If you approach the motel you wish to
purchase using the methodology of a professional valuer you will
save a lot of time and effort and should be able to secure bank
finance. Remember
that the capitalisation method, direct comparison method and
hypothetical lessor and lessee’s interest provide guidelines
only. You must also
take into account all aspects of the property that will increase
or decrease the price.
A number of valuers neatly summarise these aspects using
a SWOT analysis (Strengths, weaknesses, opportunities and
threats).
Factors That Add Value to the Motel (Strengths, Opportunities)
Good state of repair, or recent
renovations
Good location
Strong base of repeat business
Unlikely to see other motels built in
town in foreseeable future
Can be quickly improved with better
management
Can be quickly improved with better
marketing
Profits have been increasing
Factors That Detract From the Value of the Motel (Weaknesses,
Threats)
Poor state of repair.
Money must be spent to bring the property up to
scratch.
Profits declining.
Other motels will be built in town.
Difficult to maintain star rating.
Restaurant is unprofitable.
Poor manager’s accommodation.
Little repeat business.
Over reliance on discounting.
Encumbrances, encroachments or other
restrictions on title.
Neutral Factors
The performance of the motel relative to
other motels may be important from an operational point of view,
but it should not affect the value.
If, for example, the average occupancy rate in the town
is 55%, and the motel is only achieving 45% this may mean that a
good operator has scope to improve the business, or it may mean
that 45% is all the motel is likely to achieve.
Either way, the net profit is the more important
indicator.
While occupancy rates are widely used in
the motel industry they are misleading indicators of profit.
Take two similar 20 room motels – Motel A and Motel B.
Motel A has an occupancy rate of 70%, achieved by
discounting its average room rate to $50.
Motel B has an occupancy rate of only 35%, but enjoys
average room rates of $100.
The revenue of both the motels is therefore the same.
Motel A – 20 rooms x 70% x $50 x 365 days =
$255,500
Motel B – 20 rooms x 35% x $100 x 365 days
= $255,500
Motel A, however, has to clean and service
twice the number of rooms cleaned and serviced by Motel B.
Therefore Motel A’s costs are higher and profits lower,
although its occupancy rate is twice that of Motel B.