When buying or financing an RV Park, a critical step is often getting a favorable appraisal. But figuring out the financial value of these types of properties can often be a tricky issue. In this RV Park Mastery podcast we’re going to explore the appraisal process and why this has inherent issues when it comes to this asset category.
Episode 159: Why Appraisals Can Be Tricky Transcript
Webster's defines an appraisal as an expert estimate of the value of something. And when you're trying to get a loan on an RV park, what that appraisal says can be a matter of life or death. But there are some certain things you need to know about appraisals, particularly concerning RV parks, that often makes the process tricky. This is Frank Rolfe with the "RV Park Mastery Podcast." We're going to talk about appraisals, what makes RV park appraisals especially difficult, and what to do if the appraisal doesn't come anywhere near what you think the actual value should be.
Now, let's first acknowledge that appraisers are not God as far as what things are really worth. An appraiser is just an individual who hopefully has some expertise, read some books, took some course, became licensed. But it's not like when they throw out a number, that's the number. Now, when you look at gold, if you want to invest in gold, the value of the ounce of gold is a set number. You can go down to any place that buys gold, and you can get a certain amount for your gold because you know that it's worth X dollars an ounce.
And that's very objective. But in the RV park industry, it's much more subjective. And the reason it's subjective perhaps falls back to the three approaches used by appraisers to come up with a value. Those three methods are, number one, replacement cost, number two, comparable sales, and number three, the income approach. And they then average those together, and that tells them exactly how much they feel that RV park is worth.
But let's reflect on that for a minute. Replacement cost. Hmm, let me think about that. Well, in our industry, replacement cost is very hard to come up with because it's not just the land, it's not just the cost of the electrical lines and the store and the clubhouse and the roads. You also have this kind of rare permit.
So how do we come up with the value of that permit? I don't know. It's really kind of difficult. And what about the kind of rare location that makes it actually work, some type of destination? How does the appraisal factor those in? Well, it's very difficult. It's hard. It's not like farmland where they can say, "Oh, well, most farmland in this area sells for this much an acre."
But on RV parks, coming up with a replacement cost, very difficult. Very subjective. And then comparable sales, again, very tough. Not a lot of RV parks change hands every year. It may be that you're looking at an RV park in an area that no RV parks has sold since 1960. What do we do? Take the value in 1960 and inflation adjust it? Which, by the way, is about 10 times what it was back in 1960.
No, that's probably not really fair or accurate. That RV park, when it was purchased in 1960, who knows what was going on back then in the economy and in occupancy and everything else. So we don't know for a fact at all that's actually going to be anywhere near realistic. And then sometime the appraiser will say, "Well, gosh darn it, there's no comparable sales within 100 miles, so I'll just pick this park over here. It sold recently, but it is 119 miles away from the subject property." How is that really comparable?
That's so far away. How does that even make any sense? And of course, the answer is, well, it probably doesn't. Which then brings us to the income approach. Now, the income approach at least has some science to it. We're going to take the income from that RV park for the last maybe three years and average it together and apply a cap rate to it.
But even then, that's a little bit subjective because what cap rate do we actually use? Do we use the cap rate of what it is right now, or what we think it might be next year? And then what about on the income level? What if it's very poorly run? Is that really, truly reflective of its income potential?
And for these very many reasons, it's very hard to get a very accurate RV park appraisal, at least one that you really feel, "Ah, yes, that's a good one, and I'm comfortable with that." And also remember that most appraisers have very little experience in RV parks. That's just a fact. That is not their bread and butter. If that was their bread and butter, they would have no bread and butter. They would starve to death. There aren't that many RV park appraisals ever happening out there. So most of them have probably never done one ever before.
Now, there are sophisticated RV park appraisers, it is true, but those are not the ones typically the banks are going to choose. If it's a really big transaction, maybe. But a lot of times, RV parks are financed by local lenders, and they don't even know any of the big guys like Colliers, so they're going to call up their buddy Larry or Jim and say, "Hey, do you want to appraise this RV park? You'll make X dollars." And of course, he's going to say yes, because he's starving to death, so he wants to do the deal, but he has absolutely no clue what he's doing.
And he's about to go on the most subjective journey in the world, trying to come up with the replacement cost and comparable sales and income approach on an object he knows absolutely nothing about. And even worse, the bank chooses the appraiser. You don't. You have no say in it at all. They do that deliberately so you don't cheat.
Because they know you'd throw the ball to someone who's a friend of yours, and God knows what that appraisal might come in at. So instead, the bank is going to choose them, and because the bank chooses them, more than likely, you're going to get a guy who doesn't know anything about it at all. So what happens when you have someone with no idea appraising something that they know nothing about? Well, it can go either way. You can end up with an appraisal that's far more than you think the thing is worth. That's great. But more common, they end up with an appraisal that is lower than what you expected.
So now what do you do when the bank got the appraisal through their typical system, and they report back, "Well, I got bad news for you. The appraiser didn't come in anywhere near what you're paying for that RV park." What do you do then? Well, you can go ahead and accept it and just say, "Well, I'm sorry it didn't work out," and that's the end of that lender.
Or you can push back and you can say, "Now, come on now. You know that number isn't crazy." And give them all the reasons why you think it is crazy. We once had a property that came back, and the way they appraised it was simply the value of the land as farmland, plus the depreciated value of the utilities.
That was it. That's not a very satisfying appraisal. It came in at a fraction of what we were paid. So we went to the lender and said, "Lender, come on now. This is goofy. How can the property only be worth this amount? You know that's just flat out silly, right?" And we were lucky. The banker said, "Yeah, you know what? You're right. That number's stupid. That guy didn't know anything about what he was doing on this asset class. It's wrong. We'll get somebody else."
And fortunately, the next person they selected, who also didn't know anything about RV parks, well, that number came in correct, and it got us the loan. So in that case, pushing back helped enormously. But another option you have is also to go back to the seller and say, "Seller, we have a terrible problem. This appraisal came in way, way lower than your price.
So here's the only way I can buy the thing is, you can either carry the paper, or you'll have to lower the price down to this appraised amount so I can go back to the bank." Now, if you think of it that way, sometimes a bad appraisal is a good thing, because that's something you probably wanted to do anyway. You would love to get the price lowered, for sure. And then what would be better than having the price lowered and/or getting a seller note and not have to go through the entire banking process?
So in that case, sometimes having a bad appraisal is, in fact, good news. So really, perhaps, when we talk about appraisals and RV park appraisals often being bad, maybe that's more of an opportunity than a problem. Now, the other part of it is, of course, how much you have as far as volume of lending options. This is why you don't want to just go to one bank and put all your eggs in the basket with one bank, thinking they're going to pull it off. Until that deal is closed, you never know what may happen with that bank. That bank could change their mind. The appraisal could come in wrong. God knows what. You have to be ready to move quickly.
But having a bad appraisal isn't always the end of the movie. Sometimes it's a cry from the heavens to get a lower price and to potentially get seller financing. This is Frank Rolfe with the "RV Park Mastery Podcast." Hope you enjoyed this, and talk to you again soon.