When performing due diligence on a self-storage facility, the questions you ask have a huge impact on gathering facts – especially regarding the costs of capital improvements or maintenance projects. In this Self-Storage University podcast we’re going to review the questions to ask and the questions to avoid.
Episode 123: The Importance Of Asking The Right Questions Transcript
When doing due diligence on a self-storage property, it's perfectly reasonable to have lots of questions. But the way you phrase those questions can be very important in the results that you get. This is Frank Rolfe, the Self-Storage University podcast. We're gonna talk about asking the right questions when doing due diligence, just some different tips and things that we've learned over the years. So the first one is, when talking to the seller or the broker that represents the seller, ask your questions twice in two different attack plans of the same question. If someone has 100 units and they say that they've got 60% occupancy, the next question would be, "So how many vacant do you have?" And of course, the answer should be 40, because 60 out of 100 would be 60% occupancy. But sometimes you ask the seller, "So what's your occupancy?" "Oh, I'm at 80%." "How many vacant units do you have?" "Oh, I've got 50." Now, wait a minute here. 50 means you're at 50% occupancy. So which answer was correct? Were they 80% occupied or are they 50% occupied? You would be shocked how often, and I mean very, very frequently, those two numbers do not add up.
When you simply say, for example, how occupied are you? And then how many vacant do you have? And you add the two together, you don't get the actual number of units that they have. Now, why is that? Basically, they make mistakes. Sometimes what's happened is they're so focused on wanting to tell you they hit a certain occupancy number, they haven't been paying attention and they've lost some units since then. So ask your questions twice when it comes to occupancy and in two different directions and then make sure that they both equal each other. Another common problem when asking the questions is that you ask too much of the owner without getting the input of the manager. Because often the truth comes out when you talk to the manager of the property and not the owner. The owner is trying to put on their best foot forward even if it means perhaps nudging the truth a bit. But the manager doesn't really care whether it sells or not. In fact, the manager probably prefers it not to sell because they know the current owner, they don't know you, and they're afraid that if you buy it, you'll fire them.
So typically, the manager is the source of the good information and the seller is not. I've been in meetings, in fact, when the manager offered to give me a list of perhaps vacant units or a P&L and the owner snatched it from their hands and said, "Oh, no, no, no, no, no, no, no, no, I'm the one who provides that information." It's immediate tip to you that something's wrong, that the truth, which the manager knows, the seller does not want revealed at this stage in the negotiations. And you should always put that in your memory cap because when you come back to do further diligence, you're going to want to talk to that manager somehow one-on-one, even if it means picking a day and time when you know the owner can't be there, to try and uncover the truth of what's really, really going on. But another problem that often people make when asking questions is coaching people on the answers, and that can cost a lot of money and heartache. So let's say, for example, that the facility has some leaks in the roof. So you bring the roofing company out and you say, "So, you know, I think this roof must have lots of problems 'cause there's all these leaks in it. What would it cost to replace the roof?" You've just then coached the vendor that A, there are leaks in the roof and they're major, and that B, that you somehow are prepared to replace all the roofs.
So clearly the vendor is then going to tell you, "Oh, yes, you're right. This roof looks terrible. I could totally replace it for $250,000." But if the vendor had come out and you didn't coach them and you simply said, "What do you think of the roof?" They look around and say, "Well, I don't know. It doesn't look too bad." And you then say, "Well, it does have a couple of leaks. What's the cheapest way to fix those leaks?" Now you have his mind bent on, number one, the fact you don't want to do a complete replacement, and number two, that you're trying to conserve cost. Because the vendor is looking to you for guidance as to what your budget is. How rich are you? How much do you want to spend? And if you start directing them from the get-go that spending big bucks is all fine with you, then that's definitely the direction they will go. Same is true clearly with paving companies, foundation companies, even tree companies, even lawn maintenance. Whatever the vendor may be, they look for signals from you as to what their bid should be and what the problem should be.
I've seen situations where you bring in a vendor, one vendor tells us some terrible thing, like, "Oh yeah, these 12 trees all have the Dutch elm disease and they all need to be taken out." And I bring in the next arborist and he says, "Oh no, those trees are fine. That's not a terminal disease those trees have. We just had a really hot summer, not a lot of rain. They're kind of in shock. That's why the leaves are a little wilted. They'll be fine next year." So often when you're talking to people, when you're asking questions, it's important that you don't give them leading questions that then help them gather their response. It's like coaching somebody. And the problem is that people are often coaching the vendor to get the result that they don't want, and that's not a good idea for your business. Also, when asked questions, it's sometimes very important who's asking the questions. Now, if you are asking the questions as the sole owner who will be buying it, it's a little different than if you can somehow get an alter ego on board with you so that you have actually some kind of committee.
Because when you gather information as the sole decision maker, people always look to you for immediate response. But if you're part of a committee or larger group, it gives you the luxury of going back, pondering the decision, coming back to the seller, and perhaps playing good cop, bad cop. You can tell them, "Well, you know, I went back to everyone, and based on this occupancy, they're a little concerned we're going in the wrong direction, maybe hard to get a lender. So as a result, we're gonna have to probably go with a lower price. I don't think we should. I was the guy saying I think it's fine, but you know, those other people, they're just not willing to stretch that far." So sometimes it's a good idea when you're asking questions, meeting with sellers, not to be the sole decision maker. You could just add into that grouping. It might be you and your spouse, you and a partner, even if you don't have a partner, but that gives you a chance to deflect people and gives you a much better ability to negotiate later when you have the luxury of going and saying, "Well, I have to go back and have a meeting." It basically just buys you a lot of time.
The bottom line to it all is when asking questions of sellers, you have to make sure that you ask the right question, you frame it properly, you ask the same questions twice to try and make sure as best you can to get the correct answers. Now there's one question that always seems to linger on every storage deal, and that's simply, will you carry the financing? Now we have found many sellers, when first asked the question, will they carry the financing, they'll say, "No, no, I don't want to do that." But often, if you keep at it, you can convince the seller who wants the cash to instead carry the paper. Now why is that? It's because often it takes a while for the seller to think through what will happen post-sale. And then, when they talk to their accountant, they talk to maybe the brokerage company, and they find they just can't get the amount of income they dreamed they would from the sale when they put it in the bank. But if they carry the paper on it, they pay less taxation on the front end, and they get a higher rate of return.
So that's one question that needs to be asked not once, not twice, but typically at least three times. And if the seller still fails to understand the benefits of seller financing, you can then go to them even with a written description of what it all means to help push them along in that area. Asking questions is a key part of due diligence on any self-storage facility. But if you go out about it the right way, you'll get better answers, you'll get them quicker, and that'll make for a better purchase. This is Frank Rolfe with Self-Storage University Podcast. Talk to you again soon.