Tuesday, November 10, 2009

When sellers ask "would my house make a good bed and breafkast?"

This question comes up more often than we think. And I get my brain picked enough to find it important to write this post geared toward residential real estate agents as well as buyers who want to do a startup bed and breakfast by converting a home.

Let me start by saying that I don't claim to know absolutely everything about the bed and breakfast business. But I do have experience and it is my specialty. And so many historic homes have the feel of a classic bed and breakfast, but are they all worthy of that marketing angle? The answer is, not always.

Sometimes this marketing angle could be good for your sellers, but if there really isn't the potential for a good business, down the road, the buyer isn't going to be happy and might feel they were misled. You don't want that reputation.



So what do you look for when determining B&B potential?
--The area... Is it a destination spot? Is it on the way to or from a destination spot? IF the visitor stays at the house turned B&B, when they drive just a few miles beyond the limits of the immediate town, will they find themselves thinking that next time they'll stay in the town they just found? Look at the competing towns in terms of tourism. Tourism potential is key.
--How many other lodging establishments are there already? and could the town handle another and are there enough visitors to fill the rooms in the busy season?
--What brings tourists to the town?
--Is there enough to do in town?
--Are there enough restaurants in town?
--Are there shops, galleries or museums in town for tourists?
--How far is the property from a daytrip to a national park? And keep in mind, the closer the town is to a park or tourism attraction, but not IN the town, it's going to have to compete with that town.
--Is there interesting history associated with the town, therefore giving a buyer a way to visualize the house as a B&B?
--Does the house have enough common living room space for the number of guest rooms it would have?
--Does the room flow make sense for B&B use?
--Today, it's very important to have all guest rooms with en-suite baths, and double showers or jacuzzi's even better.
--Does the house in its location and on its site give a potential buyer/B&B buyer enough to market to attract business?
--Is there ample parking?
--Does the house offer good exposure for walk-in business?
--Is the house large enough for a B&B?

So, how are B&B's are priced? This method will vary by region but for example in Maine, if a business is performing, we use a GIM (gross income multiplier) or GRM (gross rent multiplier). So if a business is grossing $200k, and if the region is using a GIM of 6 for the list price, the inn would be priced at $1.2m. They may sell for less, depending on the market, but the GIM has been used for some time. If the business isn't performing to its potential, the property may be priced on its residential value and/or a combination of its residential value and its revenue potential. Often there are properties out there that have real growth potential and those in a position with the cash to subsidize the business until it reaches its potential.

Another note for any of you representing buyers of an existing B&B, educate your buyers on what the banks will require for a down payment. And again, this may vary, but a standard rule of thumb will be a 25-30% down payment with a commercial loan structure. A big difference from the down payment required for a home - often this is a surprise to buyers!

As a rule of thumb, the fewer number of rooms, the lower the room revenue potential, the lower the price on the home. Great, right? Not really. If a buyer is looking for the property to support him/her financially, a small property will only bring in limited revenue (unless the rooms were extremely high end and pricey). Not all buyers can afford to subsidize the B&B lifestyle.The buyer looking to be financially comfortable from the cash flow of a B&B will likely have to spend more because the larger properties with more rooms offering more potential have a higher price tag. Higher price tag might mean smaller buyer pool. You have to determine the best way to reach the largest buyer pool. Always keep this in mind. What's important when buying a home is much different than what's important when buying a B&B. The former is what's best for you, the latter is what's best for your guests. Sometimes the best use for a house is just as a home...

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