Pricing – There is a Right and a Wrong
- Posted By Andrew Morgan
To save significant time, money, and stress, it is essential to set an accurate price for a motel or accommodation business from the outset—rather than pursuing unrealistic expectations. This can be achieved by gathering reliable data, seeking expert advice, and approaching the decision objectively, without emotional bias. The API states the definition of market value as follows: -
“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.
In essence, anything is worth what a buyer is willing to pay for it. One buyer may see unique value in the property and offer a premium, while another may not and propose a lower price. Ultimately, the market, comprising both buyers and sellers, determines the value through negotiation. When a willing buyer and a willing seller agree on a price, that transaction reflects the true market value on that particular day. This dynamic underscores the importance of realistic expectations and objective valuation in any sale.
Pricing is Key to a Timely Sale
Setting the right price when bringing a motel to market is critical to how quickly it will sell. Listing at $1.5 million when the true market value is closer to $1 million is likely to result in prolonged buyer inactivity. While initial interest may be high, it tends to fade quickly once buyers recognise the price is unrealistic. Even genuinely interested parties may hesitate to make an offer, assuming the seller’s expectations are inflexible. Buyers compare listings, and if they perceive better value or more reasonable sellers elsewhere, they will shift their focus accordingly. Overpricing not only delays the sale but can also damage the perceived value of the asset.
The Link Between Pricing and Time on Market
There is a clear and direct correlation between pricing and the time it takes to sell a motel. So, how long should a sale take? While there’s no definitive answer, a well-priced motel typically sells within four to six months, including marketing, negotiation, and settlement. However, if the asking price is above market expectations, the property may remain unsold for an extended period.
Understanding the Market Requires Up-to-Date Information
Accurately assessing the current market relies on access to timely and relevant data. Buyer activity is influenced by a range of factors, including interest rates, the performance of the motel and broader accommodation industry, access to finance, business confidence, and the overall economic climate.
Over the long term, there is a clear correlation between the health of the accommodation sector and buyer demand. When the industry is performing well, interest in acquiring motel assets increases. Conversely, when business conditions are poor, buyer interest tends to decline. This pattern reflects a natural intersection of human behaviour and economic fundamentals.
Pricing a Motel: An Inexact but Informed Process
Setting the right price for a motel is not an exact science. It requires careful consideration of numerous factors to estimate what genuine, financed buyers in the current market are willing to pay. These factors include the physical attributes of the property, land size, location, position, presentation, and critically, its financial performance. Some elements will carry more weight than others, depending on the priorities of individual buyers. This variability makes it difficult to predict exactly how value will be perceived. However, one thing is certain: if the price is misaligned with market expectations, the feedback, or lack thereof, will be immediate. In such cases, the silence from initially interested buyers can be telling.
Informed Decision-Making in Motel Pricing
A seller can only make the best possible pricing decision by conducting thorough research and seeking expert advice. This process should include reviewing comparable properties currently on the market, analysing recent sales of similar motels, and considering the insights of an experienced motel broker who understands how the market is likely to respond. Additionally, obtaining a registered valuation can provide an objective benchmark. Each of these elements contributes to forming the most accurate and realistic assessment of value. While no method guarantees precision, combining multiple sources of information significantly improves the likelihood of setting a price that aligns with market expectations.
Information Needed to Assist in Setting an Accurate Motel Price
To determine a realistic and market-aligned price for a motel, sellers should gather and review the following key information:
- Financial Performance
- Accountant’s Profit & Loss Statements: Ideally, provide three years of trading data. One year alone may not reflect typical performance and could skew valuation.
- Insight: Just as one good innings doesn’t define a cricket season, one strong or weak year doesn’t define a business’s value. Historical and projected trading both matter.
- Plant & Equipment List
- A detailed inventory of all chattels included in the sale (e.g., beds, TVs, fridges, kitchen equipment).
- Exclude leased or rented items unless they will be paid out before settlement.
- Lease or Rental Agreements
- Include agreements for leased chattels, signage, waste removal, etc.
- Lease Document (if leasehold)
- Provide the full lease agreement and any amendments (e.g., Form 13 Amendments).
- Occupancy Rates
- Monthly occupancy data for the past three years, if available.
- Monthly Income Breakdown
- Revenue split by department (e.g., accommodation, restaurant, bar) for the past three years.
- Current Tariff Schedule
- Include the current rate card and note the last increase and percentage change.
- Council Property Rates
- Provide the most recent one or two rates notices.
- Recent Property Improvements
- List major refurbishments or significant maintenance investments.
- External Agreements
- Copies of contracts with chain affiliations, booking platforms, service providers, etc.
- General Operational Information
- Details on daily operations, including:
- Booking systems
- Social media presence
- Office hours
- Staff structure and roles
The Buyer’s Perspective: A Critical Step in Pricing
Failing to consider the viewpoint of a potential buyer when preparing a motel business for sale can be a costly oversight. One of the most effective starting points in setting a price is to ask, “if I were an active buyer in today’s market, what price would I be willing to pay for this business?” Simply stating, “This is the price I want, regardless of what others think,” ignores the reality that buyers, those who ultimately decide whether to invest, must be convinced. Understanding their mindset and expectations is essential. It’s about shifting focus from the desired outcome to the buyer’s journey and decision-making process.
Presenting Value Professionally
Identify the key information a prudent buyer will expect—financials, operational details, asset lists, and present it clearly and professionally. This builds trust and demonstrates that the business is well-managed and transparent.
Return on Investment (ROI) and Market Dynamics
The motel market is dynamic, with ROI expectations shifting over time due to economic conditions, buyer sentiment, and location specific factors. Over the past 30 years, ROI across freehold motel ownership has typically ranged between 12% and 18%. While this may seem like a modest range, the impact is significant.
Location plays a major role in ROI expectations. Coastal motels often attract different buyer profiles and pricing dynamics due to tourism demand, lifestyle appeal, and seasonal fluctuations. This results in a lower ROI expectation than for those motels located in inland locations.
Let’s now explore how ROI has varied across the three main motel ownership models over the past 30 years from coastal to inland locations.
Leasehold Motels: High Returns, Unique Considerations
Leasehold motels have consistently offered significantly higher returns on investment (ROI) compared to other motel ownership tenures. Historically, leasehold ROIs have been at least double those of freehold going concern motels and more than three times those of passive investment motels.
Historical Leasehold ROI Range
- Lowest observed ROI: ~25% (circa 2008)
- Highest observed ROI: Exceeding 100% in certain cases
Why Such High Returns?
These elevated returns are often due to the nature of what’s being sold. In some cases, the leasehold sale may include minimal or no tangible assets—just the lease agreement itself. Without plant and equipment included, the transaction resembles more of a rental arrangement than a traditional business sale. This lower capital outlay relative to the profit potential can result in exceptionally high ROI figures.
Key Takeaway
While the potential for high returns is attractive, buyers must carefully assess what is actually being acquired. The absence of tangible assets or the structure of the lease can significantly impact the risk profile and long-term value of the investment.
What is a Freehold Going Concern Motel?
A Freehold Going Concern means the buyer acquires:
- The land the motel sits on
- The buildings and infrastructure
- The business operation itself (including goodwill, plant and equipment, and sometimes employees)
This contrasts with Leasehold motels, where the buyer only acquires the business and leases the property from a Lessor.
Return on Investment (ROI) Trends
FHGC motels have shown:
- Lower ROI variance over time compared to leaseholds
- Typical ROI range: 12% to 18%
Comparison with Leasehold Motels
|
Feature |
Freehold Going Concern | Leasehold |
|
Ownership |
Land + Buildings + Business | Business only |
|
ROI Variance |
Lower | Higher |
|
Initial Cost |
Higher | Lower |
|
Risk Profile |
Lower (long-term) | Higher (lease dependency) |
|
Capital Growth |
Yes | Yes |
Freehold Passive Investment Motels
This tenure which includes only the land and buildings with a lease in place has shown a lower variance again than freehold going concern motel. This for each is probably not surprising as the variances are in line with where the ROI lies. Again, in general terms they have been as low as sub 7% and above 13%.
Comparison of Motel Investment Types
|
Investment Type |
Ownership | Involvement | ROI Range (General) |
ROI Variance |
|
Freehold Passive |
Land + Buildings | None (leased out) | ~6-12% | Lowest |
|
Freehold Going Concern |
Land + Buildings + Business | Full operational control | ~12-18% | Moderate |
|
Leasehold |
Business only | Full operational control (the right to quiet enjoyment) |
~25-100%+ | Highest |
Please note the percentages mentioned above do not account for exceptions and such things a waterfront property where the ROI may vary even further due to the higher value of the land or redevelopment potential, etc. The ROI on any individual motel will be different from one to the next, the above is merely a guide and each must be considered on its own merits.
Presentation and Reinvestment: Key Drivers of Motel Sale Value
While pricing is often the headline focus in motel sales, presentation and reinvestment are equally critical in achieving a premium result.
Why Presentation Matters
A well-presented motel:
- Attracts more interest from serious buyers
- Commands a higher sale price
- Reduces negotiation pressure and buyer objections
- Common Buyer Concerns That Impact Offers
Buyers frequently hesitate or reduce their offers due to:
- Lack of split system air conditioning
- Poorly painted or deteriorating surfaces
- Damaged or outdated benchtops
- Sagging or uncomfortable beds
- Bathrooms needing full renovation (e.g., showers, tiles, vanities)
These issues are often seen as cost burdens that buyers must inherit, something most are unwilling to do without a significant price reduction.
Reinvestment is Not a Cost—It's a Strategy
Investing in upgrades and maintenance is not just upkeep, it's a value-adding strategy. Even though some improvements require capital outlay, they:
- Enhance buyer perception
- Reduce time on market
- Justify a higher asking price
Very few buyers want to accept a seller’s generosity of passing on their problems to the next owner.
The Power of Minor Details: Small Fixes, Big Impact
While major renovations can significantly boost a motel’s value, minor repair and maintenance tasks often make a surprising difference in a buyer’s decision-making process.
Small Issues That Matter
Buyers frequently notice and mentally tally up:
- Overgrown gardens or untrimmed trees
- Touch-up painting left undone
- Mouldy or loose tile grout and silicon
- Worn or stained floor coverings
- General wear and tear
- These may seem minor, but to a prudent buyer, they signal neglect and add up to perceived costs, often resulting in a lower offer or no offer at all.
Cleanliness: Non-negotiable
Cleanliness is essential in daily operations, but during inspections, it becomes critical:
- A spotless motel, regardless of age, impresses buyers
- Clean, tidy interiors and exteriors suggest good management and care
- First impressions are lasting, cleanliness builds trust
Small items add up to big costs in a prudent buyer’s mind.
Conclusion: The Role of Strategic Pricing in a Successful Sale
The success of a motel sale campaign hinges on effective management of the entire process, with pricing being the most critical factor.
- No matter how much is invested in property improvements, business operations, or marketing, an incorrect price can undermine the entire effort.
- The goal is to set a high but realistic price that motivates genuine buyers to take action, not just to attract attention, but to initiate offers.
- A well-informed, realistic pricing strategy ensures that all other efforts, presentation, reinvestment, and promotion, work in harmony to achieve the best possible outcome.
A price level that will influence a buyer to act whilst achieving the highest possible price, is what a genuine seller should be seeking.