Bob Fuehr
The Inn Broker, Inc.
11368 E. Indian Lake Dr.
Vicksburg, MI 49097-9101
Email address: fuehr@innbroker.com
Phone/Fax: 269\649-5556
Phone/Fax: 800\926-INNS (4667)

Web: http://innbroker.com

 

Dear Michigan Innkeeper:

MICHIGAN INN SALES TRENDS- I’m seeing a strong preference among B&B buyers towards the lower-end priced B&Bs that are underperforming. These buyers are avoiding the large mortgages that come with the $1M+ successful inn operations. It’s a combination of avoidance of high debt and a concern that the expensive, successful inn won’t be able to sustain their profitability and could decrease in performance. They are also seizing the opportunity to buy an under-performing inn at a price slightly above its real estate value. Through facility upgrades and increased marketing & management, they can improve the profitability and value of the inn.

The current Michigan inn market lacks marketable, medium-priced inns. Many of the current inns for sale are grossly over-priced or don’t offer any buyer assistance with the downpayment. Most B&B buyer only have between $100K and $150K in a downpayment. Most commercial lenders require a minimum of 30% down. Without some seller financing assistance, these buyers are limited to inns priced under $500K. In most markets, a $500K inn won’t cash-flow. With an additional $150K in seller financing, that same $150K downpayment buyer could purchase up to a $1M inn! It’s unusual to find a medium-to-high priced inn selling without seller financing. The seller financing not only maximizes the inn value to the seller, it’s usually the difference between a sale and no-sale. Sellers should talk to their banker about what will be required of a new buyer for their inn at their price. Bear in mind that the B&B buyer with $200K+ is definitely in a buyer’s market and can leverage that downpayment into a $4M+, very profitable inn. Likewise, buyers would expect an annual rate of return (10% + plus innkeeper wages) on their downpayment similar to the investment market would return without any effort on their part.

I’m looking for more medium-priced listings that will enable a buyer w/$100K-$150K to replace an income with an income. In addition to profitability, the inn needs to be in a popular B&B area. Most inn buyers are very narrow in the area of search for a B&B. They usually restrict themselves to areas they are familiar with.

Innkeeping is still the dream job. It makes a perfect bridge between career and retirement. What other occupation affords you a nicer house than you otherwise could afford, a desirable location and hosting the cream of the crop for travelers? None!!

Don't wait until you have to sell your inn; there's no shortcut to speeding up the process. Winter is a good time to position your inn for sale for upcoming selling season. B&B buyers experience the "winter of discontent" during the bad weather & are ready to spring into a change when the weather warms. By summer, they become distracted with many other activities.

I'll be happy to chat with you about the marketability of your inn. I'm usually in during the P.M.

Assuming ownership during the low season allows plenty of time for new owners to get settled in prior to high season.

WHO KNOWS THAT YOUR INN IS FOR SALE? There are some things going on in the B&B business brokerage field that inn sellers should be aware of. I try to track all MI B&Bs for sale regardless of who has the inn listed. Obviously my listings get featured treatment & the other broker listings receive a classified ad treatment. http://innbroker.com/inns.html

I don't track For Sale By Owner (FSBO) listings; everybody is for sale with that scenario. I've never sold an unlisted inn. Most brokers don't spend too much time on 'open' listings; they usually have a very low rate of return.

There is a trend developing among residential realtors to only split commissions with other agents who exclusively represent the buyer (a Buyer Agent). I don't do buyer agency primarily because I usually have had confidential conversations with many B&B sellers prior to their entry into the mkt. Most inn sellers wouldn't want me to use my 18+ yrs. of B&B selling info & experience to their detriment. If the local agent won't allow me to a be a sub-agent of the seller or a transaction coordinator (represent neither party), I can't track the listing. Make sure that your listing agent does cooperate & share commissions with other brokers (particularly with the guy that has sold more MI inns than anyone else). Sellers should also be aware that some business brokers are not licensed to sell real estate. To verify a real estate license, go to: http://www.dleg.state.mi.us/verify.htm

At the very minimum, your inn for sale should be listed on http://www.bbonline.com/forsale/mi.cfm If your inn for sale or agent is not being promoted outside of the broker's website & MLS, it may be invisible to the market. I use those overpriced/undertermed non-cooperating & FSBO listings as a comparison for buyers to see how much more marketable my listings are. You'd be surprised at how many buyers I've poached from those non-cooperating & FSBO listings. Who's going to show a B&B buyer that what they're buying is a good deal; the B&B seller or a local residential realtor?!

You should check out my web to see if your listing is included in the classified section for your region: http://innbroker.com/inns.html Once an inn is listed w/another broker, I cannot contact that seller directly (although the seller is free to contact me). The typical 2 year inn selling process can be greatly extended if the inn for sale is not being properly priced, termed & marketed.

SAVORING A LIMITED SELLER'S MARKET- The uncertain economy, low profitable, B&Bs for sale inventory and low interest rates have helped create a very favorable B&B sellers market, for the more profitable inns, compared to the 90's. You could say that the sale of owner operated businesses runs counter cyclical to the economy; the worse the economy/employment opportunities, the more buyers need to replace an income. Selling inns is similar to selling sailboats, there's a lot more buyers in the spring! Prior to spring is a good time for innkeepers to plan their future. Since it can take up to two years to find the perfect match, innkeepers need to put their inn on the market in advance of when they need to sell. There are no shortcuts to speeding up the process. It has been, and probably will be, a B&B buyers market for the smaller, supplemental income B&Bs. The combination of unmotivated buyers perusing a large inventory of over listed, unfinancable listings produces a slow pace for transfers. B&Bs selling at up to 25% below listing price usually was a waste of everyone's time. I generally recommend that the sellers of small B&Bs list them as unfurnished real estate at a lower price (plan on an estate sale for the furnishings) and another premium listing value as a turnkey operation with some seller financing. Many B&B buyers focus their search in a narrow range of resort areas and sometimes some very good B&B businesses go without buyers because of location and aesthetic factors. Likewise, B&Bs that are profitable, in popular locations, offer updated décor amenities, and comfortable keeper quarters seem to sell quicker. Assuming that the demand for B&Bs remains strong, the lesser number of B&Bs available should become more valuable through an increase in revenue (increasing business value) and rising real estate values.

REAL ESTATE VALUES HAVE SPIRALED! The demand for desirable real estate has enabled some B&B sellers to sell at record values (some over $100K per guestroom). One innkeeper has even questioned my moniker as "Guide To The Affordable Great Lake State." In the Petoskey area, the majority of the B&B sales have been as homes at prices that were not much less than they were listed at as furnished B&B businesses. I suspect that over the past few years that Michigan has had more B&Bs close and sell as homes than we have had new B&Bs started. On a smaller B&B, the real estate value usually constitutes about 80%+ of its total value. The surging real estate market along with principal residence capital gain exclusion has encouraged many of Michigan B&B owners to shut down & sell as a home. Entry into the B&B market via conversion or new construction has been limited by construction costs, financing, and zoning compared to conditions in the 80's. Many of the new startups tend to have less guestrooms and are in areas where the owners already reside (which isn't necessarily where most B&B buyers are looking)

SUPPORT YOUR INNKEEPING INDUSTRY BOOSTERS: During the past years we have noted the demise of some long term boosters of the innkeeping industry: Bed & Breakfast Journal, Country Inns Magazine, Inn Marketing Newsletter, The American B&B Assn., The Inn Times & The Innsight Magazines Annual Conferences. I believe that part of their demise has been due to the way we now do business over the internet vs. ten years ago. The other factor is that innkeepers have not vigorously supported allied businesses that have been a booster of innkeeping. Having been the Lake To Lake Conference Vendor Coordinator for a number of years, we would typically experience turnover in excess of 50% of our exhibitors each Conf. This was due primarily to the unresponsiveness of innkeepers at a previous Conf. They realized most innkeepers are on a tight budget but they also made comments like "innkeepers wouldn't even make eye contact with them" or otherwise ignored them and treated them simply as a source for donations. Since innkeepers represent such a small percentage of total lodging rooms, it's relatively easy for those B&B boosters to shift their focus to the motel/hotel portion of the lodging industry. I also believe that innkeeper independence and indifference to innkeeping boosters has spread to the only true representative of Michigan innkeepers: The Michigan Lake To Lake B&B Association. Our membership is down and many of the inns who joined simply to be in the Directory are gone. I am confident of the current leadership is moving the organization in a direction that will help restore the group to its former strength. As a small businessperson myself, I can't imagine working in a competitive environment without a network of similarly committed allies. So before you turn over those hard earned dollars to some virtual company, an acquaintance or a distant discounter, ask yourself if you've at least given consideration to the people who have supported our innkeeping industry over the years. Just an observation from L2L Affiliate Member #1.

FINANCING TRENDS: The Prime Rate is falling and is still well below its 20 year average of 8%. It's lower than in the 90's and the competition between lenders has increased. Most commercial lenders are quoting a rate of prime + 1 pt. on a 20 year amortization and a half point closing fee and a five year adjustment in rate. These loans typically can be up to 70% of total appraised value or sale price (whichever is lower). Add on to that $2,000 to $4,000 for a commercial appraisal, most B&B buyers prefer seller financing with a longer amortization (even with a balloon) to avoid the upfront fees. Smaller inns are usually better financing as a local portfolio loan (bank does not sell loan in secondary market). These are typically are up to one point over residential rates on a 25 to 30 amortization. They're are based on the owner's income outside of the B&B and up to 80% of the appraised value or sale value of the unfurnished real estate (whichever is lower). SBA Lenders are at about 1.5 points over prime rate (fixed rate for 5 years). They can lend up to 90% of the value of the unfurnished real estate (with sufficient cash flow) and can work in a situation where the buyer has a small down payment and the seller is carrying a second mortgage for the buyer. They are up to 25 year amortization loans and can be assumed by a qualified subsequent buyer. They usually include up to two points in fees which can be amortized into the loan. Most commercial lenders expect their borrower to have at least 25% more cash flow than debt payment to cushion the lean years. Many B&B buyers anticipate a 20% down payment (and less than that on a larger inn) and a least a 10% cash return to them on that down payment (their mutual funds yield that much without any effort). Most buyers don't place much value on untapped income potential if they have to create it. Before you put your B&B on the market, take your financials to a lender and get an estimate of how the financing will work based on your estimated asking price. Seller financed inns can receive up to 20% more value from their inn because they can offer attractive terms to the buyer. If the seller refuses to help in the financing, the buyer and lender could make the terms work at the expense of the seller's price. In either event, the savvy buyer won't spend much time on overpriced B&B listings that can't be financed. Most buyers focus on terms while most sellers focus on price.

WHY USE A BUSINESS BROKER: Every industry has their gatekeepers and B&Bs are no exception. When you need real estate legal advice, you go to a real estate attorney who specializes in that area. As a business broker, The Inn Broker, Inc. networks, trains and cooperates with other business brokers. Business brokers focus on selling businesses not residential houses. While it may initially appear that it is more expensive to retain a business broker, one needs to evaluate the total cost and benefit of using a specialist who sells businesses. Even if a specialty broker's commission appears higher than a local broker, the specialty broker can render more benefit to the B&B seller as an experienced B&B dealmaker, a timely sale, and a more valuable buyer pool which nets overall more proceeds to the seller. As a B&B broker, I mostly attract B&B buyers who are purchasing a business from which they can earn a living or early out folks who at least want a small B&B that will at least cover its own costs. The local house seller broker is generally most helpful to those B&Bs that are mostly real estate and with very little business value. Many times they can convert a non-innkeeping prospective buyer into a B&B buyer with the same appeal as they might sell a duplex: you can purchase something nicer than you could otherwise afford for some hospitality effort. My co list program doesn't cost the B&B seller any more than they already paying a local broker yet they are doubling their B&Bs exposure with the local broker covering the local area and the Inn Broker, Inc. covering the regional and national markets. A few B&B sellers have been further enticed into marketing their own inn via the internet and national B&B publications. I've had a much greater response to having a great number of inns for sale vs. a single inn ad. If I knew where B&B buyers looked for inns for sale, I'd be there and I'd be rich! I'm not rich but I do rely upon my web and my 12,000+, 20 year compiled mailing list for my buyer base and referrals. My web had over 12,000 hits and 300+ visitors per month this past year; it’s been increasing each year! I also regularly broadcast email over 400+ aspiring innkeepers on my email list. I use advertising to add names to the list for a time in the future when those new folks may be ready to do innkeeping.

Just like selling your own house or car, most savvy buyers discount what they are willing to pay for a FSBO by what a sales commission or wholesale cost would produce in net proceeds to the seller. Many B&B buyers, or their appraisers, contact me seeking reassurance that they are doing the right thing with an unlisted, or locally listed, B&B. Many times they become interested in the variety of B&Bs for sale that they may not have known about. Likewise, I have over 18+ years worth of Michigan B&B sales comps that many appraisers appreciate. Why not put Michigan's biggest innkeeping booster and my 18+ years of Michigan B&B brokerage on your selling team! Please read on to discover how I may be of assistance to you.

CAPITAL GAIN & DEPRECIATION TAXES: With the passage of the last tax bill, we have gained some valuable advantages for the buyers and sellers of inns. The capital gains tax was reduced from 20% to a maximum of 15%. The depreciation recapture rate is still 25%. While the percentage reductions don’t appear large, it could be a substantial tax savings for an innkeeper whose inn in ten years has appreciated over $100,000 and the owner has taken a $100,000 in depreciation deductions.

PRINCIPAL RESIDENCE TAX EXCLUSION CHANGES- Even more dramatic is the replacement of the 55 year old, $125,000 one time principal residence exclusion with a $500,000 lifetime exclusions for couples with no minimum age or number of transactions limit. This should be of particular interest to the owners of small B&B’s. If you’re like most small B&B owners, your annual rate of real estate appreciation greatly exceeds what little benefit you may receive from deducting a large percentage of your expenses related to your building (utilities, repairs, depreciation, etc.). Each situation is different, but it may be worth your while to declare a larger portion of the building as your residence (foregoing some annual deductions) for the benefit of retaining a larger portion of the gain as tax free under the new $500,000 exclusion for your principal residence. I just became aware of a B&B seller who is taking their place off the market and shutting it down so that when it does sell later it will be 100% their principal residence. That’s rather drastic because even a small B&B should be worth at least 20% more than an empty house. I suspect that if the owner had been less aggressive in the percentage of the building that had been deducted for business purposes, this shutdown strategy would not be necessary. This change in the exclusion will also be an incentive to buyers of inns so that the sale of their home could be tax free at any age. As with all tax and legal issues, you should consult with your tax and legal adviser to discover how these changes effect your situation.

BENEFITS OF LISTING: My national advertising, website, as well as referrals, generates daily inquiries from new aspiring innkeepers. Please email, phone or fax my 800# with any seminar or inn buyer prospects so that you may be properly credited. While I help promote other inn listings, my exclusive listings and co listings receive the following select treatment:

WEBSITE & FLYER HIGHLIGHT: On both my web & flyer, each exclusive and co-listing is featured with a description and a photo/sketch. The other listings are merely mentioned in vague terms without a sketch. Obviously, the activity is greatest on the featured inns. My web had over 12,000 hits and 300+ visitors per month this past year; it’s been increasing each year! I also regularly broadcast email over 400+ aspiring innkeepers on my email list. My last flyer was mailed regionally to over 3,500+ aspiring innkeepers of my 12,000+ national list.

DVD TOUR: Since many aspiring innkeepers live a great distance from the inns, I have compiled a DVD tour of each of my listings and their locale. This is complete with narration and letter titling. This will help promote inns in areas that may be unfamiliar to buyers.

MARKETING PACKAGE: Working with the selling innkeepers, we develop a package that profiles the inn with photographs, and historical, marketing and financial information. We also develop some marketing or management alternatives for the potential inn owner who may have different needs and priorities for the B&B.

ADVERTISING: Many aspiring innkeepers aren't certain as to the exact type of B&B they are seeking. Therefore, I market myself as a national clearing-house for Michigan B&Bs. I have used national publications and websites such as the Michigan Education Association Magazine & website, Yellow Brick Road’s website, Michigan Lake to Lake B&B Association Directory and website, Professional Association of Innkeepers International Roster and website, BedandBreakfast.com, Virtual Cities, BBResources, BBOnline, Pam Lanier’s, BnB Register, BusinessBookPress.com, Michigan Business Brokers Association, bbinternet.com, inns.com, & Intl. Real Estate Digest websites. I’m also involved in some pay-per-click advertising with Yahoo & inns.com. Many buyers respond to specialty brokers rather than searching individual listings. As the premier Midwest inn broker, I'm usually contacted by most Michigan B&B buyers (or their appraiser) prior to their purchase. Obviously, there is no one source that potential inn buyers utilize or I'd be rich! I rarely sell an inn directly from paid advertising. I use a generic ad to keep the potential buyer database fresh. Unfortunately, the buying cycle for some buyers can take up to 10 years!

MULTIPLE LISTING SERVICES: All of my listings and co listings are submitted to the Michigan Business Brokers Association statewide multiples system and Website: mbba.org. I have served as Treasurer of the MBBA since 1999. I am also a member of the Grand Rapids Association of Realtors, which is the largest in West Michigan. I am also a member of the Southwest Michigan Realtors Multiple Listing Service. I am a member of SWMRIC which is the S.W. Michigan regional MLS. I use the regional MLS to complete the marketing coverage. The more profitable the inn, the less likely I need a local broker to locate a B&B buyer. The local agents are more helpful with B&Bs that priced near their real estate value without much of a markup for the B&B business.

LOCAL BROKER CO-LIST PROGRAM- I have a colist program with innkeepers and their local brokers. For half of the local brokers listing commission, I will provide the highlighted services mentioned above. The selling broker receives all of the selling commission and each of the listing brokers half of the listing commission. This enables inns to be marketed on the local multi-list, although I can access the local MLS myself, as well as regionally and nationally through my efforts. For the seller, it provides the best of both local and national market coverage for no more cost than their current local listing cost.

CONFIDENTIAL & SINGLE PARTY LISTINGS- Sometimes high profile inns prefer anonymity in their quest for a new owner of their inn. I carry a number of "pocket listings" that are not publicized on my web or MLS. There's a lower probability of success with this method because were totally relying upon my identification of a potential buyer. Most B&B transactions occur as a result of a B&B buyer's response to a listed inn. Although many times they do not buy the inn that piqued their interest, it does get the buyers to reveal their intentions. I also do a "single party agreement" with inn owners if I have identified someone who may be interested in their unlisted inn. That listing agreement is for those identified buyers only. Practically speaking, both of these listing methods are long shots at best. I've never sold any inns with either method. What's worse than someone discovering that your inn is for sale? Not selling!!

JUST AN EMAIL or a PHONE CALL AWAY- If you are curious about the marketability of your B&B, please contact me via email or on my toll-free phone line. I travel the State extensively and would be delighted to have a no- obligation meeting or phone conference with you at your convenience. We can also explore some finance and tax planning issues for you to discuss with your accountant and attorney. Why not utilize my 18+ years of Michigan B&B brokerage experience as a value-added service to the sale of your nest egg! Have a prosperous year and please contact me if I can be of any assistance.

Thanx!

Bob Fuehr