WHEN IS SELLER FINANCING ON RV PARKS NOT HELPFUL? By Frank Rolfe

WHEN IS SELLER FINANCING ON RV PARKS NOT HELPFUL?

We are huge believers in seller financing, which rates as our favorite type of debt. It has a huge number of benefits. But it can also be a trap if you don’t know what you’re doing. So what’s so great about seller carry and when is it actually not a good idea?

Why we love seller financing

Seller financing has always been the gold standard on financing RV parks. There are many reasons why this is the preferable source on most deals:

• Low down payment. While banks are focused on a range of from 20% to 30% down, sellers will often go lower. How low? We’ve done 12 “zero down” deals and a bunch of deals ranging from 2.5% to 10%. That’s just not possible with traditional bank financing.
• Low interest rate. Banks have rigid interest rate structures based on the prime rate. Sellers have no such restrictions and will often go with below-market rates.
• Non-recourse. While many bank loans come with “personal recourse” which means the bank can go after the borrower for any deficiency if the loan goes into default. Seller financing rarely has this provision.
• Often assumable. Bank loans are rarely assumable but many seller notes are, which makes it easier to sell the RV park down the road.
• Lowest up-front cost. Banks require a host of third-party reports on every loan including the appraisal, survey, sometimes property condition report, and then a bunch of legal fees. Sellers do not need any of these things and that might save you $10,000 to $30,000 over the costs of borrowing from a bank.
• No stress. Bank loans require committees and the suspense of whether or not you’ll be approved while seller financing has no such concerns – if the seller likes you then you’re approved.
• Mitigates risk. When a seller agrees to carry the paper then that’s almost like an affirmation that the property is solid and the diligence materials provided were accurate.

But it can be trouble in certain circumstances

While all RV park buyers prefer seller financing for the reasons shown above, there are circumstances in which seller financing can be a bad idea, and these include:

• If it gets you into an RV park that would fail typical lender 3rd party reports. Banks require those third-party reports to make sure that the property performs as promised and, if you don’t do them as a part of seller financing, what happens if the property would have failed? That’s why we always do a Phase I environmental assessment and a solid survey on every property. If you don’t do these reports then you risk catastrophe. If the seller lets you get by with zero reports – and you don’t do them yourself – that’s a scary situation.
• If it’s not long enough in time to find a replacement loan. Some sellers inadvertently put the buyer in a bad position by offering seller financing but only on a very short-term basis. That can put you in trouble if you don’t have time to get the property to the next level before the loan comes due. In general, a seller note needs to be at least 5 years before the balloon payment comes due. Anything less is very risky.
• If it has too high a loan-to-value and you can’t cover the deficiency later. If a seller gives you a lower down-payment than a bank would – and the seller note comes due a decade or so later – how are you going to be able to cough up the money to meet the bank’s higher down-payment threshold? For example, if the seller let’s you buy the RV park with 10% down and years later the bank wants 20% down, how are you going to do it? You can solve these situations often through the simple fact that the RV park will appraise at a higher amount and the bank will be focused on loan-to-value (LTV) or simply by selling the property before the loan comes due.
• If it is not structured the same as a regular loan and the title is not in your name. This can be a real problem when you let the seller structure the financing in a non-conventional manner, such as wanting it to be a structure in which the total does not go into your name until they get paid off. This means you run the risk of the seller dying (or simply changing their mind) and then refusing to give you the title.

So here’s the solution

To create successful seller financing, consider the following:

• Do great due diligence. Whether you do all the third-party reports or not, the key is to know what’s important and what’s not and making sure the property is a winner on all the important issues. You should not be reliant on other people telling you if the property will be successful or not: you need to be the one to make that decision.
• Ger longer loan length. A seller note must be at least five years or longer before the balloon payment comes due. Five years gives you a few years to make your improvements to net income and then two years to season the financials. But even longer is better – a 10-year term is the gold standard of seller financing.
• Have a Plan B to cover higher down payment requirements on the transition. If you do a seller note with a low down-payment and a balloon that comes due in 5 years that gives you 5 years to figure out how to come with the difference between that amount and 20% or 30% down.
• Demand that the seller note mirror a conventional note. There should be no difference in the construction of a seller note and one from the bank. The title needs to be in your name and the bank (or seller) in the position of the mortgage holder. Nothing else will do.

Conclusion

Seller notes are great – one of our favorite things about the RV park business – but you have to structure them properly and mitigate your risks. Seller notes have terrific attributes but they can also be a trap if you do not manage them properly. These tips should keep you out of trouble.

By Frank Rolfe

Frank Rolfe has been an active investor in RV parks for nearly two decades. As a result of his large collection of RV and mobile home parks, he has amassed a virtual reference book of knowledge on what makes for a successful RV park investment, as well as the potential pitfalls that destroy many investors.