RV Park Mastery: Episode 33

Why Bankers Love Pessimists

Getting an RV park loan is an essential part of the acquisition process. You may be excited about your deal, but that enthusiasm can sometimes be the wrong approach in getting a loan. The issue is that bankers love pessimism. But why is that? In this RV Park Mastery podcast, we’re going to explore why bankers get turned on by negative people, and how to harness this energy is crafting an even better loan package for the lender.

Episode 33: Why Bankers Love Pessimists Transcript

There are two types of people in the world: optimists and pessimists, one with the glass half full, the other half empty. This is Frank Rolfe, the RV Park Mastery Podcast. We're going to talk about taking the perspective of half empty and why bankers love pessimists.

Now at some point in buying an RV park, you have to have financing. Very rarely does anyone buy a property for all cash. Now, if you're going to use seller financing, that's a great way to do any deal, we heartily recommend seller financing, but often you can't get it. They can't offer it or they won't offer it, then you have to get a bank loan. And what I found over the decades is that nothing makes a banker more attracted to your deal and to you as a borrower than when you have a sour outlook on life, when you are very, very negative. Now, why would that be? Why do banks like people who are pessimists? Well, it's pretty simple, you see. Basically, the mantra of bankers is before the can be return on capital, there must be return of capital. You see, the banker gets no upside in your deal at all. If it does amazingly well, what do they get? Their loan back. If it only does average, what do they get? Just their loan back. So they don't get any upside. And when you don't get any upside, you lose all interest in it. You look at your deal and say, "Well, if I do it, I can raise the occupancy and do things more efficiently I can make all this additional cash flow," but the bank sees none of that. So when you're a banker, all you want to do is to protect your downside, because all you have to look forward to is that interest rate, which today as we know is among the smallest in American history.

So how do you approach deals in a negative manner? How do you make that bank realize that you're their kind of borrower because you're very, very dour? Well, the first thing is, you've got to at all times look at three scenarios: your worst case, your realistic case, and your best case. And your focus for the bank needs to be all about your worst case. Now, when you're buying a property, clearly probably your focus isn't on that. Your focus is on the best case, how much money can I make with this deal? How will it impact my cash flow, my financial stability, building an asset for later generations? But that's of no concern to the bank at all. They want to know what happens if you fail to hit your budget or things just generally turn against you. I think it's a very good exercise for all RV park buyers to do. Derive what could happen in the best case, if everything goes your way. If you succeed in  marketing and bringing in customers far more than the old owner did. And the realistic case, here's what I think is probably going to happen. Not as good as the best case, but still, I think we can hit this. But then the worst case. I would never do a deal unless I've done all three cases. I want to know what happens if I'm very, very unlucky, can I still cover the mortgage? What happens to me? Do I go bankrupt? What's the end of the movie if I can't hit my targets? And that is the one that the banks really want to hear about. That's where they want to focus.

It's the exact inverse of what you want to focus on as the buyer, you always want to think about the good things. The bank only wants to think about the bad things. And part of the thinking about bad things is you need to have a plan B for every possible thing that can occur. So if you are there on the banks of a river and you're in a floodplain, I need to plan B of what happens if that big flood hits. It may have never hit, maybe only hits every 100 years. But maybe next year is that 100th year, I've got to have a plan B. You have to have a plan B for marketing issues, collections problems, utilities that go out, you name it. Banks love to hear that you have a contingency. If you read a lot of war books like I do, typically books about World War Two, the most successful generals were the ones who always had that plan B. The bombers failed to show up, they had a plan B. Weather was terrible, they had a plan B. So having a plan B it is a smart thing to have. It's not just that bankers are ridiculous in this request. It's a very good idea for you as the buyer even if there was no banker involved. Even if there's only seller financing involved, it makes complete sense for you to have contingency plans. When you have contingency plans, you fail to worry as much about life because you know that no matter what happens, you can open up that folder that you keep in your desk titled "Contingency plans" or "Plan B" and there you'll find a plan B to every possible doomsday scenario.

That requires you to think about every doomsday scenario. Now we can't all go through life thinking that everything in life is only in the worst possible case. If that were true life would basically stop. So if I want to say my worst case scenario of driving down to the grocery store to buy some cereal is I'll have a horrific wreck and burn to death, and therefore I refuse to drive my car, and then later refuse to walk there because if I walk there my worst case would be lightning hits a tree and the tree falls on me, we would all just basically curl up in a concrete bunker and die of starvation. So don't go to that level of worry. But do think about the true risks that you have as an RV park owner. There's a certain subset of things that could happen based on the property. And you need to think through if they were to occur, exactly what you would do to fix it. It makes complete sense.

Another way to think like a banker is just be very, very realistic in your numbers and your projections. Bankers hate it when you base everything on the, "Well, I plan to increase this by this much." That sounds great and everything, but all they have to go by is what's happened in the past. So when you talk about all the wondrous things you'll do, they don't know that any of that will actually occur. So don't be giving the bank all kinds of unrealistic expectations, based on just your personal opinion of what you can do. Bankers are obsessed with actual performance, the bank is going to want to see the financial statements from probably the last three years, and the tax returns, if they can get them. And they're doing next they want to judge what can this property normally do? This person is telling me that the old owner is a bad owner, well, how did it do when you had the bad manager operating it? So just be very realistic. Nothing scares the bank more than when you start the conversation off with, "Well, yeah, the numbers aren't very good under the current owner, but I'm going to make them a lot better." Because the only numbers they really can go by are the current numbers, which are under the old owner. They don't know you, they don't know if you can do any better than that person. So banks love to hear when you talk about worst case scenarios, contingency plans, and just stay realistic in their numbers. Don't try and sell them on all the upside, because they don't  get any of the upside. That's not critical.

Now, a little upside makes them feel better, it means there's more fluff in the deal. So if you explain to them how you're going to cut the cost, and all the things, all these great things you're going to do well sure that does have some impact. They say, "Well, you know, the deal seemed kind of tight. But he did have such many great ideas to make it a little better." So I'm not going to say that's a worthless course of communication. But nevertheless, let's be negative.

Also, remember that the bank is going to want to hear certain things can be met, regardless of outcome, such as a coverage ratio of like 1.25%. So go over those things with the bank, the things that banks  watch over, the things that make them get criticized by their boss. Remember that a banker is just an employee of a bank,



they have to create so many loans, they have to make sure loans don't default. They don't want to have any loan losses, don't get them in trouble, they're not going to want to do deals with you if they think you might get them in trouble. So ask the bank, "What do you need me to do? What's the minimum I need to do to be a success for your bank?" And then make sure you hit those things. If the banker tells you, "Well, you've got to make sure that you always have 1.25 coverage ratio over your mortgage, that's the most important thing to all of my bosses," well then that is the one item you better do. Because if you start getting that bank officer in trouble with his higher ups in his bank committee, then what will happen? Well, he'll certainly never make another loan to you. I can almost guarantee you that.

The key to lending for everyone, particularly in a modern America, is to think like your boss, and your boss is the bank. Who owns the RV park after closing? Well, really, the bank does, because the bank has a lien on the property. So if you don't make your payments, it's going to be the bank's property. You're basically renting it from the bank, and when you get the bank paid off, then it becomes yours. Even though your name is on the title, they've got that big lien on that title, and so it's not really your property at that point. So all of us, we like to make sure that our boss is happy. We'll make sure that our boss is feeling that we're doing a great job. It's no different when you have an RV park lender. So always think in terms of them. All conversations should point to them.

When you meet with your banker, don't do all the talking. Do most of the listening, find out what's important to them. And at all times learn from what you hear. S some people in the RV park business who have gone on to own multiple RV parks, every single deal they did was a little better and every loan they did was a little better because they were constantly listening and learning from what they did. Every meeting you have with that bank is going to point you in the direction more of what they like to hear. You'll notice their facial expression their body language, and will say, "Ah, well I'm getting much better at this, aren't I?" And yes, of course you are, just as long as you keep an open mind and focus on what a bank wants, and there's nothing, nothing that makes a banker happier than when you approach every single deal as a pessimist. This is Frank Rolfe for the RV Park Mastery Podcast. Hope you enjoyed this and talk to you again soon.