April & May 2007 Newsletter

An RV Park Deal Gone Bad: Something to Ponder and Watch out For:

Hi Terri:

Supposedly, there was another buyer who had cash and they offered a check for less than the asking price. The owners had told us the price was firm and they called us. We went to see the campground, and fell in love. We stayed that afternoon and their attorney came to get the details of the deal so he could draft the buy/sell agreement.

We paid a $2500 Binder but did not sign an agreement at that time that they would return our money if they did not follow through – MISTAKE 1. Among other things was the assignment of the lease where the sign was on the highway, the method of payment, & the approximate date of the closing of April 30. We met with the banker, were approved, and the bank was supposed to prepare the note and appraisal. His attorney was preparing the paperwork, our attorney was reviewing the drafts. Meantime, we had formed an LLC and opened a bank account in its name. We had a number of expenditures (lease credit card machine, begin immunization shots so we could serve food, business formation, etc.) Two drafts of the Buy/Sell agreement had been dickered over and agreed upon although not yet signed.

On April 25 or thereabouts, my husband quit his job, gave up his weekend business and moved up there. I was waiting to go until I had a job offer in the area. The sellers host a large event (5000 people) on the first weekend in June, and needed to be able to sell beer at the event. Any transfer of the business would have voided their beer license, so the agreement was made to transfer ownership after the event on June 4^th. On April 30, as with many closings, the paperwork wasn’t ready. Their attorney had not prepared the documents for their portion of the financing (promissory note, deeds, deeds of trust, survey of property)– although our attorney offered to prepare the initial drafts. The bank was also behind on its documents. On April 30, my husband and the seller went into the bank and when he found out that the bank would not complete their portion of the loan based on just the signed Buy/Sell agreement, he stormed out.

The sellers consulted that evening and told my husband the next day that the deal was off. He stayed 2 more days trying to obtain the $2500 binder back and was informed that their attorney told them that they didn’t have to return it. Our attorney is still pursuing it. Thank God we did have an attorney involved or it could have been horrible. We have not given up our dream, but will take a different approach next time. And yes, I had considered your seminar but we failed to act on that. Say OOOPS. Diane

Potential Advantages to Lease/Options rather than the standard Purchase and Sale:

Why leases with an option to buy may be a better way to go for sellers and buyers.  Instead of an outright purchase of a Mobile Home or RV Park, a lease with the option to buy can make more deals happen.  Here are some benefits that often occur in these type transactions:

1.  Instead of selling a property with seller financing, when a seller does a lease option they still have the title to the property.  If the buyer does default for whatever reason, then the seller can usually evict the lessee in a much more timely manner than going through the foreclosure process.  The lessee is not the owner.

2.  Instead of receiving a down payment on the sale, the seller/lessor will receive an option deposit.  Whether this option deposit is $5,000 or $500,000 it is typically treated just like a security deposit.  It is not reported on the sellers tax return until the option either expires or is exercised.  This can in effect postpone the capital gain taxes on the sale for several years depending on when the option expires or is exercised.

3.  The seller/lessor will still be allowed to depreciate the mobile home park improvements until the option is exercised.  This depreciation can shield some of the income that the seller/lessor receives from the lessee during the option period.

4.  The seller/lessor is relieved of the day to day management duties and can be freed of that responsibility.  Instead of running the park themselves, they step aside and collect a monthly rental payment from the lessee until the option is exercised.

5.  By using a lease/option an owner that may have only owned the property for a few months may be able to convert a short term capital gain into a long term capital gain.  This would happen as long as the option is not exercised for at least 1 year from the date the owner acquired the property. 

6.  By doing a lease/option instead of a purchase/sale/owner finance, the current financing can be left in place until the option is exercised without triggering a due on sale clause.  If the property is in need of being turned around and it would be hard to get a new loan this may be the best option for the buyer and seller.

7.  The seller/lessor can continue to make the mortgage payments and not be in default.  If the buyer does default it should not be a difficult process to get rid of the buyer.

Buyer Benefits:

1.  For a buyer with less than perfect credit, this may allow them to get into a property while their credit is being built up and then complete the purchase when they can qualify.

2.  During the option period, the buyer can build equity so long as the property increases in value.  This is the usual case.

3.  If the property declines in value, then the lessee is not required to exercise the option.  As long as the option deposit is not more than the decline in value, it shifts some of the risk.

4.  The seller/lessor is usually more readily available to help in the case of problems with a lease option than an outright sale.  They don't usually want the property back so they will be available to answer questions and give other advice.

5.  Instead of the depreciation deductions, the lessee will be able to deduct the monthly rent payment to the owner.  While this is amount will probably be less than the mortgage interest and depreciation, if the lease payments are structured that a portion of them reduce the option price, this can be a benefit as well.

6.  The lessee is able to work the property as if it were their own and if done right will be able to increase the value of the property above the option price.  Then when the option is exercised it will be much easier to obtain financing.

These are some of the benefits of the lease/option.  I am sure that there are a few more that I have not thought about but this should get you started.

Dave Reynolds

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