When you’re buying an RV park, the typical seller is an older mom and pop couple who either built the property from scratch or bought it several decades ago. That’s what everyone is used to seeing. But what does it mean when the seller has only owned the RV park for a couple years or less? Well, it’s never a good thing. Here are some of the issues to consider when you have a short-term owner as the seller of an RV park.
Their motive is always concerning
The one thing you can never really get over is the feeling of insecurity as to why they are really selling. Is it because the property is failing financially? Is there a problem with the utility systems or license? Does the property flood and they want to sell because the water wipes everything out? There are a million different scenarios that your brain will feel compelled to concern you with – and none of them are good. When an older mom and pop sell, the stories always make sense and typically focus on health issues or a desire to simply retire. And the simple fact that somebody has owned a property for decades gives you a felling of security as they have succeeded through good times and bad and show no fear of ownership.
They have debt and therefore can’t carry financing
One of the best things about buying RV parks is the frequent ability to obtain seller financing. But to do that, the seller has to own the property outright. When somebody has only owned a park for a short time, it’s clear and evident that the ability for them to carry paper is no longer on the table, as they incurred debt to buy it and already have a loan on it. Sometimes the seller will allow you to obtain a “wrap” note if you are paying substantially more than they did, but the simple fact that you are paying a premium for something that somebody just recently purchased is concerning. And then, of course, are the issues with “wrap” notes which are often contrary to the seller’s loan documents and puts the property in jeopardy of foreclosure. The bottom line is that it is extremely rare to obtain seller financing except when the property is owned free and clear by a long-time owner.
They have a higher basis in the property and are less negotiable
When you are negotiating with a mom and pop long-time owner, it’s a safe bet that they own the property free and clear and paid very little for it decades ago. As a result, they are extremely negotiable on price. This works to the buyers favor as $500,000 is just as good as $600,000 when it’s all profit to the seller. That’s why most mom and pop sellers are extremely negotiable – they have nothing but upside. However, when the seller has only been there a short time their profit is only the slimmer margin between what they paid and what they can sell it for. This creates much less price elasticity.
It’s really a call to perform great due diligence
We have bought successful deals from short-term buyers before. Although you never really know what motivates them, you can conquer all of the fears expressed above with a singular focus on performing extremely strong due diligence. Benjamin Franklin once said that “diligence is the mother of good luck” and that good luck occurs both with long-time and short-time sellers when you make sure you have uncovered every pitfall and locked down the correct revenue, expenses and net income. In many of the short-term seller situations we have found what motivated them in due diligence and are fully aware of what the turn-around plan encompasses. But just as you must be careful with short-term sellers, you need to really be just as focused on long-term mom and pops who perhaps have had more time to try to hide the problems with the property.
Buying an RV park from someone who has only owned it a short while can be a very scary experience. You are convinced that there is something wrong with it and that you might be falling into a trap. Additionally, there is little ability to obtain seller financing or to cut the price dramatically. But on the other hand, with proper due diligence you can still make a successful purchase.