Before The Hammer: Hits Preparing For Lien Sales And Auctions

Reality television shows such as “Storage Wars” have popularized self-storage auctions. To the average consumer, they’re full of drama, colorful characters, and fun.

However, those in the self-storage industry know preparing for auctions isn’t fun, and the only drama that typically happens is when a tenant shows back up at the 11^th hour to claim their property. In the worst cases, drama can also occur when the letter of the lien laws wasn’t properly being followed.

According to Neighbor.com, there are approximately 80,000 storage auctions held in the U.S. each year. “There will always be those people who won’t pay,” says Cheli Rosa, marketing and communications manager for OpenTech Alliance, Inc., in Phoenix, Ariz. “When thinking about auctions, the most important thing is the preliminary work.”

“Lien Sale” Vs. “Auction”

Some people use the term “lien sale” and “auction” interchangeably, which is mostly true. “Lien sale is really just industry jargon,” says Rosa. “The public and most of the people within the industry refer to it as auction.”

Scott Zucker, partner with Atlanta, Ga.-based Weissmann Zucker Euster Morochnik & Garber P.C., and an attorney experienced in the self-storage industry, explains that legally the term refers to “having a lien or property foreclosed, and the property is sold.”

“When people use the term ‘lien,’ it comes from the contract with the customer,” adds Zucker. “They grant the lien when they sign the rental agreement, and that is only triggered when they don’t pay, and the only way for the operator to get paid is to sell the property.”

Storage auctions have existed long before reality television, but many people don’t know self-storage auctions are different from other real estate liens. “In the big picture, it’s been a process entitlement provided uniquely to the self-storage industry for remedy of non-payment,” Zucker says. “Owners can seek self-help remedy without the court process.”

Self-storage is unique in the real estate sector in that all other forms of real estate rentals, such as apartment, house, and condo rentals must remedy through the judgement court process. Self-storage operators must follow the process only to notify the customer of their delinquency and then the items can be placed for sale.

Industry experts explain the national Self Storage Association (SSA) has worked hard to get this process put into place, so collecting back rent isn’t so expensive and cumbersome for operators.

According to Zucker, the privilege the industry enjoys not to need to remedy through the courts is one of the many reasons operators should be following all of the state statutes when it comes to auctions.

Preparing For The Auction
As Zucker points out, an owner/operator really starts preparing for the possibility of an auction with the lease agreement, which must outline that the property is in a lien holder situation that is activated through non-payment.

After the lease, the next most important step is customer service and following up on delinquencies. Obviously, it’s better to try to avoid situations that bring the operator to auction, if possible. “It’s really important to provide good customer service and follow up closely with delinquent tenants and give them a sense of urgency to pay,” Rosa says.

The maximum amount of worth the tenant can store should also be lined out in the lease. “Most states only allow for a maximum of $5,000 in goods,” says Tony Johnson, director of sales and operations for SelfStorageAuctions.com, which is located in Phoenix. “Smart facilities will outline this in their lease.”

Once a tenant falls behind and you, as the operator, start looking at the auction process, it’s then important to know the lien/auction laws in the state in which the facility is located. If you have multiple facilities in different states, one law does not apply to another. “Because we do auctions in all 50 states, we had to study the laws in each, and there are probably 49 different routes for each state,” says Lonnie Bickford, CEO of StorageAuctions.com and Appletree Storage, based in Baton Rouge, La. “All have their own particular notification process and timelines that have to be followed.”

The price of not knowing the laws in your state and making even a small error can cost you more than you realize. “Statutes need to be followed strictly,” says Zucker. “There is potential significant liability when operators don’t follow the law if there is a clear-cut violation.”

While each state law can be different and sometimes cumbersome to navigate, Zucker adds there are so many resources now to get that information, including the Self Storage Association, as well as state self-storage associations, that there’s no excuse to not follow the laws and put yourself in that liability.

Critical Decisions

Many industry experts agree the last thing a self-storage owner/operator should want to do is go through the auction process. Zucker says it’s critically important for a self-storage operator to enforce its rights and try to recover what its owed, but one also assumes a liability if they go to auction.

“Property sold at auction doesn’t typically recover what’s owed, so it is important for operators to look if there is better recourse by settling the debt,” says Zucker. “If you sell the property, you are assuming a contingent liability and always run the risk of being sued. There is the cost of your defense, even if you did everything right.”

Moreover, if you have a policy of attempting a settlement with the tenant, it’s important to have settlement forms ready. “Yes, you have the legal right not to accept any settlement,” says Zucker. “But if you do, you’re eliminating that contingent liability. Your settlement form should say you are agreeing to the settlement amount and the tenant agrees to move out immediately. If the tenant doesn’t move out, then you have the right to continue with your collection process.”

If you simply cannot find the tenant or the tenant cannot come up with a reasonable settlement, Zucker advises to first ensure that your tenant has not informed you of a bankruptcy or they are active-duty military, as this requires court action. “If you are notified of either of these scenarios, you have no right to sell,” he says.

If your state has stay-at-home orders in place due to the pandemic, it’s best to consult an attorney before doing any auctions. “There was a question of whether stay-at-home orders may have prevented tenants from paying,” says Zucker. “Be aware the tenant may argue against the right to sell.”

The Process

As auction experts point out, there are literally different rules for different state. If you’re going to go it alone, without the assistance of your attorney or a reputable auction company that knows the laws for your state (either an auction company that operates live self-storage auctions in your state or an online company), it cannot be emphasized enough to know the laws. “It’s better to take the time to look at the laws rather than put up an auction, not do it right, and be tied up in court,” says Johnson.

Generally, states require one to three letters be sent to the tenant, which is followed by a prescribed cure period, some sort of public notice process, and that is finally followed by the sale.

Johnson points out that some states allow operators to start the process at 31 days in delinquency, while others require 40 to 61 days of total notification and advertisement before the sale can occur.

Many self-storage facilities and companies have a check list of things to do to prepare for auction, which includes trying to reach the tenant by phone and email prior to starting the official letter process.

Johnson outlines the letter process below:

1^st letter: This letter is to notify the customer of the amount due. If you don’t hear from the customer within the allotted time frame, you can proceed to the second letter.

2^nd letter: “This is the most important letter,” says Johnson. “This is the intent to sell letter; you must put the date and time the tenant must pay by to avoid the action.” This letter must be sent by certified or registered mail, depending on the state.

“The national Self Storage Association has also done a good job of getting the laws changed in some states, so we don’t have to do certified mail,” says Bickford. “We can now do verified mail in some states.” And that process costs around $1.30, rather than $6 for certified mail.

Johnson adds that email may be acceptable in some states as well.

If there is no response from the tenant, then you must follow the public notification procedure, which may include a newspaper or online notification, depending on the state.

Once that time has expired, Bickford says you can proceed with cutting the lock, or gaining access to the unit.

Access And Rules
Possibly the biggest change in the auction process in the past few years, especially since 2020 with the pandemic, is the prevalence of online auctions.

Bickford, who is also an auctioneer, thinks live auctions will eventually be a thing of the past. “I’m an auctioneer,” says Bickford. “I love a good, live auction, but the internet is how things happen now. We rent online and do everything online. With live auctions, you have the crowds and the cars and other things to deal with.”

Bickford also makes more with online auctions, citing an example in which a bidder online recognized some ceramics held in a Miami, Fla., unit as highly valuable collectibles and bid $17,000 for them from Texas. “At a live auction, what were the chances someone would know what they were getting? The internet did that.”

If you are still set on live auctions, it’s advised to get an experienced auctioneer who knows the self-storage industry, can drive bidders to your auction, and may also be able to go over your paperwork to make sure everything was done by the book as to limit your liability.

In either type of auction, once you’ve gained access to the unit, Zucker reminds operators that they are not permitted to enter it. Operators can only view items and take photos from the outside. However, if there is something large blocking the view, stepping in only to take photos of what’s inside is permissible in most instances.

Looking at the items helps avoid potential property disputes. For instance, if there are appliances that are marked as being from a rental company, you must contact the rental company, as they are the owners of the property. If there is a titled vehicle or motorcycle inside, you must check for liens on that title.

“If operators know someone is storing a titled item in their storage unit, the smart ones will get a copy of the registration when the unit is rented,” says Bickford. “If there is something like that stored, you must look for a lien and notify the lien holder to pick the item up.”

While some operators have learned what they need to do to sell titled property, many states just allow the operator to call a tow company and put it into their hands, which frees up the unit.

Per Zucker, one thing to look for when you gain access to the unit is anything with high value. “If something doesn’t seem right, such as a unit that has a lot of property worth a lot of money, then it may be worth the research to see if there is a problem with the tenant you don’t know.”

Though you don’t have to do this, as you have the legal right to sell, Zucker says caution should be pursued in some cases. “Once that sale happens, you can’t put Humpty back together again,” he says.

If you proceed toward auction and are doing an online auction, some of the companies that post online auction will provide the “second pair of eyes.” Zucker recommends this to ensure that the process has been followed.

Some companies, such as Lockerfox.com in Charlotte, N.C., have set it up so the entire process will integrate with some facility’s management software. “For example, on the newspaper or online ads, we have text you can copy and paste and just send it in,” says Peter Allen, president of Lockerfox.com.  

One of the most important things you can do to prepare for an online auction is to take as many good quality photos from outside as you possibly can. “The online bidders want to see as many photos as possible,” says Bickford. “Take as many as you can that show as much as possible and stand in different positions outside of the unit.”

Once the auction is posted, bidders have a certain amount of time to bid. Another benefit of bidding online is that buddies cannot team up to buy a unit, as no one knows who put in what bid. As with live auctions, certain laws govern the minimum number of bidders, as well as the goal to recover a “commercially acceptable price” for the unit.

While many auctions do not recover what is owed to the facility, some recover that money and then some. The facility should make every attempt to contact the tenant again to notify them of the money in holding. Depending on state law, after a certain period of time, it may be kept by the facility or may have to go to the State Treasurer’s office as unclaimed property.

Once the bidding has closed, the winning bidder has 48 to 72 hours to visit the facility, pay for the unit, and pick up the property. “The store typically sets the rules,” Bickford says. “They determine the timeframe to pick up, and many advise the winners they do not have dumpster privileges when they pick up the property.”

Many even require a deposit to ensure they will claim the property in the timeframe, as well as a clean-out deposit, ensuring they will leave the unit clean. “Many require cash so they cannot dispute the charge on the credit card if they get home and have buyer’s remorse,” says Bickford.

Zucker also mentions that if the tenant shows up within the 72-hour window and the winning bidder has not paid nor claimed the property, the tenant must be given the opportunity to reclaim their property by paying what he/she owes to the operator. 

As you can see, there are many steps and caveats to preparing for auction. If you’re new to the self-storage business, Rosa recommends you do a lot of research and ask industry insiders for help. “There are tons of resources,” she says. “All the lawyers have blogs, and the state associations are a big help. Stalk people in the industry; be prepared to learn.”