“How to Make $700,000 Eating Shrimp, Catfish, and Southern Grits”

Jul 30 07:55 2010 Casey Cavell Print This Article

I love to chronicle my real estate purchases through words as it is my goal to help others achieve great success in real estate. I love to give back because I got started the same way, piggybacking on other’s successes to make it to the top. 

By Casey Cavell

President,Guest Posting CSSM, QSM

Always Open Storage

I love to chronicle my real estate purchases through words as it is my goal to help others achieve great success in real estate. I love to give back because I got started the same way, piggybacking on other’s successes to make it to the top.  Please visit my website CaseyCavell.com or contact me at Casey@CaseyCavell.com to learn more. I would love to help you any way I can.

On August the 7th I received a call from a property owner in Covington, Georgia.  He was calling me after my latest marketing campaign targeting self storage owners. The friendly voice greeted me and I began to introduce myself, to build a relationship with the gentleman on the phone. I took some time to ask some open ended questions (ending with) who, what, why, when, and so on. I was able to dig deep into the details of the property and we exchange emails to send some additional information back and forth. 

Later in the week, the owners emailed over some profit and loss statements along with their overall operating numbers for the past two years. I was able to dissect these numbers and they were enough to get me going. During our next conversation, I was able to gain more insight on their motivation, which is important with any property owner; all-the-while, building more of a rapport with the owners and developing a relationship over the phone. Without a motivation to sell, most owners will not be flexible on price and the chances you will strike a good deal for yourself are slim to none. 

In this case, the owners were downsizing there business and wanted to start selling off many of their rental properties. Their main business, which was also their passion and love, was electrical sales and contracting. They occupied a 20,000 sq. foot retail building which was at the front of their 53,000 sq. feet and 498 unit storage facilities. Their property, although old, was in good condition structurally and was located right on the busiest road in the county. They acquired the property over 25 years ago and were ready to downsize and slow down. 

Their passion was not in the storage business and it showed in their operations.  The units were not able to compete with many of the facilities in town because of the lack of amenities. They did little, if any advertising, their phone sales were poor, and they were never open on Saturday (one of the busier rental days of the week). They poured all of their time, money, and hard work into their other business and I saw an opportunity to add value in their storage operation.

After building a relationship and building trust, the owners were willing to share any information I needed. During our first conversation, they were looking at a 2.5 million dollar purchase price with a $500,000 down payment. They owned the property free and clear and were in the position to hold financing so they did not have to pay Uncle Sam. I asked them how they arrived at the price and they said that they knew the value was there. I then had to explain to them that I had to buy based on cash flow and the cash flow could not sustain the purchase price.  It was during that conversation that I was able to tactfully have them lower their purchase price to two million dollars. I also mentioned that I would most likely want to add amenities and improvements in the property and was unable to provide a $500,000 down payment. They said they were flexible on that and would consider $300,000 down with a credible buyer. 

The credible buyer they found was me. I showed them reference letters and some of the other properties I have purchased in the past and the improvements that I made (if you are a newbie, partner with someone like myself on your first deal so you learn the ropes). I was able to build a relationship with these people based on trust and honesty so they wanted to do business with me. I remember sending them a small gift in the mail, (a sewing kit as the wife of the couple loved to quilt) and a picture of myself and my family. They worked so hard for so long on this property that they wanted to leave it to someone they liked and trusted. 

After they lowered the purchase price and down payments, the property was still a bit over priced. This property’s worth in my estimation would be 1.9 million dollars in 2-3 years. I could not afford to pay for future value and needed to reduce the price even farther. Remember never buy on performance buy on actual operating numbers only. 

During my next talk on the phone I referenced how long properties are staying on the market, how they would be savings upwards of $80,000 in commissions, and how many people do not have the cash or ability to manage a property like this. I let them know that they were dealing with a credible buyer and if they wanted a quick and easy solution, they were dealing with the right person. They were willing to discount the purchase price to 1.750 million and $300,000 down.  However, this still was not what I needed so I let them know that the value of their property and the income still did not meet the requirements. They wanted me to give them a price that I thought the property was worth. I did my best not to because then I would name a price. Always remember, whoever names price first looses so in turn I asked them, “I still had to do more research but just so we don’t waste each other’s time, what would be the very minimum that you would sell your property for if I was able to close quickly.” I was then given a $1,500,000 purchase price but they held firm on the $300,000. Now we had a starting point and we could start negotiating!  What I was able to do was to discount the property over $1,000,000 in price and $200,000 in down payment without giving a price at all. Not bad huh!  If people you are negotiating with ever ask you to name price, it’s almost a stale mate on who speaks first; “Who speaks first loses in most negotiations”

We are now in the month of September as it has taken some time to get the relationship built and barriers broken down. All the while, I have three or four other relationships with other owners in the pipeline as well, just in case something falls through. It takes some time and work to get someone to trust and like you.  Most owners will take time getting financial information together for you that will be needed to evaluate the facility.

 

After my evaluations, I have found that the current ‘as-is’ value on this property is between 1.4-1.5 million. It was my goal to purchase the property below current value so I would have instant equity. I was focused on current value but I was also focused on the terms of the deal as well. Most importantly, I was focused on not where the value was today but where I could take the deal in the future. Like I mentioned earlier, the property was poorly managed and was experiencing below market occupancy levels. This was for many reasons but the mainly because of poor management. 

You say poor management huh?  Almost all brokers or sellers will tell you they are terrible but you need to check yourself as they will just try to convince you that it is an easy turn around. You should always trust but also verify everything.  Here is how I found this property to actually be poorly managed. The phone would go unanswered during the day, voicemails would not be returned and there was a lack of advertising, no website, and no amenities to compete with area facilities. The facility needed electric gates, new signs, new landscaping, new marketing materials, and new energy. These were all things I knew I could bring, because I bought a facility almost identical a year prior and jumped the occupancy from 65% to 95% in three months; see my other article on that property at my website www.CaseyCavell.com on that property. 

After they came down to their bottom dollar of 1.5 million, I put together a professional offer describing why I was offering the amount I was. I also listed several reasons and benefits of doing a deal with me. My first offer was for just over one million dollars and still with the $300,000 down which they were insistent on. I also proposed a 30 year amortization period with a 6% interest rate. Through my open ended questions and research I found that they needed to receive a certain amount per month for living expenses and we needed to structure the payments around that.  It is really important to know what the owner wants out of a sale. Each situation will be different and in this case these were the owner’s four most important things in selling their property.  1.) Dealing with a credible buyer and person they liked and trusted 2.) To be out of the day to day business operations 3.) To receive enough money down to feel comfortable with the buyer 4.) To receive enough monthly cash flow to live off of. 

It was then my job to try and structure my deal around those items. I did my best to structure an offer that was a win-win for the both of us but was unable to do so initially.  After my initial offer, they countered at 1.45 million with the same down payment amount. I then realized that the owners would not come down to my target price of 1.3. I was also trying to get into the property with even less money down but the owners would not budge. Even though we could not reach a win-win situation I was able to professionally describe why this would not work for me or anyone else and we agreed to part ways in late September.

In early October I called up again to check on things as it is always good to make follow-ups with people who are looking to sell. Time changes everything and one day they may be motivated and the next day they may not be. On our next call you could tell that they were more motivated to sell but they had a hard time selling for any less because they knew the value of their property was much more than we were talking about. I told them I understood and was still interested when the time came. 

During the entire process, all of which I might add, was over the phone, they insisted that I should come visit the facility and maybe my thoughts would change. I was starting to believe that since they were so concerned with who they were selling to, instead of how much, it would be a good thing to visit the property if we were close enough to seal the deal. I knew I would be in the area visiting family for the holidays and would do my best to visit.

Right around Thanksgiving I was able to finally visit the property for the first time.  I never like to visit a property unless I have it under contract or know it could be a deal sealer. This time the site visit was a step in the right direction.  The owners were exactly how I pictured them and we struck it off right away. I don’t even think we talked about business until about an hour into our visit as his entire office was filled with baseball memorabilia, which is my favorite sport. I spent that first hour building rapport with the couple and had a nice morning. They then took me around the property and showed us their home away from home for all of these years. After we built up more of a rapport and did some sucking up, we started to talk vaguely about the numbers and how I still value this property for less than they currently were asking. We forgot about all prior negotiations and had a new starting point of 1.45 million which is where we left off. I also let them know that I would have a hard time investing so much money into the down payment when I planned to add some amenities to the property, which would only help increase occupancy and raise rates. He could understand that as he knew his property needed some upgrades to keep up with the competition. He then instantaneously mentioned that they would consider lowering the down payment to $150,000 and the interest rate to 5%, which I didn’t even ask for. I knew right there that we had a homerun of a deal but instead of jumping out of my shoes, I had to put on my poker face and say something along the lines of “I appreciate you being flexible I will have to revisit the numbers.” 

Oh, I almost forgot to mention something that I didn’t even know until I made the site visit. There were two single family homes that the owners owned that boarded the property. They bought them so they could rezone the property so many years ago and never had the chance to sell them. He decided to throw in those homes with a total $1,200 in monthly income into the deal. Those homes were value by a local real estate agent for $30,000-$35,000 each although the owner insisted they were worth $50,000 a piece. This was an added bonus in the deal and even got us close to where we needed to be at 1.3 million. 

I then went on to talk about how the value of the property is there but the cash flow was not. I showed that I would be hurting initially with cash flow from day one as well as the list of all the improvement upgrades that I would make (me posturing).  He understood that and asked me to come up with a solution. I proposed that I would give him $150,000 on the day of closing and then put another $150,000 into the property. This would give him the $300,000 and him enough certainty that I would not run away from the project. (Although there is nothing holding me to putting the $150,000 into the property.) However, whatever amount I do invest I will get an immediate return. This money invested will directly help improve rental rates and occupancies up to market levels. During my due diligence I have found that the facility I was interested in was operating at or around 65% occupancy while all of the competitors were operating at 90%.  The current rental rates were also below market value. Talk about value add!

 

During final negotiations we were able to structure the loan schedule to provide them with their monthly income needed and secure a 5% interest at 18 year amortization with no balloon payment. The loan is also assumable to another owner which will be a big plus on resale. With interest rates projected to move up in the next few years and the low down payment needed the financing was the best part of the deal. I was also able to negotiate another $150,000 of the price to finally arrive at 1.3 million with the terms mentioned above.

 

We are now in the middle of December and due diligence is taking place. During the process I made it clear that their facility was not doing well and was losing market share. The main reason their property was trailing down was because of poor management skills and they simply did not like running the storage business. They had not even opened there doors on Saturday’s for the past two years. Each one of my calls to the facility was never answered properly and never once did they ask my name or number. I also quote several inspection reports showing different maintenance issues and really emphasized the money this place needed to be turned around. I did this all in person because I knew I could seal the deal once again if I could show them in person my plans. What I asked for next, most people have never done because they would have been afraid of the result. We had already had a tentative agreement in place but I needed more. I told them since I was going to be putting $150,000 into their pocket and another $150,000 into the property; I needed some time to turn this around.  In the first 18 months I did not see this property making me a good return on my investment with the debt that I would have to carry. I explained how I could put it in other deals and receive a better return. At this point in the relationship and with all of the time and energy they had committed to me they were locked into the deal emotionally. I did not want to take advantage of anyone and did not in this situation. It is always best to structure win-win relationships like I mentioned before. If I did not believe them agreeing to no payments for the first 18 months would create a sour seller or make this feel uncomfortable, I would not have proposed it. I asked for the no payment period and was granted that at 18 months no payments no interest. Please send me your deal at my email address if you can come close to the terms I have mentioned.

Remember those single family homes that he threw into the deal? Well, after the home inspections came back with thousands needed in improvements, I once again brought up those homes. I remembered back to the owner mentioning the values at $50,000 each.  After my due diligence I found the values to be $35,000 each with the total amount of improvements to be upwards of $20,000. I am not in the single family home business thank gosh.  I have only heard stories and I was lucky to jump straight into commercial. I told the owner the homes were making me nervous and did not want to include those in the deal. I had him speak of the price again and he mentioned they were worth $50,000. I then proceeded to ask him how much he would be willing to take for each house if we would back those out of the deal. He said that he would be willing to take $35,000 each. I took him up on the offer and refused to negotiate, which I could have. This left a nice taste in his mouth as he thinks he sold $50,000 house for $35,000 even though they needed new furnaces, fridges, paint, and the list goes on. This was the last item we finalized and the owner felt like a winner.

No matter what you do after negotiations are completely over and a deal is at a closing table, always congratulate your counterpoint on an amazing job and mention how you paid more than you should; but the knowledge that they taught you was well worth it. You never know, they may want to do business with you again.

After all negotiations and due diligence was complete, we were both very happy and heading towards closing. I just wish I didn’t have to talk about baseball every time I call the owners as I am business first, Cubs second, Colts third, and girlfriend 4th (shhhh). However, I do think me having insight and knowledge about the New York Yankees sure led to me negotiating one heck of a deal.  Remember, always concentrate on building rapport and trust with all people in life. It will go a long way and create a great win-win relationship.

We are now here on February 26th, my first night as the new property owner at Always Open Storage in Covington, Georgia, www.StorageCovington.com and it feels really good. This is six full months after I made the initial contact with the sellers. It took time, energy, and relationship building but this deal will land me $250,000 in equity at day one, $100,000 in first year cash flow, and $700,000 in equity after the property is brought to market occupancies all with no money out of my pocket. I am fortunate enough to have people realize my success and have had the opportunity to make my investors money along the way. This deal will not only land me some nice passive income and equity but will also help my investors achieve their dreams. Thank you so much for taking time to read up on my last investment success and please keep in touch. I am looking forward to helping you achieve your dreams as so many people have helped me reach mine.

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Casey Cavell
Casey Cavell

Casey Cavell is a nationally respected entrepreneur, commercial real estate investor, and self storage expert. To learn more about Casey Cavell and how he can help you solidify your financial future, visit www.CaseyCavell.com or contact him at Casey@CaseyCavell.com

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