What is Due Diligence in Self Storage

03/19/2020

If you're interested in either buying or selling self storage, one of the crucial parts of the process that needs to be navigated is what's called Due Diligence.  In the world of residential real estate, this isn't really a thing (though there are often physical inspections). In the commercial real estate world, due diligence encompasses the physical inspection, but also much more which we'll discuss below.

As you likely already know, when you buy or sell your self storage facility the first step will be executing a Purchase and Sale Agreement with the buyer/seller.  As part of this agreement there will be a section dedicated to "due diligence." In this section, all of the details of due diligence will be described. This includes things like how long the due diligence period will be (often between 30-60 days), what can be done and inspected during due diligence (property, financials, leases, the local market etc.), and often what remedies will be involved if there are issues (i.e. getting your Earnest Money Deposit back).

Why is this so important?

This is a huge transaction for both sides, so it's important that the buyer know what they are buying and have the opportunity to inspect so there aren't issues down the road. While there is inherently risk associated with any real estate transaction, this process helps to mitigate risk and for both sides to understand the elements of the deal.

In addition, there is a third party that's going to play a key role in the length, process, and requirements of due diligence:  The Bank.

Banks are especially interested in mitigating their risk when you sell your self storage facility.  They will be looking at the performance of the facility (as it sits) and the ability of the facility to pay the debt. It is also interested in the environmental assessment of the site which can be strange for first time commercial real estate buyers. That said, if the bank were to need to "repossess" the self storage facility, they would need to know all of their risk associated with owning or reselling the site.

Remember that there aren't hard and fast rules to what can and cannot be looked at during due diligence, so make sure you take your time when crafting the language to be included in the purchase and sale agreement for your self storage facility. As the buyer you will want as much time as possible and to be able to get access to all the information possible that the seller has to offer in addition to time to do your own studies if necessary. As the seller of a self storage, you'll often want the opposite (i.e. as short a time as possible until closing and as limited a range of things that the buyer can investigate). Remember, the more time and "breadth" a buyer has in how they can investigate the property, the more likely they will come back with issues.

All of that said, in order for the transaction to get to the finish line and be successful, it's important for both the buyer and seller to work together and compromise on what is acceptable during due dilligence.

Are you thinking about selling your self storage facility? 

We buy self storage properties throughout the Eastern United States including Pennsylvania, Maryland, Virginia, New York, West Virginia, New Jersey, North Carolina, and Beyond! We'd love to speak with you about how we can help you get a fair price and as simple a transaction as possible. 

Give us a call today at 717-687-1883