The Price is Right!

Andrew Morgan - QTHB The Price is Right!

In this edition we are focusing on setting the price of motel assets correctly before the start of the marketing campaign.

So, what is the definition of market value? 

The API states the definition of market value as follows:

“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.

What is any motel worth in the marketplace? 

To paraphrase the above, what a buyer is prepared to pay to have it. Buyer ‘one’ may be prepared to pay a price to acquire the individual asset, however buyer ‘two’ may not see that value and hence offer much less. The marketplace, made up of buyers and sellers will then determine what the value is, if one offers, and one accepts. Willing buyer and willing seller on a given day really is what determines the value of any product or service.

Having the price right when going to the market plays a huge role in how long it will take that motel to sell. Going to the market with a price expectation of $1.5m and a real value of $1m is most likely going to mean a lengthy period of buyer inactivity as a result. Initial interest may be strong, however will drop off rapidly as each realises the price is too high and in affect, any genuine interest is scared away. Even those that have strong enough interest in the asset itself, will most likely not have the courage to make an offer as they will believe the gap will be too much and not worth pursuing. They perceive that based on the high price the seller’s expectations are unreasonable. Potential buyers will consider the price and compare it against others that are for sale. Each are competing for the same buyer’s interest and will pursue other offerings where they believe the seller may be more understanding of the market.

Timing

There is an absolute direct correlation between pricing and timing. How long should it take to sell a motel?

There is no definitive answer to this question. In general terms, a marketing, sale and settlement period of approximately four to six months for a motel that is priced correctly to market expectations. If the price offered to the market is too high, then for that particular time and place in that market, market expectations have been incorrect. This is not really something any genuine seller wants.

The market

Understanding the current market relies on information. The latest information on the status of buyer activity, which is a result of many factors, such as interest rates, how the motel industry in performing, access to finance, business confidence, economic climate, etc. Over the longer term there is a direct correlation between how the accommodation industry is performing and the demand to acquire accommodation assets.

In other words, when business is good, people want to be involved. When business is poor, no one is putting their hand up. A combination of human nature and economics.

Setting the correct price

Setting the price for a motel is not an exact science. There are many factors that must be considered to determine what genuine financed buyers, active in the marketplace, will be prepared to pay for an individual motel property and/or business. These factors include the physical asset, land size, location, position, presentation, financial trading and the list goes on. Some factors play a more major role of course and that may be different for each individual. Ultimately this is why it is difficult to try and foresee what value will be seen by individuals in a motel or business.

One thing is certain, when one gets it wrong, they find out very quickly. The silence will be deafening.

A seller can only research and receive advice and then make their own decision based on all the research and information they can gather. That will include, what is currently for sale that compares, what has recently sold that compares, what their motel broker has advised based on how they believe the market will react, and perhaps having a registered valuation completed. All these things can help play a role in determining the most accurate value assessment one can.

Information needed to assist in setting an accurate price

Some of these things include but are not limited to:

  • Accountant’s profit and loss statements - three financial years of trading data (if available) is required to be able to make a reasonable assessment. Considering just one year would mean a very restricted basis for the value decision.  This one year may have been a stronger or weaker year than normal. There is an old saying (or sledge if you like) in cricket, ‘one innings doesn’t make your season’. Historical trading and expected future trading both play a role in determining a business’ value. It is no good basing a value on trading with 90 percent occupancy when, for whatever reason, 50 percent is expected the following year. All other matters aside, a motel’s value is a direct reflection of its profitability.
  • Plant and equipment list - a comprehensive list of all the chattels that will be sold with the business e.g., beds, televisions, fridges, kitchen equipment, etc. This excludes any items on lease or rental agreements, unless they are being paid out prior to contract settlement.
  • Lease or rental agreements - chattels under lease, road signage agreements, garbage removal, etc.
  • Lease document - if the business is leasehold tenure, not a freehold going concern (excludes land and buildings). Include all Form 13 amendments over the years for said lease.
  • Occupancy rates - per month for the last 3 years if available
  • Monthly income split up by department - per month for the last three years if available e.g., accommodation, restaurant, bar, etc.
  • Current tariff schedule - and the last time they were increased and by how much.
  • Council property rates notice - last one or two received.
  • List of recent property improvements - refurbishment items or large repair and maintenance items.
  • Agreements - copies of any agreements with external parties such as chain affiliations, service providers, booking agencies, etc.
  • General information on the day-to-day operation of the business such as the booking system, social media, office hours, employee details, etc.

The buyer’s shoes

To not put oneself in the shoes of a potential buyer for the offering of a motel business (or anything for sale really) is detrimental. This is a great place to start when setting a price and preparing a business for the market. Asking the question, “if I was an active buyer in the market for a motel, at what price level would I be interested at or what would I be prepared to pay to have it?” 

Simply saying, “I don’t care what anyone thinks, this is the price I want,” is ignoring those who need to be convinced, those who are in charge of “writing the cheque,” or not. It is really looking at the sale process from another point of view, rather than being fixed only on the result. Identify the important items that any prudent buyer will require and present these in a professional manner.

The market for anything is an ever-changing dynamic, so the returns on investment (ROI) at any particular time will most likely vary to that of the previous year or the next year. That being said, in general terms, the return on investment over the past 25 years has had a variance of approximately 15-30 percent across all three tenures. This may not seem like a lot on the surface however on a $3m sale price it is the difference between $450,000 - $900,000. That is a nice little capital gain for the seller on the back of simply maintaining the business profitability and only relying on buying and selling at the right time. Again, depending on the type of tenure.

The location plays a huge role in ROI levels and for the purposes of this article, we will consider more about coastal locations from an ROI perspective.

Let us take a closer look at ROIs of each of the three tenures of motel ownership over the past 25 years...

Leasehold motels

Leasehold motels in the open market have always offered a return on investment of at least double that of freehold going concern motels and more than three times that of passive investment motels. The ROI’s have been seen as low as 25 percent back in approximately 2008 and we have witnessed those above 100 percent at times.

How is that possible? Well in certain circumstances a lease may produce a profit however may not be selling anything tangible other than a lease document (no plant and equipment). One may argue that this is more of a rental agreement.

Freehold going concern motels

This type of tenure that includes the land, buildings and business assets has shown a lower ROI variance over the years than leasehold. In general terms they have been as low as 12 percent and as high as 17 percent.

Freehold passive investment motels

This tenure which includes only the land and buildings with a lease in place has shown a lower variance again than freehold going concern motel. This for each is probably not surprising as the variances are in line with where the ROI lies. Again, in general terms they have been as low as sub 8 percent and above 10 percent.

Please note the percentages mentioned above do not account for exceptions and such things a waterfront property where the ROI may vary even further due to the higher value of the land or redevelopment potential, etc. The ROI on any individual motel will be different from one to the next, the above is merely a guide, and each must be considered on its own merits.

This issue’s content may be more focused on pricing; however, it is always worth considering those other factors that form a large part of the sale. In summary, high quality presentation achieves a higher sale value. To maximise the sale price of a motel it is imperative that the complex presents as well as it can upon an inspection by an interested buyer. Reinvestment back into an asset is not an expense, it is a measure used to achieve as higher sale value as possible. Items that are often raised as concerns by buyers which deter them from paying the asking price or making an offer at all, include not having split system air conditioners installed, poorly painted surfaces, damaged/dated bench tops, sagging beds, and bathrooms in need of full renovation (showers, tiles, vanities). These items can be expensive and require a large capital outlay, however reinvestment back into the property pays dividends.

The alternative can be a much lower price than expected. Very few buyers want to accept a seller’s generosity of passing on their problems to the next owner.

Minor items also often make all the difference, when small repair and maintenance issues are completed, such as gardens and trees being trimmed back. Buyers will discount the price that they are prepared to pay for a motel if they can see repair and maintenance issues throughout the property. A small cost upfront to fix and tidy up these items (touch up painting, mouldy or loose tile grout or silicon, worn floor coverings, etc.) can make for an increased price the buyer is prepared to pay. Small items add up to big costs in a prudent buyer’s mind.

Cleanliness is important in the day to day running of a motel anyway, but it is also of the utmost importance upon an inspection. Cleanliness goes a long way, whether the motel is 5 years old or 50 years old, a clean and tidy motel inside and out will impress.

To conclude...

The entire sale campaign involves good management of the process particularly in relation to pricing. Focusing on the most important matters such as price that will influence a buying decision. There is no benefit in spending time or money on the business, property or marketing campaign if incorrect pricing is going to sabotage the process by not drawing the interest of genuine potential buyers. A price level that will influence a buyer to ‘take action’, is what a genuine seller is seeking.

 

 


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