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Welcome to the Self-Storage University Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate self-storage facilities. And your host is a partner in one of the largest real estate portfolios in the U.S. with nearly $1 billion of holdings, Frank Rolfe.
There is no deal without a signed contract. And it all begins with a first offer. This is Frank Rolfe with the Self Storage University podcast. We're gonna focus on how to make that first offer. Because if you make an offer and it's not countered by the seller, you've accomplished nothing. You've wasted all your time. There was no point in even starting the process of making the offer if you can't come up with an offer that the other party will respond to. So here are some critical things to think about when making that first offer on a self storage facility.
The first thing you've got to figure out is how low can you go? Because you always want to start off with the lowest possible amount that will in fact be countered. But too low and the other party won't respond. They'll disregard you. They think that you don't know what you're doing. We have found historically that when looking at cap rates on a first offer, running the numbers, coming up with that first offer number, typically you want to stick with something in about the 12% or so cap rate range because that's low, but still high enough that they might counter it. Of course, you could adopt a different number. You could say, well, I'm only gonna offer things based on a 20% cap rate. But very unlikely that anyone will ever respond to that because most people are seeing typically numbers in the ballpark on an offer of 10% and pricing somewhere around that. And 20% would be half of what people are accustomed to. Probably the seller is gonna say, this guy's not a real player, so I'm not even gonna respond to it. But you just got to think through, although you want to be low, you can't be too low. Don't forget how negotiation works, right? You have the low offer, the counter, another counter, another counter, another counter, and you bang around back and forth like a ping pong ball until you typically come up with something that's in the middle. So you have to give yourself plenty of room for them to counter at a much, much higher price and then to work your way back down. But you can't go too low. If you go too low, then your first offer will always fail. Also, don't forget the psychology of numbers, because some numbers, even though they're only marginally more, look much, much larger. You see that come to play typically when we talk about seven digits. If there's a self storage facility that you think is maybe worth a million dollars, then you're probably not gonna be doing a very good job for yourself if you don't allow the seller to triangulate a negotiation back to the million dollars. And if they're asking like a million three, million four, you wouldn't want to start off at like $900,000. That sounds insulting because they want seven digits.
So the $50,000 difference between 950,000 and a million is not a huge amount in the big scheme of things, but the way it's presented is enormous. So if someone is trying to get seven digits, low seven digits, then you probably need to figure out an offer, if you can, that will at least accommodate that need. Because sometimes numbers don't have a lot of difference, but there's a whole big issue when you change the front of those numbers. Same is true of lower numbers. If you're looking at something and 595 does not sound nearly as high as 600. The same behavior that Walmart uses in their pricing, where they'll price something at 2.99 because it sounds a lot cheaper than 3. All goes back to basically the way that people embrace numbers and how it looks to them and the emotions involved. So don't forget the emotional side of making that first offer.
Also, present your first offer with an inclusive preamble. Something like, "Here's what I think, but I want your input on it." That helps make them elicit the counteroffer. If I just say, "Here's my price," well, they look at that and they think it's way too low and they just say, "Ah, well, forget it." But if instead I say, "Well, here's the price I came up with based on the information I've got, but what do you think?" That'll probably get them to counter. Even if the number is very, very low, they'll probably say, "Well, here's why I think that number is too low. Here's what I think a reasonable number would be." But at least you've now included them in the conversation and you've got the ball rolling.
Another key item is to be more than just a price. Tell people why you think you're the right buyer for the property. When you're trying, particularly in a setting with other bidders, for example, if there are multiple offers coming in, you don't want to just be a number. You don't want to be just a price. You want to be a person. You want to be a player. So don't just give them just a number. Give them a number plus why they should go with you. And even if it's a non-competitive format, if you're the only person out there giving an offer on it, nevertheless, you're gonna get a much better response, much more likely counter, if you give them reasons to counter. So if you say, "Well, I'm thinking on this property about $800,000, and I know I'm the right person for it because I own another property nearby or because it's an area I'm very enthusiastic about," those are the kinds of things that will drive the seller, even though your number may appear too small, to say, "Well, okay, you know, here's more along the lines of what I need." But at least you've gotten them to counter.
And then finally, there's a rule of negotiation sometimes where you just want to cut right through all of the BS of that ping-pong ball back and forth of offers and counters and counters and counters, and that's simply to say, "What would it take to get you to sell me this storage facility?" Now you've flipped it around because now they're making the first offer. But when you say something like that, it just makes you sound like you're very serious, very enthusiastic. So a lot of sellers will respond to that very favorably because they think you're a no-nonsense person wanting to save them the time of the typical negotiation back and forth and back and forth. And even though they might not have responded to your first offer, when you twist it like that and say, "What would it take?" now they're gonna be in that position of making their first offer. Now, their first offer, of course, will be high. Remember, they're the seller. The buyer always starts off low, seller always starts high. But at least we've now established and got the process going between the offer and the counter simply off one statement. Now, it's absolutely critical when you're making those offers, those first offers, you take everything I just mentioned to heart because if you can't get a counter to your offer, you can't get anywhere. But as you make more offers over time, you'll soon learn the art of what it takes to get people to give you that second price. This is Frank Rolfe with the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.