RV Park Mastery: Episode 66

Behind Closed Doors On Your Loan Request

Getting a loan to buy your RV park is an essential part of the business model, unless you are obtaining seller financing. So what really goes on in those bank loan committee meetings and how can you impact that discussion from outside the room? In this episode we’re going to discuss how banking works and what you can do to improve your odds of success.

Episode 66: Behind Closed Doors On Your Loan Request Transcript

There's nothing more suspenseful for that RV park buyer than waiting to hear back the decision from the loan committee, but we feel powerless when they're in their meeting. So what can we do to help influence the decision of the bankers when they're in those closed doors, in that nice conference room with the big mahogany table and leather chairs? How can we somehow get what we want? How can we make them approve your RV park loan? This is Frank Rolfe with the RV Park Mastery Podcast. We're gonna talk about what goes on behind closed doors at those bank board meetings and what you can do to walk away a winner, even though you're not there in the room.

Well, let's first talk about what making a loan means to a bank. Banks make money by making loans. It's a pretty simple business model really. People make deposits in the bank. They do so for security. They might get a small amount of interest, very, very small amount on their savings, and then what does the bank do? Does the bank just leave it all there in the vault? No, they go out and they make loans. Let's say the loan has an interest rate of 5%, and let's say they're paying you the depositor, nearly nothing, so that 5% is all profit to the bank, and so that's really how the money is generated inside banks. So banks have to make loans.

So that loan committee meeting is meeting because that's the engine, that's the driver for the bank having money to give their shareholders, and pay the bills and the utilities and the salaries and everything else. So banks have to make loans. They can't just stop. They can't say, "Oh well, America right now is in complete anarchy. We will stop making loans for the foreseeable future." Well, then that means they will go broke. So that's not an option. So then what are the bankers looking for when they have those meetings? What makes them say, "Ah, this loan is better than that loan." Well, a lot of it just revolves around safety. There's an old say that before you can have return on capital, you have to have return of capital, and banks are obsessed with that.

You see, here's how it lays out. Let's say you're a bank and you make a loan, and that loan fails. Well, you lose not only the interest you would have made, but all the principal, whatever the thing brings at auction. But let's say instead that RV park does phenomenally well, incredible, it's worth three, four, five times more than what your paid. What does the bank get? It doesn't get anything more than its principal back and that little amount of interest. You see, it has absolutely no skin in the game with your deal. It has no stake in the upside. So banks, by definition, have to be pessimistic. If they were owners, if they had equity, if when the RV park went up 10 times in value, then they got a piece of that, well, then they may be more risk-taking, but they're not.

They don't have that appetite because they don't get compensated for it. So what does it mean when they look at your loan to decide whether your loan is safe, 'cause really safety is all that they are after? The first thing they're gonna look at is the market. Now, they may not know every market. None of us is smart enough to really know every market by memory. So make sure, in your loan presentation, that you explain all the benefits of your market. Give them sufficient maps and information on why this is a safe market to make a loan in. And make sure you only choose good markets when you put things under contract, because the market is a big part of the decision. Remember, real estate is all about location, location, location. Make sure that you've got a good location, and also make sure they understand that.

Next, the numbers. Again, the bank is only looking for safety. That is the key driver to what they're doing. So as a result, when you're only looking for safety, you wanna make sure those numbers all add up. And if they don't, or there's absolutely no thought given to what happens if they don't add up, then you got a real problem on your hands, because they're gonna think that, "Oh no, this loan is just not safe. We're gonna get in trouble if we make it." So make sure that you give them really, really good and thorough numbers, and not just the best case, not just the pie in the sky. Show them where it stands right now, and you can even show them what would happen if there was a decline in revenue. What would happen then? 

I know some really good banks, and what they do is they stress test loans. The borrower doesn't know it, but behind the scenes, what they like to do is they like to take your revenue and take off 10%. Why? They're trying to see what would happen. Could you still cover the mortgage, could you pay the bills, or would the whole thing go insolvent? So show people good solid numbers. Again, they don't care about your upside. Don't hammer that a whole lot. That's not going to impress them, because they get no part of that. To impress them, show them more of the safety net and what happens if numbers decline, and never lie to them on the numbers. Show them precisely what it is. If you lie on the numbers, if you can really try and alter them in some manner, to reshape their thinking, they're gonna catch that. They're gonna know that. Don't even bother with that.

Also, they're looking for good solid property condition. If things are broken in the RV park, that's no different than if you're looking at buying a house that has a bad roof and a bad foundation. And if the park is not in perfect condition, explain to them what your plan is to fix that. Just show them that you've set aside appropriate capital reserves to get that done. Also, the bank is gonna wanna know, is the borrower safe? What is the borrower's credit score? What is the borrower's liquidity? What is the borrower's experience? Remember that there's basically two parts of a loan. You've got the collateral, which is the property, and then you have the character, which is the borrower. If you have any blemishes on your credit or issues the bank needs to know about, explain to them what it is. Don't hide from them. They'll see it when they pull their credit reports, etcetera. So instead, explain what went on.

If you had a property and you lost it during the Great Recession, well, many, many people did. That's a learning experience. It may actually add to your experience. It may impress them that you went through that and so you know not to do that again, and you know what the hot buttons were for, why bad things happened before. But make sure you have, on paper, the right criteria to be what they consider a safe borrower. You will also always improve the odds, in that conference room, if you're always thinking like a banker the entire time you are constructing your loan request. People say, a photo is worth a thousand words. Show them lots of photographs. Show them good photographs. Show them photographs shot with your smartphone turned horizontally when the light was on the right side of the object that you were filming, where you've properly bracketed in everything in that photo, so it's got balance.

You'll be shocked how many loan presentations lose the day because they have crummy photos. If you can't shoot good photos for your loan application, then hire someone to do it. You can get people on Craigslist for $50 who can do a fairly decent job of that. But make sure that your presentation has plenty of photos. People love photos. They also love maps. Show them where the RV park is located, show them all the other points of interest around that, show that on the map. Don't just assume they know that stuff. Even if they do know it, they may be wrong as far as the distance or there were things they may have forgotten on that. So make sure that your presentation not only shows the park in its best light, but shows locationally what there is also there going around.

It also doesn't hurt if you wanna have an entire section focusing on what the downsized risks are and how you will address those. If your RV park has a component that it's in the flood plain, it would not hurt to explain what you would do in the event of flooding or how often flooding has occurred in the past. Never forget that the bank, all they wanna hear about is how you are gonna protect their investment. It's a one-sided thing. They're not trying to hear what you're gonna do with it, because they don't get any part of that. They're gonna give you X thousands of dollars, and in exchange, they want you to really keep that protected.

It's like a football player who has the football and there's a few minutes left and they just can't fumble it. They don't want you to be running around the field with the thing with just one arm. They want you to grab that thing and hold on to it dearly and make sure that their capital is never at risk. And as long as they think that no matter what happens in this loan, they will get their money back and they will get their interest on the loan, that's all they ask of you. Now, another way you can influence what goes on in that loan committee meeting is to not have to do one. So when you're looking at doing a RV park, it often helps if you can get seller financing, particularly if you have any blemishes on your own credit from problems in the past.

And another important item is just to use someone who acts as a loan broker to do everything we've just discussed for you, to build the package, to go to the loans, let them worry about what goes on in the loan committee meeting, let them create a volume of lenders so they know that they can find you someone to make that RV park loan.

This is Frank Rolfe of the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.