So many Hotels for sale,… how come so few are sold?

It is curious how day-to-day, experiences in the real world and, above all, persistent and intense dedication to a job or professional task, help you in an unparalleled manner to any other theoretical knowledge collection, to develop a work or professional task. They even allow you to adapt, improve, refine and enrich the way you practice such activity.

More than four and a half years have gone by since I started to provide hotel brokerage services, basically focusing on hotel sale operations, a period that coincides with the last economic crisis we have experienced so far. Along this time, different situations have taken place, and based on the perspective that experience gives us, we can draw some conclusions.

In my opinion, hotel investors somehow participate in that widespread trend of searching for two-digits yield investments, so they may be missing some good opportunities, confirming the saying “the best is the enemy of the good” and perhaps coming in certain cases to emulate what happens to the characters of Samuel Beckett’s “Waiting for Godot”, while available investment funds are getting some really tiny returns, well below what it would have obtained if it had been invested in the opportunity.

On the other hand, at any time of the economic cycle, there is always the speculative and short-term investor, acting in pure logic and consistency with his objective, who is dedicated to locate possible edgy debt-situations, and adjust bids down to offer “demolition prices” that occasionally may even be accepted by the vendors, confirming the popular saying that teaches us that the price of any good is formed and depends on the combination of the buyer’s interest and the seller’s need.

Frequently enough we may find a situation in which the hotel owner calculates a starting price of same based on square meter residential price (as in a dwelling) and the hotel investor only calculates the expected return on investment (ROI), to be obtained from the exploitation (considering only the business), which can lead us to a scenario in which the offered amount barely reaches half of the requested amount.

As time has been passing, it seems that positions are getting closer, owners lower their expectations and hotel investors take into account that it does not make much sense only valuing the business, because property and business are so inseparable as complementary, therefore, calculating an operating result (GOP) multiple they are ready to offer, including both realities, may reach an amount close to the exit price requested by the owner. In addition, entry price often coincides with a “back-of-a-napkin calculation”, an amount per room, either a flat-rate amount or a range of prices.

So far, we have not considered a relevant ingredient at the current juncture, regarding the indebtedness that support hotels proprietary companies, being originated by the required financing for the construction and equipment of the hotel, or as a result of the funding requirements of other shareholders, subsidiaries, sister, associated or related companies,  which have led them to request loans or mortgage loans at the peak of economic expansion times, with grace periods that are already expiring, some of them being currently expanded but they cannot be extended indefinitely.

As in any other field, once an owner has taken the decision of selling the hotel, the most advisable move is to place the operation in the hands of a hotel brokerage professional, preferably with experience in the tourism and leisure industry. Then we have different approaches, which in a practical way can be reduced to two: the signed commissioned, mandate or sale authorization and the oral order, also condensed in the expression: “bring me someone who offers what I am asking, and I will sell it to him, letting you keep any overprice you may get”.

Following the second approach, which is extremely diffuse and indeterminate, we find that a hotel is being put on sale in the market in a way that completely eludes any control and monitoring from the owner’s side, usually produces a viral effect derived from the oral transmission of the opportunity, as a result of which a large number of intermediaries is going to say that it is entrusted for the sale of the hotel, each one of them is going to set a different asking price depending on what they find more appropriate, so the hotel is going out massively into the circuit, in a very short time period becomes an asset that appears in lists and web pages of all real estate companies, until in many cases is offered as an opportunity to the owner who started the whole process.

On the other hand, if the owner uses the figure of the signed commissioning, mandate or sale authorization with fee recognition, he will be always aware of who is looking for a buyer or an investor for his hotel, maintains the confidentiality of the sale transaction, can decide the information he provides regarding his property and, especially, who will get it,  transmits a greater seriousness and formality to the potential buyer or investor by keeping a lower level of exposure to the market since the knowledge of the opportunity is restricted and chosen, as well as the indisputable fact that having a single asking price and established by the owner is a guarantee of solidity and security for the investment proposal.

In conclusion, it has powerfully come to my attention the large number of hotels that any professional within the tourism and leisure sector can assure you that are for sale, a significant part of them without a formal mandate, many of them in the market for several years, and the few operations that are really closed. Does it have something to do with the reluctance to hire the services of a company devoted to hotel brokerage?

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