How to Make Your Hotel Sale Easier

(6-minute read)

Author: James Cornell

This article aims to provide tips to make your hotel sales process smoother with fewer troublesome issues.

Sell or Not Sell

When the economy is growing, there is an abundance of buyers seeking to purchase hotel properties. During market corrections, buyers are scarce, and the prices they offer are usually lower. By contrast, buyers will compete with one another in a rising market, driving up property prices. The best time to sell is when the economy is growing and occupancy rates are rising.

Generally, the Economy Will Grow Slowly and then Decline Quickly

Knowing that the economy generally increases gradually and declines quickly can help you stay patient and less worried about timing the market.

We understand that after a strong economic upturn, the economy’s inherent cycle eventually results in a market downturn. Once the economy has expanded, a cooling-off period happens as it adjusts to reach market equilibrium. This pattern always happens. It is part of the nature of the economy.

Old Saying: “Whatever goes up must come down.” This proverb applies to the economy and the stock market.

Old Saying: “The stairs going up are slower than the elevator going down.”

Occupancies are Rising. Why Sell Now?

Should you sell when occupancies are rising? You will need to decide when to sell. However, hanging in there for too long could be a losing strategy. The economy will rise and fall in a never-ending cycle. When the economy falls, it usually catches most investors by surprise. Who can predict the market economy? Most economists are frequently wrong about swings in the market economy. Even professional stockbrokers cannot predict the market, as they are often mistaken about which way it will move. 

As we know, economic downturns can negatively impact the price you get from a sale. During a market downturn, finding serious buyers becomes difficult. The low-ball buyers emerge as they look for hotels at bargain prices.

In a difficult economy, hotels usually remain on the market longer and sell at lower valuations.

Hotel Prices are Higher During a Rising Market 

Below is an example of a simple math calculation. During a growing economy, what if your net income increases by $100,000?  How much more money could potentially be gained from a property sale?

Example sale price realized at 0.10 Cap Rate (10% capitalization rate)

When selling at a 10% capitalization rate (Cap Rate), each additional $100 increases the potential selling price by $1,000. A net income that has increased by $100,000 in a rising market will generate an additional $1,000,000 from the sale of a hotel property.

Equation: Hotel Price = Net Operating Income / Cap Rate

$100,000 / 0.10 (cap rate) = $1,000,000. An additional one million more sales dollars realized from a sale.

It’s good to realize an extra million from a sale. However, in a market that is heading south, the cap rate can increase, which leads to fewer dollars realized from a sale.

Example sale price realized at 0.12 Cap Rate (12% cap rate)

$100,000 / 0.12 (cap rate) = $833,334

Over $800,000 in sales is generated. Clearly, a sale at a 0.10 cap rate is better. Should you sell now or wait?

Prices Descend When the Economy Declines

As we all know, during a recession, occupancies decline, resulting in lower realized net income. When net income drops, hotel selling prices will fall. Good buyers will exit the market. Decreased competition between buyers generally results in property prices not staying high for long.

Hotel Buyer Demand Is Returning

Currently, the hotel acquisitions market is showing signs of emergence. Major hotel deals are happening nearly every day. Buyers are excited about acquisitions and actively looking for hotel properties. If you’ve been thinking about selling, now might be the right time.

TIP: There is an old saying: “Strike while the iron is hot,” which means to take action promptly when the opportunity arises. 

Preparations for the Sale 

Proper preparation can boost your confidence and reassure you that your hotel sale will proceed with fewer issues.

Selling your hotel can be daunting, but Cornell is ready to help simplify the sales process. Our goal is to substantially reduce frustration. We do not offer confusing listing contracts. Our listing agreement eliminates confusing legalese to keep things simple. With that said, there are some things the hotel owner will need to consider. 

Here are some tips to help you get ready for a sale.

Financial Statements

To help us accurately appraise your hotel, providing your financial statements will ensure you understand your property’s value and support the sale process. To enable us to appraise your hotel, we will need to review some financial statements. Your accountant or controller can provide Profit & Loss Statements for the last 3 to 5 years. Balance Sheets will also be very helpful.

Property-specific characteristics, the macroeconomy, discount rates, and local-market criteria will factor into the hotel price valuation. Understanding these factors can help owners feel more in control and prepared for the sale.

TIP:  Hotels without financial statements are difficult to sell. We can’t help you without examining the hotel’s financial statements. To protect your sensitive information, we can provide you with a ‘Confidentiality & Non-Disclosure Agreement’.

1031 Tax Free Exchange

Understanding the complexities of 1031 Tax Free Exchange issues can be overwhelming, so consulting with a professional will help you feel supported and confident in your tax planning decisions.

Property Cosmetic Repairs

Make any necessary cosmetic repairs or renovations. Now is the ideal time to address cosmetic issues. Potential buyers are drawn to a property that looks clean and updated. Upgrading a property can increase its value.

Due Diligence & Vendor Contracts

Review contracts and present them to the broker. The due diligence period will be a time when the buyer’s attorneys will want to review existing contracts.

    • Billboard and advertising contracts
    • Vendor contracts
    • Franchise Agreements
    • Management agreements
    • Maintenance contracts
    • Food and beverage contracts
    • Occupancy Permits
    • Food & Beverage Permits
    • Any other service or equipment Agreements
    • Gathering all these contracts is very important, as the buyer will need them during the “Due Diligence Period.”

TIP: It is very important that you present ALL contracts to Cornell and to your attorney. This will help identify any serious issues.

Code & Local Permits

Make sure the hotel is up to code. We do not want to delay the transaction closing because the necessary permits are not up to date.

Contact Cornell for Your Hotel Consultation

Reach out to Cornell Hotel Brokers today for a professional hotel price valuation and expert guidance through the selling process.

Contact us for a Market Analysis and Price Valuation Consultation

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