Buyer's closing costs in PA and Self storage inspectors?

Question

I'm buying my first property in Pennsylvania and am wondering if anyone has a recommendation for a good self storage inspector in the Allentown area.
Also, what are typical closing fees? The agent sent me a bill that is over 4% of the property price, and is asking me to pay for 100% transfer fees. Is this correct? Thank you for any guidance you can provide!

Michael Wagner · Answer

@Mike Magliette, Yes, I too like the idea of Converting old warehouse space.  I am actually on the tail end of a project where we converted a 45,000 square foot facility into 33,300 rentable square foot of storage.  We've got everything from 5 x 5 units up to 24' x 48' units.  It's  viable model for sure.  Generally faster than ground up development and can usually happen at a lower price point (ours will be $27 per square foot inclusive of land).

And maybe I am nitpicking here put I would respectfully challenge the idea that "in order to grow you have to use leverage" and instead suggest that while leverage can be a very powerful to to increase the rate of growth, it is not a necessity.  We are growing without using much of it at all.  Though we did use it to accelerate growth when we first got started.  It should also be noted that leverage also has the ability to erase a lot of growth pretty quickly.  Like all tools, it can be very powerful if used correctly and it can be dangerous if not used properly.  I'd suggest that far too many (and given that I don't know you, we can agree that this isn't directed at you in any way:) use debt irresponsibly and end up building a house of cards.

Regarding your comment about no appreciation in Scranton, I'm guessing you mean that there is no "organic" appreciation!  In the storage world (perhaps more so than any other asset class), the value of the property if based on the value. As such, your increasing cash flow will force appreciation.  I recently took a $465K property in the poorest and least populated county in all of Florida to a $1.2-$1.3 Million valuation...belief me when I tell you ALL of that was forced...Like Scranton, we don't have the benefit of organic appreciation.

Just some things to think about as you get started in storage!

Anthony Angotti · Answer

@Steffany Boldrini I don't think the agent would be billing you 4% however the sales agreement and your representation agreement dictates the fees and how they are split. I imagine what the agent is providing is a cost estimate since that is required for PA Realtors

Typically in Western PA the transfer tax is split evenly between buyer and seller, but if the seller is the bank or if the agreement states it you may have to pay 100% of it. Additionally most of the municipal related inspections are usually the sellers responsibility.

Then you will have title insurance costs which are dictated by the state and the value of the property: http://www.alphaadv.net/patitle/parate25.html

Contact your title rep for a current breakdown because I can't validate those costs since it's not my field.

You'll also have some certifications as fees at closing depending on the area.

Then based on the lawyer or the title company you'll have additional fees (some necessary some of the junk variety depending on who you use).

Additionally you'll pay prorated taxes and insurance and whatnot. Those are technically "closing costs" but they are due at closing.

Lastly, most brokers in the area charge an administration commission. Admittedly it's kind of bogus but as an agent you can't control it unless you personally eat it. It's negotiable however like I said usually it's just going to be the agent that eats it if anything. Additionally if your buyers agent is working with a minimum commission and the seller is not paying a commission then you'll be due that or the difference between what the seller is offering and the minimum commission. Many agents worth working with have a minimum commission to ensure that every customer gets equal attention no matter what they are buying. May be other fees depending on who or where you are working, but everything should be disclosed on the agency agreement and the sales agreement.

Mike Magliette · Answer

@Michael Wagner I like this hybrid idea in your blog, but I could also see myself overseeing a retrofit of storage units from existing warehouse space or building a few rows of small outdoor units on an existing commercial property. Over in Taylor someone is triple dipping (laundry, self storage, and self carwash) on the same property.Also I fully believe in order to grow you have to use leverage, I finished a cash out refi on a duplex before the virus struck hard. I have cash and hopefully solid lending in place to take advantage of what seems to be an impending downturn in the market. I as you, look for value add properties, but here in Scranton it's all about the cashflow as there is very little appreciation year to year on small multifamily properties. So if I find a turnkey property that cashflows (relatively easy with the low interest rates) I'm buying it.

@Chris K.  Yeah I think my CPA meant poor returns if you just buy a turnkey at market value. I think for my first attempt at the self storage game would be to buy a existing facility that is poorly performing, but in a good area. That way I could just focus on the management part, be it from self implemented systems, or from outside providers. Once successful at that I would be more comfortable taking on a retrofitting job or building from the ground up.

Chris K. · Answer

@Mike Magliette

Way too many variables to simply say that self-storage doesn't have "good" returns. Also, it depends on what you mean by "return" --- there are many ways to measure it. For example, let's say your only metric is cash-on-cash return. That's fine but if that's your only metric you will never find a single deal that makes sense in a low cap market.

Building from the ground up has been a preferred method for many folks. Compared to other construction projects, self-storage construction is relatively straight forward. It's arguably more important to find the right design team who can do whatever is the best layout nowadays. But I know many people who just decided to convert their building to self-storage since getting another commercial tenant seemed daunting.

The real question is the business aspect of self-storage. Not an expert on this topic but the best success stories I've seen involved situations where the underlying business was done by a separate entity/experts who knew how to properly run the business.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Michael Wagner · Answer

I thought you might find some value in this blog post where I share my take on the pros and cons of developing ground up vs. buying existing:https://www.biggerpockets.com/member-blogs/3915/86006-3-ways-to-invest-in-self-storageRegarding your CPA's advice, I am ALL for owning free and clear and making sure that any leverage used is done so responsibly.  That said, to say that you can't get good returns UNLESS you buy with cash, it crazy.  I no longer have much debt on any of my properties but I did when I got started.  I bought my first facility for $330K with an 80% LTV SBA loan...refinanced a couple times to expand it and ultimately sold it for $1.8 Million which was a full $1 Million more than I had into it.   Not to mention the $500K in cash flow over my 7 years of ownership. I' used debt in various forms to buy 4 additional properties since then and have done well on those ones as well.

My guess is that your CPA's comment was colored by the fact that he assumed you would be buying a turn key property (which are trading at a premium right now).  And if that was the only way to invest, he might be right!  Not much delta between compressed CAP rates that we are seeing on turn key properties these days and the interest rates on the loans many folks use to buy them.  It is for this exact reason that we only buy VALUE ADD properties...where the income we generate once stabilized is considerably greater than any loan payment we might have.

Hope that helps some!

Chris K. · Answer

@Steffany Boldrini

There's too many variables to estimate what the closing costs should be. It also depends on what you are calling "closing costs." I've seen everything from 3% to 15%. From the deals I've been involved in, I would say the average is somewhere between 6% to 10%.

I don't have data on this. But due to realty transfer taxes, my guess is that Pennsylvania already has higher closing costs percentage than most other states.

For the agent part, you'll have to see what you signed with them.

For the transfer fee, the custom is 50/50 split. But again, all that is negotiable. It depends on what you signed (or what they are asking you to sign).

If you don't have experience in PA, I would get a lawyer and/or your own broker to have them guide you through the process. That especially true since it sounds like you are looking to buy a self-storage facility/business. While obviously the main asset is the real estate, you'll want to do your due diligence on the business side as well. Things like Bulk Sale Clearance Certificate can come bite you later if you don't account for it.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Michael Wagner · Answer

Your contract should stipulate who pays what fees.  It varies state to state as well as being negotiable up until the terms are agreed upon in a written contract. They should provide you with an itemized listing of the fees so that you can make sure they are accurate.  It's Hard to answer here without seeing it as sometimes folks mistakenly lump "closing adjustments" (like prorations) in with closing fees and they are two different things. Also, 4% doesn't sound absurd if you are talking about a small property with a relatively modest purchase price....if its a Million dollar property, I'd start to suspect they are artificially high.  Again there's not enough info here to give you anything too definitive to go on.  Are you loan fees included in that amount...or perhaps 3rd party things like survey, environmental, etc....

As for an inspector, you might see about finding a SS builder to do the inspection.  They will know more than any generalized "inspector"...

Hope that helps some!

Mike Magliette · Answer

Great post! I think all the above responders have answered your questions quite well. I'm interested in adding self storage to my portfolio as well in Lackawanna County. How did you find the one you are buying? Ever consider building from ground up?

My CPA said it would be best to buy in cash or returns aren't great with self storage, not sure how true that is just what I was told. I'd be interested in speaking with you more about your deal if you would be so kind.

In any case thanks for the post!

Patrick Liska · Answer

Steffany,

I have a few properties in Pennsylvania, as stated by others, there is a 2% transfer tax in Pennsylvania, usually that is split and the buyer and seller pay 1% each. My Average closing costs have been 6% when purchasing a house ( and that includes that 1% transfer tax).

As far as an Inspector in that area, I can not help you on that, sorry.

Steffany Boldrini · Answer

Thank you @Michael Wagner @Anthony Angotti and @Chris K. I greatly appreciate your responses in depth. If there's anything I can do to help you please lmk.

Buyer's closing costs in PA and Self storage inspectors?

Most Popular Reply