When you are looking at a self-storage facility to buy, sometimes comments are made by sellers, or their brokers, that have hidden meanings. In this Self-Storage University podcast we’re going to unlock what the simple expressions that many sellers and brokers use on a regular basis really mean.
Episode 135: The Hidden Meaning Of Some Broker And Seller Comments Transcript
Prior to the invasion of Normandy, which is where the American army and the British army sought to defeat the Germans by crossing over the English Channel into France. The way they orchestrated with the French resistance that the attack was about to occur was they went on radio and they gave the same quote over and over without putting in the second part of it. So every day on the radio, they would tell the French Resistance, which the Germans were listening to, they would say, "The violins of autumn." Next day they would say, "The violins of autumn." And they kept repeating that phrase. But what they didn't know was what the French were listening for as a second part of that. Sometimes they would say, "The violins of autumn are beautiful." "The violins of autumn make me filled with joy." But what the actual trigger was when they said, "The violins of autumn wound my heart with monotonous languor." Those are the trigger words. When they said those words, the French Resistance immediately started blowing up train tracks, cutting signaling wires, doing everything they could to impede the Germans' ability to fight back. Now, there was a lot of hidden meaning in those words, but there is hidden meaning often when you talk to self storage brokers and sellers.
So I thought we would try and unpack some of that here in the Self Storage University podcast. So let's start off with some of the terms that sellers and brokers will tell you and what the real meaning is behind those words because it's rarely what they tell you. So the first one is when they say, "Yeah, well, we want a best and final offer on this self storage facility, " it's not going to be best and final. That's not what that actually means. What they want to do is they're trying to get people to throw out their offer, but they're going to come back and then they're going to go back to the winners from that round and ask you to bid again, try and get you to up your price. So when it says best and final, it's often not a good thing to give them a best and final because that's not going to be the best or final. They're lying to you. It's not going to be like a sealed bidding at some estate where they're trying to like wrap it up. No, in this case what's going to happen is they're trying to just still the number of buyers down to create a sense of urgency.
So you throw in a price and they bait and switch you by saying, "Oh yeah, this is the best and final, " but yet it's not. Then they're going to call you and say thank you for submitting that. But yeah, we have other people who outbid you. Can you go up on that? Another one that a lot of brokers like to use or sellers and that's called OBO or Best offer. And what OBO really means is they don't believe in their asking price at all. That that's just not really something that it's ever going to sell at. So if they're telling you this self storage facility is we want $2 million OBO, that means they know $2 million is ridiculously high. But they want to say OBO to suggest to you to go ahead and make an offer anyway. So you ran the numbers, it's only worth a million two and they saying two million OBO. Well then you need to just say hey you know what, I read the numbers on this thing and I think it's only worth like a million bucks. Giving yourself the ability to go up a little bit if need be.
But OBO is nothing more to me than then kind of a disguised desperation that means the thing is not selling. They have no confidence it will sell. They have no idea what the price would be. But they know one thing, the price they're using is not working out. Another one is when the seller or the broker will tell you, "Oh, this property has tons of opportunity in the hands of the right owner. There's so much you could do to improve it." Well you know, if that's true, then why didn't the current owner do that? I hate it when they say things like, "Oh, it's so simple to fix." Well then if it's simple to fix, why didn't you fix? Makes no logical sense. So they're trying to make it feel like there's something out there. There's some pot of gold you can get a hold of that they have unattained out of sheer laziness or stupidity. I've never seen that that to actually be the case. They're trying as hard as they can to fill up those empty units. Who would put something on the market when you can go ahead and get a cap often 10 times your net income, you would fight like crazy to get those occupied.
So when they say things like that, no, that's not the case at all. Because if there was that much low hanging fruit, well they would have already picked it. Also when the seller or broker tells you that they're selling because they have other business opportunities. No that's a complete farce. There's no other business opportunities. What they're trying to do is they're trying to sell you, hey, buy my self storage facility because it's bombing. I can't cover the mortgage. It's a total train wreck. My loan is coming due and I got to get out of here. Save me, save me, save me. But they can't say that because you'd think they were desperate and therefore you go with a lower price or you'd be scared away completely. So instead they always make these excuses like they have some other greater thing they should be working on. We all know that that's nonsense. Your priority would be if you already own something, you would maximize that than rather going buying something else. It's kind of like when you see these restaurants close and the people say, "Thanks for 20 years, but now we're moving on to other opportunities."
No, you're not. You're shutting the restaurant down because it's flopped. Let's be honest, if it was successful, you wouldn't be shutting it down. You know, they say, "Well, I want to go open another restaurant." Well, doesn't mean you have to shut that one down. You could have that restaurant and open another. Another one. Right. You could franchise it. You could have several satellite restaurants. Do not let self storage people try and convince you somehow that the whole problem with their business model is they lost interest. They didn't lose interest. People don't lose interest in making money. So when they say things like, what they're really saying to you is, I don't really have a good way to tell you this, but I'm bombing at this now. It doesn't mean necessarily that you're going to bomb at it too, just because they did. There's a million stories in America and every type of real estate and business where people bought things that weren't working out and they took it over and they were much better at it and it did well. But don't let people try and give you this pretext that they're selling not because it's not working out, but they're selling simply because something is of more interest to them.
Also, a lot of times people selling storage will say, "Oh, I have some vacant land with it that you can use to expand into, " as though it is a done deal. Well, here's a notice on that. It normally isn't. So when they have some raw land that comes with the storage facility, that in no means no ways means that Europe will obtain the permits to expand it, that area of land they have may be completely off limits with the zoning department. It may have issues like floodplain and other things that you do not know. Do not let that flavor your decision at all. Now, if the price they want seems too high for what they have, then maybe expansion is a way to bridge the gap. But to do that, you'll have to go to the city and you'll have to work out exactly what the steps are to get it properly permitted to expand. And there's always risk fundamentally in that. So when someone tells you, hey, I've got all this, I've got all that, do not for a minute let that flavor your sense of value. Because more than likely that extra land is not going to amount to anything at all.
Also, sometimes sellers and brokers will try and tell you that storage facilities have a lower expense ratio than their peers is typically because they left things out or they've misreported what they have in a big standard one, two are insurance, which they're normally not properly insured, or number two, property tax because the thing is valued at a very low level if you buy it, however, those may change. I've never really seen a storage facility with lower expense ratio than their peers. It's not normal. In fact, if you go to get a loan from a sophisticated lender, they're going to just throw that out the window and run their own expense ratio based on the industry norm. The bottom line is there's a lot of people out there who talk big and are trying to go out there and dissuade you from the real reasons why they're selling or what's going on. But you have to see through that. You have to understand that there is hidden meaning in almost everything the broker and the seller tell you. This is Frank Rolfe, the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.