It is always encouraging at the upturn of the market to see how many Guesthouse owners would like to sell their properties and how many requests we get for valuations. We have put together a short list of suggestions we would encourage Guesthouse owners to consider before putting their properties on the market, and we believe, this will assist owners with the process and provide more ease and set realistic expectations in terms of the time it takes to sell and what behavior to expect from the current buyers in the market.
It is all about being prepared and well informed.
Let’s talk business
When you are selling a Guesthouse you are selling two things; a property and a business. Although there is a value attached to the physical building i.e. the property, the business also carries a value and often the property and business in terms of Guesthouses are inseparable. You will be able to get a much higher price for your Guesthouse overall if you have a good, solid business and if you can show good profits. Typically, the market requires a 10% return on investment but it can be less or even more depending on the location of the Guesthouse and the type of buyer.
Lifestyle buyers usually require a lower return but they are looking for a property carrying a lovely residential feel where they can comfortably settle while living from the proceeds of the business. Investment buyers require a higher return and are more interested in medium to long-term gains in terms of profits and capital returns.
Getting your business in order and making sure you can back suggested returns up with management accounts and financial statements will be one of the best ways to prepare yourself for a sale.
Without having a legal business, Guesthouse owners find it very difficult to sell. You have to make sure that your current Land Use Rights or Zoning allows for a Guesthouse and the amount of rooms you are currently operating. If necessary, departures or consent usage rights needs to be applied for at your relevant Municipal Council. If you sell Liquor on the premises, we would advise getting a Liquor License and any other License pertaining to the business you run.
Time, value and money
The location of your Guesthouse and the profitability of the business will determine the time it takes to sell it. This is of course not an absolute statement but is informed and supported by the market we work with. We find that the current market is looking for a Guesthouse in a 200km radius from Cape Town with at least an 8% return on investment. The more co-operation we get from the owner in terms of sharing up-to-date management accounts and financials and the more readily the owner is available to assist with viewings and assisting us with questions, the easier the Guesthouse sells.
Current buyers are also looking for value for money so they are unlikely to pay asking price or close to asking price without doing their research. We find that owners who want to put their Guesthouses on the market at a certain price point to “test the market” motivated purely by their subjective view of the market and a replacement value calculation, are often disappointed.
Essentially, the sellers of Guesthouses are looking for cash buyers because the banks are reluctant to give finance for more than 20-30% and as a best-case scenario, 50% of the transaction price. This factor also shrinks the market significantly. Traditionally the banks were more lenient towards loans for Guesthouses i.e. Commercial Loans but because businesses are bought as a going concern and they cannot possibly assess the future potential of the Guesthouse earnings based on the capabilities of the potential buyer they run the risk of borrowing money that they never get back. We have seen the closure of many Guesthouses because they simply could not repay the bond.
The decision of owners to put their Guesthouses on the market is encouraged by life changing circumstances and seasons of life that necessitates movement, often geographically. We are here to assist with valuations and welcome all owners currently thinking of selling to contact us with regards to a valuation or a discussion about current market conditions pertaining to the location of their Guesthouse.