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 raw for the Self Storage University Podcast, we're going to 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 fear 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, phase one environmental surveys, appraisals, these things cost 1000s of dollars, it came out of quickly. So certainly I can 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 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, pay bills to lenders, lenders have lots of upfront costs, that could be a scary moment, have you 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 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 your cash down payment, enter into that mortgage obligation, that's all really scary stuff. But you notice none of those things were scary on the front end, right? Those are all things that come along after you sign the contract. So as far as having an aversion of fear to signing the contract, there's no reason you would do that. Now, there are some times in which you would not want to 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 want to buy it. So you got to 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 the financing contingency, you've got to 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 got to 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. You're You're whenever you put up money in any format, in any contract, you may not get it back, it's potentially going to be that way. And typically RV parks earnest money is 1% of purchase price. If it's higher than that, if you're talking 10 or 20%, you would never want to do something like that tied to free money under that basis. Yeah, that would scare almost anyone. Finally, you don't want to have what is called buyer specific performance buyer specific department says if you forgot, for whatever reason to cancel the deal, during your due diligence provision in your financing provision, you will 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 have to move forward at some point regarding the the costs associated with buying the property? So how do you do that? How do you get over that fear? Well, first off, there's two things number one, you have to know what you're doing. So if you don't know how a self storage property works, you got to learn about it. You have to read everything you humanly can, because knowledge is absolutely key. So you're never going to feel good about buying a self storage facility unless you know how the self storage industry works and are able to properly analyze that deal to make sense based on expense ratios and revenues and future forecasts. The you're in a good position. But I think it's also equally important that in any deal you analyze and 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 a 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. So you did 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 had 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 do 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 had pain, the best the realistic and the worst case scenario, then you want to stand back and see where you're at, I would never want to 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 wouldn't 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 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 has 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 a rather lengthy books by Tudor pages long, it all boils down to 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 want to take on risks that does not have a commensurate amount of gain. And 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 and be ecstatic at the best and fine with the real, it will help GAE give you more confidence, it's okay to go forward, you will no longer than fear signing the deal, you will no longer fear closing or fear putting up money on those third party reports. But yet to structure it in that manner. You have to know what you're doing. And then you have to stand back like a scientist in a white lab coat to make this decision. The buying any form of real estate is very, very serious stuff. No one takes it lightheartedly. And if you're going to do what you need to put in a lot of a lot of thought because it could very, very much change your life. But there's nothing terribly wrong and taking no action because 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'll never be able to buy anything. So you got to understand what is holding you back exactly what is causing the fear that makes you not press 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 up and not have a fear. As long as they have a diligence contingency of financing contingency, low earnest money, and no buyer specific performance there's nothing there for this should hold you back. And then before we make the really big scary decisions of putting money in and the poor form of third party reports, and even closing by that point, you should have done all of your efforts at 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 buying a self storage facility. But don't feel bad because many people begin without knowing how all this goes together. And they find the very act of signing the contract to be highly alarming. Totally out of their comfort zone. It's always hard to do things it 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 under contract. Great deals are not too far behind. This is Frank Rolfe, the Self Storage University Podcast. Hope you enjoyed this. Talk to you again soon.