When I bought my first RV park, it was a very unusual deal construction. Since the property was in poor condition – and the seller very motivated – I was able to get him to agree to the following terms: $400,000 sales price, $10,000 down payment, and the seller would carry $390,000 for 30 years. I was immediately hooked on seller financing. My next five deals were also seller financed. I had never heard of that type of lending before, and the benefits were immediately obvious to me. So how can you buy an RV park using seller financing?
Why a seller would want to finance the sale
The first step in obtaining seller financing is fully understanding why the seller would entertain such a concept. There are basically three reasons that a seller would carry the debt. The first one is interest rate. If they sell the RV park for cash, all they will get on their windfall is about 1% to 2% in a CD. Instead, they can get around 5% from you as a mortgage on the property – that’s about two to five times more, which is huge. The second reason is favorable tax treatment. If they carry the paper, they only pay income tax as they receive the money, so they earn interest on the money that would have gone to the IRS on day one. The third reason is control. When they carry the financing, they don’t have the risk or worry of the bank scuttling their deal. That’s a huge stress reliever.
The advantages of seller financing for the buyer
The benefits of seller financing to the buyer is just as obvious. When you don’t have to work with a bank, you don’t have to pay any points or related bank costs, like attorney’s fees. You also don’t need expensive third-party reports. On top of that, you don’t have the stress of building a loan package and cold calling banks and trying to get one to finance the deal. And financially, you typically get a lower interest rate and longer loan term. You also typically get a loan that is non-recourse. It’s basically all good, and there is no downside to seller financing whatsoever.
The problems with bank debt
And just to emphasize the benefits, let’s reflect on the potential problems with regular bank debt. To go out and get a bank loan is a serious chore. Then there’s the problem of being approved. Then there’s the extra cost just of getting the loan done. And, after all that, you still are stuck with a short term deal and full recourse. While getting a bank loan is often a necessary evil, it’s always fraught with risk.
So how do you get it?
There are four ways to get seller financing. The first is the seller offering it to you on the front end. The second is for the seller to realize during diligence that there’s no way a bank loan can be obtained (typically because they do not have three years’ worth of reliable financial statements). The third is the result of you educating and selling the seller on the benefits of carrying the mortgage. And the fourth is from “bonding” – effectively becoming the seller’s friend and them then wanting to help you out by carrying the debt.
Other thoughts
While seller financing is great, there are some things you have to make sure of. One is that you only buy an RV park with a large title company. You may be getting seller financing, but that does not mean you can scrimp on anything less than a professional closing. You also need a real mortgage note, reviewed by an attorney. And you need a cure period, in case they don’t get your check. You just have to make sure that you follow the same steps you would if you used a bank to financing the transaction – you cannot take any shortcuts, as the ramifications could be huge if the seller gets cranky or passes away after the deal is consummated.
Conclusion
Seller financing is an extremely compelling option when buying an RV park. You can buy an RV park without using a bank. Use these steps to expedite the learning curve on how to pull it off.