A Sanity Check

This is Frank Roth, the RV Park Mastery Podcast. We're going to be talking all about who's crazy and who's not crazy and give you some kind of sanity check to make sure that when you're out there talking to these brokers and these moms and pops, you fully realize and embrace the fact that you're the smart one and they're not. Now let's first start off with these are income properties, and income properties tie to math.

So if you want to talk about products that we don't know the real value of, you have to look at other things, intrinsic things, like like artwork, for example. You see a Monet painting sell for three or four million dollars and you say, well, gosh. How does it worth that much? Well, it's all very subjective. It's because someone thought the painting was worth that much, or they say, oh well, you know, I think this painting will be hugely valuable in the future. But it doesn't tie to anything.

It doesn't tie to any amount of income. It's just what people think that it is. Mark Cuban once said that things are only worth what people think they're worth. Now, Mark Cuban is not in the income property business or he would know that what he said was wrong. Because in the case of R V parks, the value of the R V park is built on mathematical formulas of net income.

Now, what is that number? Let's just, for example, take the concept when people say a 10 cap. A 10 cap is a 10% return of that net income on the value. And a cap rate is just a fraction. It's just the net income over the price of the RV park. So if an RV park makes a hundred thousand dollars a year, the top part of the fraction,

And it costs a million dollars, the lower part of the fraction, you divide the upper by the lower, what do you get? Point one. And point one means it's a ten percent return. And with R V parks, ten percent return is pretty typical. That's kind of a minimum target a lot of RV park buyers have. But that means I can come up with the value of any RV park based on those constraints.

by just taking my net income and multiplying that by ten. An RV park, therefore, that makes fifty thousand dollars a year would be worth half a million dollars, and one that makes two hundred thousand dollars a year would be worth two million dollars. But you can see there's a correlation between the income and the value.

So that's what that's what makes RV Parks unique in the world of valuations against lots of other assets, is it's just based on math. So the first question is when you're talking to mom and pop and you're throwing out numbers. is who's tying it to the math. If you say here's what the net income would be or what the net income is times ten, this would be the value, they can't dispute that. That's just set in stone.

That's what any bank or any appraiser is going to go by. They're going to go by net income and they're going to apply some ratio in the form of a cap rate or on the loan, a debt coverage ratio, but it all ties back. In the world of income properties, two plus two equals four, two plus two does not equal nine.

So when the seller tries to tell you that two plus two equals nine, you have to push back and say no it doesn't. Never have, never will. It has to be based on the math. Now also when mom and pop try and tell you, no, no, you're wrong in the valuation, it's worth far more because you see, we're gonna add these extra, extra spaces on. Or we think you could really increase the occupancy if you were worked the internet because we don't do the internet.

Here's a problem with that argument, because any increase in net income, that needs to fall to you as the buyer, right? Not to them as the seller. So if I'm going to go out there and start running ads and get get a good presence on the internet and I start increasing the flow of customers in the door, who should get the benefit of that?

Mom and pop who never did such a thing? No, that should go to you. All the enhancements, all the improvements you make on a property, those are all yours. You did it. Mom and pop didn't. So why would you pay them for that? It just makes no sense what mom and pop tell you and try and convince you that you're crazy, not giving them the value for what you would be doing, for your work, your strategy. If you start giving away your profit, well, then why are you even buying the RV part?

If you're gonna price it in such a manner that all the good things you do simply make it where you can rationalize buying it, that doesn't make any sense at all. Now, when you go out to get a loan on an R V park unless Mamma Pop carries, remember

you'll have a couple more hurdles. You're gonna have an appraiser and you're gonna have a lender. And an appraiser and a lender, they only look at the downside in life. They're very negative people. It's good they're negative because you don't want to get yourself in trouble. And they don't get any part of the upside. That's the problem. See, if you're a lender, the best you could hope for in life is getting your capital back and your interest.

That's it. You don't get any portion of anything where you beat the budget. There's no upside to a lender. So consequently, when mom and pop say, oh, well, you could do all these many things to increase the net income, you can't sell the lender on that. They're not gonna buy off on that, not for a minute.

So when when mom and pop or the broker try and tell you, Oh no, you could pay this extra amount, no you can't. You cannot pay that extra amount and you can't pay the extra amount because no one will stand behind that. Absolutely nobody.

So here, what do you do then when you're talking to moms and pops and brokers and they're crazy? The prices are crazy. Well, the first thing you do is to try and work with them. Say to them things like, you know, here's how I run the numbers, here's what I come up with, here's what I've been told valuations are, here's what the banker told me. So where am I going wrong? It's called being inclusive. Show mom and pop their errors.

Show the broker how you're coming up with the valuation. You can learn a lot when you do that. When you show mom and pop in a happy, friendly, inclusive manner, okay, when I put in all the real costs because you're not having a high enough cost for insurance or property tax, and when I stick all those in, I only come up with sixty thousand of net income. And that might make the deal worth six hundred thousand, but you're at you're asking nine hundred thousand. See what they say.

Because they may well say, oh, you know, I never thought about that. You're right. If I sold that to you for 900,000, this is what the tax would be. Or, oh I see, right. I I probably don't carry enough insurance. Instead of a two hundred fifty thousand dollar liability limit, I probably need more like one or two million. And you'll see if the seller can then be morphed into someone who isn't crazy.

So often you can educate them and they respond favorably. And you may not get your price, but you may get at least a price somewhere between what they were asking and what you think the price should be. Also remember that with many sellers today and many brokers, one solution is just for them to carry the paper.

Many sellers feel like they missed the boat because they did not sell prior to the end of Q one twenty twenty two, and that's when Jerome Pallet the Fed went crazy and started raising rates like there was no tomorrow. Interest rates went up, as we all know. The Fed's rate went up five points between Q1 2022 and now. The fastest, highest amount it's ever gone up in the past 40 years. But they can still get those prices.

Because if they'll carry the financing back at the old interest rate of prior to Jerome Powell's big move, they want to carry the paper at four percent interest, not the eight percent you'll be paying today, well then you can pay significantly more. Now if you go that route route, make sure that they carry that loan for a long time. Fully amortizing would be good. A twenty five or thirty year fully amortizing alone might be appropriate.

But if they can't go that long, they have to hold it at least for 10 years or so. Long enough for you to catch up on your income on the property and long enough for interest rates to go back down. That interest rates will never go back down as low as they were. They're probably never gonna go back down to the the days of your back when you could get bank loans at often four percent. But I do think you'll see bank loans ultimately stabilizing about two points lower than they are today.

If you can just wait it out another two, three years. But seller financing is one way that many people are getting RV park deals done today you couldn't normally get done. It does give a uh the the ability to often meet the seller or the broker's crazy price.

Also, it does you a world of good when working with a broker to just to say the broker, okay, what would it take to get this deal done? Because you and I both know this price is wrong. And you'll be shocked how many brokers, when you approach it that way, will then say, okay, yeah, I know the price is crazy. But I had to I had to tell'em we'd ask this price just to get my foot in the door, just to get the listing.

But they'll then tell you what the price will be. And you may find the price that really they already know in their heart of hearts it's gonna go for is actually much closer to your price. The bottom line is you're not crazy. When you talk to brokers, when you talk to moms and pops, and they throw out crazy high prices, they're crazy. It's their problem. But it's your job then to get that corrected to see if you can get that price down to a reasonable level.

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