Episode 257: Sometimes the Best Deal is the One You Don’t Do

Big Announcer (00:03):
This is the Self Storage Podcast with the original self storage expert, Scott Meyers.

Joe Downs (00:11):
You know what one of the best business decisions Warren Buffett ever made was passing on investing in the dot com bubble. Late nineties, early two thousands, everyone and their brother was throwing billions of dollars at tech companies. Companies with no revenue, no profits, just a website and a dream, and there is Buffett sitting on the sidelines. People called him outdated, out of touch. They said he did not understand the new economy, that the rules had changed and the Oracle of Omaha just could not see it. And then the bubble burst and suddenly the guy who did not get it was the only one still standing with his capital intact while everyone else was licking their wounds and explaining to their investors how they lost everything. Buffett was ready to deploy capital into actual businesses at fire sale prices. Sometimes the best deals you do are the ones you do not do.

I am Joe Downs, CEO of Belrose Group, and today we are flipping the script. We always talk about the wins, the closings, the ribbon cuttings, the success stories. But today, today we are going to talk about the deals that almost happened and why walking away was the smartest move our students made all year.

With me today is Jack Pezzino. Jack is our VP of acquisitions and lead mentor with Scott Meyers Self Storage Academy. And Jack, welcome to the show and to 2025. It has been interesting for flow so far, has it not?

Jack Pezzino (01:32):
Thanks for having me, Joe. Appreciate you welcoming me back here. But 2025 has certainly been an interesting year to say the least. A lot of ups, but not every up was a deal closing at times. It was those ones that you were referring to where folks ended up walking away.

Joe Downs (01:50):
Yeah, no, I am excited actually to talk about and share some of these stories with folks. So let me tell you what we are going to talk about today.

So today we are going to cover a few situations where our students dodged bullets. And these were not small caliber rounds. These are financial disasters that would have sunk their deals and their capital.

All right, so first we are going to talk about Mike in Bay City, Michigan and the tenant that had a little secret that the seller forgot to mention. Then we are going to talk about a father son team that thought they had a signed deal until they actually read what the seller sent back. And it turns out, well, we will get to that. And then third, we have got a deal in Texas that looked perfect on paper until one of our students ran the numbers on the property tax reassessment. And well, let us just say there was a spoiler alert there.

And then if we have time, we are going to cover a fourth deal. The Paul, Idaho deal where the red flags were not just waving, they were having a full on parade.

All right, Jack, you ready to jump right in here? What happened with Mike in Bay City?

Jack Pezzino (02:59):
So Bay City. Mike was on and off looking for deals and found this one in Bay City, Michigan. It was a hybrid facility. It was both storage and RV and boat. Numbers looked great initially. And then we got the rent roll and we were going through the rent roll together as we were going through the due diligence. And the same name popped up a handful of times where it was interesting.

So I went back with Mike, we highlighted the name, and then we realized this one guy was paying about 25 percent of the facility’s revenue.

Joe Downs (03:36):
Across multiple units.

Jack Pezzino (03:39):
Across multiple units. He had some parking spots, he had some storage units, he was all throughout the facility. And then on top of that, we were looking at it and I had asked Mike to go back and look into the market from the standpoint of, hey, if not only this tenant but any of these other people were to leave, what are the rates that people are paying today for the same size unit?

When Mike did his due diligence, doing the competitor analysis, just trying to rent units at neighboring facilities, he realized this guy was not just renting about 25 percent of the facility and paying about 25 percent of the revenue. If he were to leave, he was paying 30 to 40 percent above market rates too. Hello.

So now if this guy were to end up leaving, we needed to now figure out how to replace all that revenue with rates that would need to be 30 to 40 percent below that rate, which when you get numbers, that is a little hard.

Joe Downs (04:49):
Yeah, let us break that down. So 25 percent of the revenue was 25 to 30 percent or even maybe more above market rent. Yep. Yeah. So I mean, can you imagine the hit that would have in valuation if that guy were to leave?

Jack Pezzino (05:07):
Well, Mike was not too worried about it yet. So him and his partner were going out to Bay City. They wanted to see the market. They had a couple other people on their list to go see. There was another owner they wanted to talk to. They went out there. And again, this is why you say this all the time, and this is just another reason why you do it. But they went out there and they were doing their due diligence at the facility. They wanted to visit the facility, see what was going on, and guess who was there.

Joe Downs (05:35):
The tenant.

Folks, you have got to be careful when you have someone with that much, either that many units or in this case even worse, that much of the revenue of the facility. If you are in your underwriting, if you are planning on raising rates and your model is driven by being able to raise rents by X amount, whatever that is a year, that is one thing when you are doing it to one unit or across, let us say round numbers, one hundred units with one hundred different customers. Yeah, you are going to lose a few, but the increase in rent should make up for it and likely you will replace them.

If you increase one tenant, you think you are increasing all the units, but really you are increasing one person by a significant amount. When it is that concentrated, you are going to run into some issues. We have actually experienced this in the past, so that was what I wanted to drop in there. You need to be mindful of this regardless of what the outcome of this tenant staying or going is. That is a real issue that you need to understand and manage. So go ahead, Jack. What happened?

Jack Pezzino (07:02):
Yeah, so had no plan on meeting this guy and he was at the facility. He saw a guy moving out and he was just like, hey, I am looking at buying this facility. I have it under contract. And he was like, oh, I am actually moving out of all my units.

Mike now is like, wait, what do you mean all? You are going to? He was like, oh, I am over here. I have this one, I have that one. I talked to the owner a month ago. He knew this.

Mike now, what do you mean a month ago you told him? He never told me this, you are leaving. And he was like, yeah, the rates just became too much. I found other avenues out there where I was able to get a lower rate. And case in point, I am speaking, I am moving out, taking all my stuff and moving it elsewhere.

Joe Downs (07:52):
Did not even know that was part of the story.

Jack Pezzino (07:54):
So Mike at this point was really devastated because it was, Jack, the owner lied to me. He knew, he did not tell me. Well, I reassured Mike. I was like, hey listen, this is why we have a due diligence period. So we do not know anything yet. Let us rework the numbers and see what we can possibly do here.

Mike reworked the numbers again. He did that market study where he did try to update the numbers with this tenant no longer being here. However, unfortunately, the story does not have a happy ending in the standpoint of Mike did not close on Bay City, Michigan. But he was able to get out of his due diligence. He was able to get back his earnest money deposit. And the common theme today is he thought he was buying an asset, but he was going to be buying a liability if that would have ended up closing.

Joe Downs (08:57):
Yeah. So Jack, I think you missed the whole point of the episode. I think the story does have a happy ending because he dodged a significant financial, but that was not even a bullet. That thing was a grenade waiting.

Did he go off and look, folks, in traditional commercial real estate, this is why you do seller interviews with tenants with leases, because you are trying to figure out, if you are the buyer, you get the tenant estoppels and you try to figure out, well, are they staying? How long are they staying? Are they likely to renew? What does my exposure look like two years, three years, four years out with these leases?

Well, we do not have that in storage. We are month to month. And that is the beauty of it, by the way. But when you start to see a concentration like this particular tenant in a facility, you actually have to start to look at that more.

(09:50):
Like even though it is a short term lease, it is a longer term issue if you lose that one tenant and those many units, and in this case 25 percent of the revenue of the facility compounded by the fact that this guy was paying more above market rate. So there are a number of things going on in this deal right here to learn from this. This is a great one to start with. So thanks for that.

All right, let us switch gears to the father and son team, Jack, who thought they had a contract signed, I think, right? Tell us what happened here.

Jack Pezzino (10:30):
So father son team, they were working on a deal in the Sunbelt and it was a tough negotiation where there was a lot of back and forth with the seller. I do not believe the seller was using an attorney pretty much the entire time. And they actually came up on this deal quite a bit. Originally, I think they came up about 15 to 20 percent on their number, which was huge.

But they went through the process. They talked to the third party managers. They had projections in place. They felt really good about the deal. They had a whole plan going forward from what they were going to do for boots on the ground, how they were going to do the advertising, who the third party manager was going to be.

And they were kind of working through all of this throughout the purchase sale agreement and they got it down literally to the last one or two deal points.

(11:25):
And then it went a little quiet where it was like, hey, we are working on it, we are working on it, we are going to get it back to you by Wednesday, Thursday, we will get it to you Friday.

And then Saturday comes along and they finally got an email from the broker basically just saying like, hey, we got a signed PSA. Everyone is excited. We are going to get started on due diligence. We are going to get everything moving here.

And then they opened up the purchase sale agreement and they were like, wait, what is this? And they sent it to their attorney, because they were not attorneys. So they sent it to their attorney. And their attorney came back to them and was basically, it just said like, hey, we had a 22 page contract, give or take. It is now 12 pages. Everything is redlined out of there. And now it is signed, but here you go.

Joe Downs (12:19):
It is easier to read through now. It is only 10 pages, 12 pages.

Jack Pezzino (12:23):
A couple things were missing. The two final deal points were deleted on top of a bunch of other things that were in the contract. Where all of a sudden the guy who did not have an attorney, it seemed like all of a sudden he found an attorney. But he basically took the two weeks that they were going back and forth with the entire deal and erased everything and started from scratch.

Joe Downs (12:45):
And if I recall talking about this, everything that they had negotiated in good faith, not just through the LOI, but in conversations that made it into the contract that they sent to the seller, was just stripped out, right?

Jack Pezzino (13:00):
All gone. Every last piece of it.

Joe Downs (13:03):
With no cover letter. No, hey look guys, I know we talked about this but it really does not work that way, or this does not work for me, so here is my counter. Take a look, see if you could live with this.

And folks, I am saying this because this is a two way process. It is not black and white. There is a ton of gray area in the negotiation of these deals. And when you come to a verbal agreement and then you spend money to have your attorney put that in the contract and then that comes back completely stripped out with no follow up conversation, just yeah, I signed it, go ahead and sign it, it speaks to the character of the seller.

Not just the character, but even the manner in which they go about doing business. Some people will call that character. I do not know. There is ignorance and arrogance, I guess.

(13:58):
And this was an unhealthy combination of the two. But I think what the father and son team realized was, hey, if this is how this guy is going to do business, the saying, I say this to my kids all the time, how you do anything is how you do everything.

And if this is how the process is going to begin with a complete bait and switch, what do you think the due diligence period is going to look like where you are negotiating even more things and you have not even physically gone through the property with your inspector yet?

Jack Pezzino (14:34):
Or something came up in the survey.

Joe Downs (14:35):
Exactly. Yeah.

It reminded me of the deal we had in Pennsylvania where they wanted the subterranean rights, they wanted the billboard rights they would not give us, or they were really difficult about the noncompete. I think I talked about this recently on another podcast.

And remember it got to the point where you were like, what do you want to do? And I said, I do not think I want to do business with these people. Every time we turn around they want more. They say one thing and then they demand more. And it is a nonnegotiating point for them. And that was just to get under contract.

Jack Pezzino (15:13):
And we were

Joe Downs (15:14):
Working

Jack Pezzino (15:14):
That one too because this was a four property portfolio and there was a gas station that was on the top of the hill.

Joe Downs (15:22):
There was going to be a lot to negotiate.

Jack Pezzino (15:25):
There. It looked like there was going to be an environmental issue where if we had to negotiate out.

Joe Downs (15:30):
We do not need to get into this deal. The point is there was going to be more negotiating. And they were not negotiating in good faith out of the gates.

(15:41):
So how would the real negotiation go once you are under contract? Because folks, you do not have to close on it. We could have gotten out in our due diligence period, but what we would have done and what this father son team would have done is spend money on attorneys, more money on the attorney, already spent some on inspections and surveys. You would have gone down the path of spending a lot of money only to realize you are dealing with someone who is a bad actor or has bad character or bad business practices.

And you are probably going to end up walking away or put yourself in this kind of mental psychosis of, I have gone this far, I might as well just accept more and more and more, where you cannot even see the forest from the trees anymore. The stage of the deal you are in. And as soon as you see these signs, it is just important to back away and walk away. And it feels like a loss, but trust me, it is a win.

All right, let us move to the tax reassessment bomb in Texas because this one almost cost someone their entire deal. So what happened here, Jack?

Jack Pezzino (16:50):
So this deal was in Texas. Beautiful facility. Oh my gosh. They had the oversized storage units. They had the traditional storage units. I mean, the owner had not raised rent in, I want to say, at least two to three years. Paved, lights, cameras. I mean, the guy took care of it. It was built yesterday. It was probably like five, ten, fifteen years old. I forget exactly how old the facility was. It was beautiful.

Revenue probably had this facility worth roughly around 1.25, 1.3. But it was listed originally for 1.75 or 1.8. And they got it down to 1.5 million where everything was looking great.

So the property was about to go under contract. I got pulled in at this point and we are going through everything. And the one thing that I realized was like, hey, taxes were about ten thousand dollars a year. And year one it was still going to be ten thousand dollars a year.

(17:55):
I was like, sweet, that is awesome. Will we validate this with the county? Like, oh, you know what, we were told from the person we were working with, nothing should change.

Okay, great. It would be an easy call. You should probably make it. Let us just dot our I’s and cross our T’s and let us see what happens.

So they make the call the next day. I get a frantic call. Like, Jack, I called the county and they cannot be right. They are not right.

It is like, okay, well what happened?

Taxes are going to go from ten thousand to twenty seven thousand dollars a year. Ruh roh.

So all of a sudden now your tax basis was going up about seventeen thousand dollars because they reassess at sale and they are right on top of it.

Once they tried to rework things with cost segregation and allocations and however else they were doing it, it was no. We look at the greater of the assessed price or the purchase price, whichever is greater.

So now all of a sudden this deal that they were able to stretch, because again it was worth probably about 1.25, 1.3, they were going to pay a premium for it because

Joe Downs (19:15):
What was the cap rate on this deal? Do you remember?

Jack Pezzino (19:18):
I want to say it was right around a six.

Joe Downs (19:25):
Okay, I just want to do a quick calculation while you are telling your story.

Jack Pezzino (19:30):
So then all of a sudden when this and the debt service on the deal for the first year went from basically averaging out to being 1.07 ish, they would have been able to go through the SBA because they were not going to hit that 1.15 threshold by the end of the year.

However, with this reassessment, they were barely going to hit the one to one ratio. I think their average first year was going to be somewhere around a 0.95.

And that was with over a ten percent increase, which I do not typically like going over ten percent, but in this scenario it looked like they maybe could have. But

Joe Downs (20:07):
This is assuming the lender would have financed the deal.

Jack Pezzino (20:10):
Correct.

Joe Downs (20:12):
Because it just dropped in value by two hundred eighty three grand at a six cap. That is nuts. And what was the purchase price?

Jack Pezzino (20:20):
The purchase price they were looking to do where the owner was ready to go was 1.5 million.

Joe Downs (20:26):
Yeah, that is huge. Huge amount.

So for someone listening, what is the key takeaway here? I mean, obviously our student did the right thing.

Jack Pezzino (20:39):
Yeah. So the big thing, and I say this to all of our students a lot of the times, is trust but verify.

And sometimes you call some of these counties and some of the people that are on the other end, they are busy. They do not want to talk about a commercial asset that you are possibly buying to talk to you about taxes. But if it does not work at noon, try again at three. If it does not work at three, try again tomorrow.

It is one of the most important steps that you kind of go through in the real estate process.

And do not always bank on cost segregation, because what ended up happening is a lot of these counties have adjusted to that now as well within their tax codes.

And unfortunately here, no two states and no two counties are really the same. You have got to really understand what those counties and states are going to do within the taxes.

So one of the best things for you to do in due diligence is to call the county and have that conversation as to what is going to happen to your taxes.

Because here again, Joe just said it is two hundred eighty three thousand dollars. That would change the value.

Joe Downs (21:48):
In value. And then obviously the debt service coverage ratio was not going to work either at that point.

But yeah, I mean, I just covered this in the Storage 100 series. People get, as we should, super excited and into the numbers and the pro forma and this.

A lot of people skip the very, very, very boring steps of confirming taxes and what my new insurance is going to be.

We just take the seller’s old numbers, we plug them in, and we worry about the unit mix and raising rates and what the competition is doing. And all of that is very, very important.

But I would argue even more important is understanding what my taxes and insurance are going to be when I become the new owner.

Because they are the hidden costs. You cannot market your way out of them. There is nothing you can do. You have no control over it.

You can try to appeal and you can shop insurance, but it is a fixed cost.

Just get it right and avoid the bad deals. Avoid deal killers like this.

All right, we have time, Jack, for the fourth. Let us do it. We have got the Paul, Idaho deal. Tell us what were the red flags here? Why do we have a red flag parade?

Jack Pezzino (23:09):
This one was interesting from the start because they used a state issued purchase sale agreement on it. You could probably do a whole other podcast on this.

But they had a certain amount of time for the due diligence. They had everything else in there. But then the closing date said something different than what was in the due diligence. And it was confusing to see which trumped what.

And then as we kind of went through it, that was the first red flag. But then it just kept going.

This deal fell out of contract twice. This was the third time. Now this deal was under contract with these students. There were different people not in our program for the first two times. But this was the third time that the same deal was being sold.

And the big hurdle here was the seller did not want to share his tax returns.

(24:02):
Now, little lesson for you guys out there shopping for deals is if you want to go through the bank, one of the number one things that is required for you to have the bank evaluate the deal is going to be the tax returns.

So if someone is telling you they are not going to give you tax returns and you are trying to get bank debt, it is going to be a little difficult unless you are looking to buy the deal outright in cash.

And if you were doing that, I would still encourage you to look at the tax returns to make sure that the revenue they are reporting is actually what they are reporting to the state as well.

And then from there it kept going.

Joe Downs (24:37):
Give me the highlights. What were the lowlights?

Jack Pezzino (24:42):
Yeah. So there were three tenants here that equated to about 35 percent of the revenue of the facility.

Joe Downs (24:50):
Another concentration issue. Not necessarily a deal killer, but we have got to understand it.

Jack Pezzino (24:55):
Two of them were late consistently.

Joe Downs (24:57):
Now it is a deal killer.

Jack Pezzino (24:59):
You did not know. Again, you were able to figure something out. But going back to your point from that first example, the plan in this deal was to raise everybody at once.

So if you raised tenants at the same time, it did not seem like a lot at ten percent, but it was over a couple grand.

Joe Downs (25:21):
Well, on top of that, two of them are already late. So they cannot pay the rent on the books and now you are planning on raising them. That is a recipe for disaster.

Jack Pezzino (25:28):
Are you going to collect their late fees or are you not going to collect their late fees? What are you going to do?

Joe Downs (25:32):
And then anything else going on here? This deal is a peach from what I recall.

Jack Pezzino (25:38):
Well then this is one that, again, you could go into probably on another episode.

But we dug deeper into the unit mix here. All the larger size units like the ten by twenties, the ten by thirties, the ten by forties were all full. It was great.

However, more than 50 percent of the facility was ten by tens and ten by fifteens, and those were 20 percent occupied.

And they had just expanded too. They brought all these additional units online and the demand was not coming. Nobody wanted the ten by tens and the ten by fifteens in this market.

Joe Downs (26:20):
So in one deal you have got a concentration in tenants, you have got two of them late, you have got a bad unit mix, and a shady seller. That is a winner.

Jack Pezzino (26:31):
It is a fun one.

Joe Downs (26:32):
But folks, this is what we are going to run into out there.

I was having this conversation the other night on our open office hours call. People are frustrated. I found this deal and it fell apart. I found that deal and it fell apart.

And I said, look, the important thing is you are having conversations with sellers. This is just part of going through it.

We have got to sift through, weed through, find the serious seller with the real value add where we can make a difference and where there are not hidden landmines and time bombs just waiting to go off.

So due diligence is not an option. It is survival in this business.

So Mike avoided buying a property that would have been underwater day one because the tenant was moving out.

The father and son team avoided doing a deal with someone that was probably going to end up not happening anyway. What they really avoided was spending another ten or fifteen grand and losing it.

The Texas student avoided buying a deal the bank would not have financed.

And the Idaho story, man, it has got everything all in one.

But again, folks, these are not failure stories. These are success stories in my eyes. Because success is protecting yourself from a bad investment. Success is living to fight another day. Success is having your capital intact when the right deal comes along.

And here is the thing. None of these first time buyers were doing this alone. They had accountability partners. They had mentors. They had a community of people who had seen these situations before and could ask the right questions.

And that is why belonging to a mastermind community matters. So you get a set of fresh eyes, experienced perspectives, and people who will tell you the truth even when it is sometimes not what you want to hear.

(28:10):
So if you are listening, you are serious about self storage investing and want to know what kind of support systems are out there, check out our mastermind at thestoragemastermind.com.

And if you are still learning the game or you are looking to get into it, go over to YouTube and look for my name, Joe Downs, and the channel, the Storage Moguls Mastermind.

You are going to find the Storage 100 series. As of this recording, I am up over 60 straight days of self storage videos covering all these topics.

From acquisitions, operations, to financing, it is all free. It is all there for you.

Remember folks, sometimes the best deals are the ones you do not do. Stay disciplined. Do your homework. Do not be afraid to walk away.

Thanks for listening. See you next week.

Big Announcer (29:03):
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