self-storage, getting a loan for more than appraised value

10 Replies

I have an opportunity to buy a small self storage unit but may have an issue with financing.  The seller stated several other people have gone to the bank and been turned down because the property appraises for less than the asking price.  Here are the general details

Asking price $325,000

Appraised  $260,000

Gross profit 44,000 / yr

Expenses 11,000 / yr

What I'd like to do is get a loan for the 80% of the asking price (260,000) but if banks will only loan on a percentage of the appraisal price I would have to find ~120,000 instead of 65,000.  

A loan on 80% of asking still provides $1000 per month After debt services. So, I'd be interested if anyone has gotten a loan approved over the appraised value and any special way to setup the deal to make it a success. I thought of creating a business plan to take to banks that would lay out the NOI to show the last 3 years of actuals and projected 3 years with a bank loan but it sounds like most banks only see this as property not as a business.

I know there are many other options with seller financing which *might* be an option.  Just trying to keep my options open in case they aren't in favor of that.

Thanks,

James

I have an investment in a mini-storage that we had to refi a couple of years ago.  In determining the value, lenders looked back five years, not three.  Weak number the first two years (right after we bought it) hurt the value.  We ended up having to do a cash-in refi to make up for the shortage.  Lenders seem to be pretty hard and fast that the value is the appraised value, if its less than the asking price.

You're also at a troublesome loan amount.  Too small for real commercial lenders.  But its a commercial property.

There is a big red flag that you're paying too much for this property. 

Jon Holdman, Flying Phoenix LLC

Looks like it is overpriced by a bit.  As much as I love self storage, paying too much for it is not wise.   That being said, if there is huge upside then it may be worth pursuing.  And you can get a bank to play ball if you are persistent.  As an example.  I just paid $350K for facility that was more likely valued at $300K based on the trailing income.  It had an acre of empty land with it and was only 50% financially occupied.  With that, I put together a lending proposal for $300K and put in 90K Cash for downpayment and renovation expenses.  Based on the 40K in renovation and proposed management overhaul, the appraiser completed an "as stabilized" value.  We used the 40K to add a gravel parking lot and erect a fence and security gate.  Those improvements along with my experience in turning SS facilities around was enough to convince the bank to accept an "as stabilized" value.  That value was $550K.  Just closed am month ago but my plan is to have the income justify said valuation by this time next year.  Bring on the elbow grease!

Is there upside to the facility?  If the facility is full and no room to expand, I would robably pass on it.  But if you can realistically increase value to $500K or so with using primarily elbow grease then it might be a deal. 

Do you have experience "overhauling" real estate and or other businesses that you can lean on? 

Also,  a business plan is an absolute must when approaching banks with this type of deal.  Im talking 10-20 pages outlining every aspect of the market and the facility.

Hope that helps a little. 

No company avatar mediumMichael Wagner, TriCounty REIA of WNY | [email protected] | http://www.tricountyreia.com

Thanks @Jon Holdman  and @Michael Wagner  !    This would be my first property so it's definitely a learning experience.  I understand why banks want to loan based off of the appraised value but with the existing numbers it's still around 20% cash on cash return.

I don't think there's anywhere to take this property.  No empty land, units are full, and there's even a waiting list to get in.  Best I could do is raise rents as I think they are a bit low.  That's part of the reason I like it for a first property though, it looks like it's setup to make money and allow me to gain some experience.

Thanks Again,

James

@James Seely  it's quite possible that the appraisal came in at the value it did because that's really all it's worth. If you try too hard to outsmart the appraiser you might end up dipping into your own pocket to service the debt when the income turns out to be insufficient to carry the debt on its own.

How did you calculate the gross income and expenses?  If you've never done this before you only have the seller's reported numbers to guide you.  If you have experience in self storage, or any commercial property, you could draw from that past experience to guide you. Without such experience you are flying blind. Bankers and appraisers look at commercial property all the time. They are your seeing eye dog when you don't know how to see on your own yet. Ignore them at your own risk.  

It's entirely possible that the property taxes will go up after the sale or other trailing costs are showing lower than normal because the owner is skimping on necessary expenses to inflate the numbers in advance of a sale.  If you are certain that the appraiser has it wrong, float the numbers out to a few commercial lenders and have them give you a first pass underwriting. You might find a consensus as to value that trends toward your estimate...or that of the appraiser.  The sooner you can figure out who is right, the sooner you can get to moving on the deal, or just moving on.

Medium praxis capital logo cmyk stacked 900pxBrian Burke, Praxis Capital, Inc. | [email protected] | http://www.PraxCap.com | Podcast Guest on Show #152

Originally posted by @James Seely :

Thanks @Jon Holdman  and @Michael Wagner !    This would be my first property so it's definitely a learning experience.  I understand why banks want to loan based off of the appraised value but with the existing numbers it's still around 20% cash on cash return.

I don't think there's anywhere to take this property.  No empty land, units are full, and there's even a waiting list to get in.  Best I could do is raise rents as I think they are a bit low.  That's part of the reason I like it for a first property though, it looks like it's setup to make money and allow me to gain some experience.

Thanks Again,

James

 Any Update here?

No company avatar mediumMichael Wagner, TriCounty REIA of WNY | [email protected] | http://www.tricountyreia.com

Hey @Michael Wagner  , thanks for asking.  Not too much to report.  After looking into it more I'm not sure the property has recently had a true appraisal.  The seller said a local bank had done one but I talked to them and they said they hadn't.  

So, as of last night I have a purchase offer out contingent on the appraisal.  If the appraisal comes in lower than the agreed upon price then we will have to renegotiate.  To me it looks like it's worth it.  The only thing I'm having a hard time understanding how to figure out what the cap rate should be.  I guess the appraisal will tell us for sure though.

Thanks,

James

@James Seely banks have to follow the regs and all loans that I do with a bank says "lesser of insert dollar amount, or insert LTV%". You'll be stuck with the lower amount based on just the real estate but sometimes if they want the deal they can get creative and give you a personal note for the difference, not secured by the property.

If you're wanting to check the cap rates call some brokers or other appraisers and ask.

Also, storage is a hot property now with some larger properties in good markets commanding 5 or even sub 5 caps. If there haven't been many recent trades in your area then the appraiser may not be up with the demand for this product type. You can sometimes fight the appraisal, as for a review or a second opinion but that's an uphill battle.

Derek Carroll, NorthMarq Capital | [email protected] | 315‑558‑8332 | http://www.realestatefinanceguy.com

Thanks @Derek Carroll!  I've heard the advice to contact a broker before but I guess sometimes you just need to hear it one more time.  I contacted one today and have a meeting tomorrow!


James


Followup for everyone.  I did meet with a Broker.  He didn't give me a Cap rate but did say he thought the purchase price was in line with net income.  On further digging I couldn't actually find someone that had done a true appraisal.  It sounded like the 260,000 appraisal was really a banks estimate of the value.

So we put in a purchase agreement at the asking price of $325k contingent on it appraising for that much.  The appraisal came back at exactly $325k...  That doesn't give me great confidence in the appraisal but the appraisal report did say that the Cap rate for self storage in the area was 9%.  Based on that I thought the appraisal would be a little bit higher given the net income at $33k.

Thanks for everyone's thoughts and advice.  We should be closing in the next couple of weeks.

James

James,

PLEASE heed the advice of myself and others on this thread - until you have a thorough understanding of how to correctly underwrite a Self Storage facility, coupled with a thorough market analysis - Putting an offer on this property could be a mistake.   I only saw 2 numbers - Gross, and expenses, and already it tells me that the expenses are understated and are way out of line with national averages = overpriced. 

I don't coach for free, but it you want to at least get a basic understanding of Self Storage, and how to value a property, watch these 6 free videos here:  www.SelfStorageInvesting.com before you get pregnant in this deal. 

Please look at your own words stated above: "I don't think there's anywhere to take this property. No empty land, units are full, and there's even a waiting list to get in. Best I could do is raise rents as I think they are a bit low. That's part of the reason I like it for a first property though, it looks like it's setup to make money and allow me to gain some experience."  

Now, put yourself in our shoes here on Bigger Pockets - would YOU advise YOU to go forward with this approach to a $325,000 investment.  I believe the answer would be a big fat NO.  

I suggest reaching out for some help on this one. 

I've coached Hundreds of people from making a mistake on a property that would have been a disaster, and I don't ever want to hear of or see someone needlessly do it again.  

Please let us know your course of action as this unfolds.  

Sincerely, 

Scott Meyers, Self Storage Profits, Inc. | [email protected] | 1‑866‑693‑5999 | http://SelfStorageInvesting.com