Self Storage University Podcast: Episode 22

When Dust Gathers On A Deal, The Options Become More Interesting



Some self-storage deals sell quickly, and others fester for years. What can be done to craft great acquisitions out of these older offerings that have gathered dust? That’s the focus of this Self-Storage University podcast in which we discuss what makes deals sit without movement, and what the potential options are to forge a successful purchase. As you’ll see, sometimes there are real winners hiding under all that dust.

Episode 22: When Dust Gathers On A Deal, The Options Become More Interesting Transcript

Some self storage deals sell quickly, and others fester sitting on a shelf, gathering with inch after inch of dust. This is Frank Rolfe with the Self Storage University Podcast. We're going to talk about those dusty deals, the deals that seemingly nobody wants to buy, and how you can potentially forge something interesting from those forgotten opportunities.

Let's talk first about what makes a deal gather dust. Why do some deals not simply move? Well, you can guess the main reasons. Often, bad location, bad market, bad physical plant itself, building crumbling. Could be a permit issue, could be a title issue, could be environmental contamination issue. But sometimes it can just be a pricing issue. So you first have to analyze on any deal that isn't selling, why is it not selling.

Now, many deals are not selling and the reason they're not selling you don't want to get involved in. so if that storage facility has a horrible location then why would you want it? Even at any price, potentially there's not enough demand to make anything out of it. And you wouldn't touch one that has a permitting problem or sitting on top of a really bad environmental toxic site, or maybe in the middle of a flow way of a flood plain. So those type of deals we're going to cast aside for the purpose of this podcast because you don't want to touch those regardless.

But then there's another variety. That's the ones that have the raw material to be something. They have good bones, but they've just not been operated properly or they're priced too high. Those are the ones that when you clean away all of the dust, you get out your soapy water and your rag, you find at the bottom an asset that you can actually buy and make money with. So how do you approach these deals, sitting there under an inch of dust? Maybe they've been on the market for a year or two. You've identified that the market is not really that bad. There's something to it. Let's break it into those two categories.

Let's first talk about the ones that are operationally a mess. So what happens here? Well, you had a good product but the problem was the owner and the manager managed the thing into oblivion. Occupancy maybe is 50% of what it should be, the rates are all screwed up. They don't even have good books, not even computerized, written with a purple crayon on a sheet of loose-leaf paper. So how would you forge a deal when that's the reason it's covered in dust?

Well, realize your first obstacle and there's two. One is it's not going to be financeable, right, because no bank is going to finance something with purple crayon for the notes of it. And the other is it's not in a state where it really can probably make any money right now anyway to pay out a note if you could find a bank crazy enough to do it. Those deals are typically solved with some form of seller financing. Now the best way to finance a dusty deal that's having problems and not being run effectively would be to do a seller note with zero down, non-recourse debt. Why is that? Because you have absolutely nothing at stake. You can tie up the thing, buy the thing, decide you hate it, give it back to the seller, nothing would happen to you because the note is non-recourse, they can't come after you for the deficiency, and you've got nothing in it to begin with on the front end. That sometimes is a sure way to cure that dusty deal. There's an option.

Another option would be if it was really, really, really doing terrible, do all of the above we just mentioned, zero down non-recourse deal, but make even the payments not payable for some period of time. There's nothing illegal about having a mortgage that has no payments in year one and two and three, or maybe a very low interest only interest payment of 1% in year one, 2% in year two, et cetera. So sometimes dusty deals can be solved simply through some kind of creative seller financing. That's an option for you. So if it's really, really screwed up there you go, there's one way you can work it.

Another way you can work it is with a master lease with option. How does that work? Well, what  you do is you forge a deal with a seller where you will take over all operations to try and bring the thing back to life, and then after you've brought it back to life then you close on it. I know it sounds odd but some sellers are okay with it, particularly when they've got an underlying mortgage so they can't carry the paper on it, and the only way you can ever get the thing where you can get the mortgage is to improve its operational cash flow before it will qualify for a new loan. Typically, you pay a flat amount every month. In many cases what really the focus is, is just to cover the mortgage which often can be at a loss I might add. You do that until such time, typically three to five years into the future, where it's creating enough cash flow that it will appraise for the amount that you need to pay off that mom and pop seller's mortgage, and that's called a master lease with option.

Now, between the two we've done a whole lot more deals zero down than we've done master lease with option. Master lease with option is kind of an unusual idea because you're asking the seller to entrust the property to what's effectively a stranger. Who knows what you can do with it. You can of course destroy it if you were a worse manager than mom and pop. So it's more of a desperation move, whereas the zero down non-recourse debt maneuver that's a little more in line with how things traditionally happen. But those are two good options for the dusty deal.

But what about when the dusty deal is just all price related? The price the person is asking is just absolutely insane. What you do on those deals, like how do you forge a deal with that kind of a dusty deal? Well when you have a price that's way too high, the key thing to do is remember it's going to be somewhat just a matter of luck because every seller, every single one of them at some point in the movie reaches a moment where they have two paths. They can either continue to have it sit there unsold forever, or they can drop the price. The key is you want to be the first person in the door when they finally decide that it's time to let it go.

Every seller, just like somebody who has been diagnosed with a terrible disease, has these different strata they go through. They have the disbelief, the anger, but they'll ultimately have where you embrace the reality. So every seller, at some point in the  movie, whether it's a year down the road or two years down the road, they'll realize it's not going to sell. If they really want to sell, they better do a substantial price reduction. If they refuse, if they will never agree to this, it's going to happen anyway because it sits unsold forever and then they ultimately die, and then their heirs they decide to do the big price adjustment.

So the key is to always keep your foot in the door, the conversation going on those kinds of deals, and just hope that you're the first person they talk to when they finally decide to dump the price. How much will they dump the price? We've seen deals where prices get dropped 50%. I don't think that would be unusual in cases, dire cases, of properties that won't sell. But the important thing is you need to stay in there, stay in the loop, to get the constant contact.

Also, throughout that process you can keep reinforcing to the seller that you really would like to buy it but you just can't make sense of the number. Keep playing that message over and over and over. Sometimes, after you've played that message to them, oh I don't know 100 times, they then remember you as the person who are interested but just not at that price. Because sometimes when mom and pop finally decide to sell at that big reduction, they again have a lot less self confidence because it hasn't moved. So they're going to remember and seek out those who talked to them in the past in a nice way, saying yeah I'd be a player but I just can't pay that much, but keep me in mind if you ever reduce the price. They're probably more likely to call that person than someone they've never talked to before. So in that manner, sometimes if you just stay in there swinging you can get the deal that didn't work, not even close to working with the old price, now under contract at a price that is finally happened.

The key to all of this is do not give up on those dusty deals as long as they have potential. The issues that are keeping them dusty, caked in that one inch of filth, are basically things that you can't fix. You can't fix a location. You can't fix an environmental contamination. You can't fix a survey or title issue. But can you fix such issues as pricing? Yes, you can. Can you fix such issues as banking? Yes, you can if you use these concepts I'm talking about. So there's no reason to give up on any deal you see that has potential. You simply have to look through all the dust, all the dirt, get out your Formula 409, get out your rag, and start rubbing all that dust off. Sometimes deep down beneath all of that, all of that time has left on the property, you can actually find some pretty nice properties. You just have to keep rubbing them until ultimately they start to shine. This is Frank Rolfe with the Self Storage University Podcast. Hope you enjoyed this. Talk to you again soon.