you back exactly.
What is causing the fear that makes you not pressed forward, when you see a deal that you know is good, trusting your instinct and signing it up. The answer should be you should always sign things if and not have a fear as long as they have a diligence contingency, a financing contingency, low-earnest money, and no buyers specific performance, so there's nothing there for... This should hold you back. And then before you make the really big scary decisions of putting money in the form of third-party reports and even closing, by that point, you should have been known all of your efforts and figuring out where this property ends up at, what the numbers are?
What the risk and reward levels are? And if you take it in that kind of a structured format, you'll see, it will take away your fear of getting your foot in the door and going and looking and tying up and by the self-storage facility. But don't feel bad because many people begin without knowing how all this goes together, and they find the very access sign in the contract to be highly alarming, totally on the comfort zone. It's always hard to do things that is not in your comfort zone, but the key is to make it part of your comfort zone. Once you understand the deals and you understand how to rate them, you will ultimately get comfortable, and once you're comfortable with putting things on your contract, great deals are not too far behind. This is Frank Rolfe, the Self Storage University Podcast. Hope you enjoy this. Talk to you again soon.