Most RV Park deals revolve around a down - payment and a first - lien mortgage. But some deals have one additional financing tool: a seller second. In this RV Park Mastery podcast we’re going to explore how seller seconds work, the legitimate purposes they can play, one pitfall they can create.
Episode 114: All About Seller Seconds Transcript
Most RV parks have a very simple construction. You've got a down payment and you have a first lien mortgage with a lender, and that's how you buy the RV park. But then sometimes you'll find RV park deals, which have one more participant. Down payment, first lien mortgage and seller second mortgage. Now, why would you need a seller second mortgage? Well, there's some very practical reasons for that, but then there's one big downside to it. This is Frank Rolfe with the RV Park Mastery Podcast. We're gonna explore the world of seller seconds, what you need to know about them, good attributes, bad attributes, so you can make a better decision when it comes time to buy the RV park, whether or not you should entertain a seller second or not.
So what is a seller second? A seller Second is a non-secured loan from the seller in which they agree to hold back part of the money that they should be receiving at sale, traditionally in the form of a note, basically an IOU. One that has monthly payments, typically just the same as your first lien mortgage with the lender. But because it's a seller second, it doesn't typically conform to normal banking rules and regulations. There's no bank examiners watching over from the federal government. So in this case, a seller can pretty much do whatever they want with it. I've seen seller seconds that have no payments due for a period of time. I've seen 'em where they start off at a low interest rate and stair step up. I've seen all kinds of issues.
Now, what is there to know about seller seconds you need to be aware of? Well, I would wanna have all the same things in a seller second note you have in a first lien note. I'd want to have in there such items as the ability to fix things if they don't get their payment. So one period to cure agreement, whereby if they don't get the payment, they send you a certified letter and say I didn't get the payment. You have some period of time, typically a matter of weeks, or maybe even as much as a month to make the payment before you would technically go into default.
So you wanna have all of those things. But the big thing to think about a seller second really is that it's a pressure relief valve. Because what's happened is that the bank, when they're doing their valuation on the RV park, it does not really meet the appraised value. So what you have going on now is you've got to buy, you wanna buy the RV park for half a million dollars. You agreed to put a hundred thousand dollars down. The appraisal comes in. It doesn't come in at 500,000, it comes at 400,000, and the bank will do 80% of that, or 320,000. How are you gonna bridge the gap? 320,000 on the mortgage and a hundred out of your bank account isn't gonna hit 500.
So in those cases, what happens? What happens is the seller carries a second and bridges the gap. That's the only way that deal was able to go down. So there's some very constructive reasons you would need to use seller carry, good things, positive things, but then there's some other things that you need to be aware of. Now, the first good use of a seller second is because it is the way it was meant to be. The seller second was used as a pressure relief valve because the appraisal did not make based on the price. Now you might say, well, why not? Maybe I shouldn't buy this property. Well, that may be true, but it may also be that the property is highly underutilized. We've all seen RV park locations where everything is great, but what's holding the property back is simple.
It's mom and pop. They lost interest, they're unsophisticated. A common issue is they have no idea how to do any kind of online marketing. And so that's why the property is being punished, not because of anything it did wrong, but because mom and pop are just not able to manage it effectively. So if you have to bridge the gap, the gap might be because you are overpaying. But the other reason is that there is a gap and you know there's a gap, but you know you can fix the gap quickly after taking control, and it will all work out fine in the end. So when you're plugging the gap, okay, that's a reasonable reason to have a seller second. Okay.
And then sometimes it's because the property needs a whole lot of work. We've all seen RV parks like that where everything is broken from the side of the front all the way in. Everything's bad. The roads are shot, the water is shot, the power is shot, sewer is shot. You can't find a single thing when you examine the property that isn't shot. It's all broken, maybe in various levels of broken, but nevertheless, it's not usable in its current form. So how are you gonna pay to do that? You're using all your money on the down payment. How are you gonna fund these improvements?
Well, the answer again, may be a seller second. You say to the seller, look seller, I'm sorry, but I just don't have the money to do this deal based on the price that you want, which, okay, the price is reasonable for what you have, I guess. But look at all the deferred maintenance. Everything in here is broken. How in the world are we gonna bridge that gap? Maybe if you carry a second mortgage, I can do it. And that just might be the key. And again, that's purely reasonable. It's a business decision that you make. You say to yourself, okay, I wanna get this thing done. So that's how you basically are gonna go get it done.
But then there's a third reason. And the third reason is a bad one. And the third reason is that mom and pop are trying to sell it in excess of its true value. That the bank is correct, they've done their appraisal properly, there is no upside of the deal, and you're gonna get in deep trouble with it. And they're gonna carry that second because they just want to get you to go forward and buy the thing. That's the dangerous form of seller financing.
You know, before I got in to the RV park business, I owned a billboard company down in Dallas. And back in the '80s when I had the billboard company in the early '90s, ultimately I sold the property, the billboard company off to a group. And during that same period, there were a number of other large sales. And the biggest sale that happened in Billboard land back then was a sale of a company called, Foster & Kleiser. And it was sold to a guy named Patrick Joyce. And the guy that owned it was America's first billionaire. But the problem was, is he knew the true value of the company, and he knew that the guy was paying way too much. So to make the deal happen and to calm everyone's nerves, he agreed to carry a big old second on it. And then he told the lenders, look, this has to be reasonable deal. Great deal. Because I wouldn't be crazy enough to carry an unsecured second if I didn't think I'd ever get paid, right?
But the problem is, he did know he would never get paid. He was getting more than he thought he should get for the whole company. And by giving the shell game that, oh, look, you know, no one would be nutty enough to carry paper on something that's bad, he convinced the buyer and the lender that the deal was fine. What happened? It crashed and burned.
That's what you have to watch out on seller's second. Sometimes the seller uses the second to entice you into the deal. Now, you may say, Wait a minute there. Look how much money the seller's leaving on the table. Well, how much are they truly leaving?
Let's go back to the first example. Let's say you're buying the RV park for 500. The seller knows it's not worth 400. So the seller says, okay, yeah, yeah, I'll do that seller second, just 'cause he just wants the value that already existed of the 400. If he gets some of his seller second, okay, that's good. But if he doesn't, he's still got all that he wanted. So just watch out for seller second traps. If the seller's second is being used for constructive and reasonable purposes to make the deal happen, to bridge the gap, and you're willing to bridge the gap 'cause you have great confidence in the deal, that's perfectly fine. Seller seconds are very, very normal.
If in fact, the whole point of the seller second is to give you false encouragement and to give false affirmation to the lender that the deal is safe, then you're gonna have a real problem. Now remember, the seller seconds not being collateralized aren't really an issue as far as the lender is concerned because they always had the first leading position. So a seller second is kind of all in the mind. It's not really a physical issue as far as the security of the collateral of the RV park, but it does have certain mind tricks that it can cause and you have to be very careful that it's free and done for real purposes, good purposes, investment purposes, and not to get you into a trap. This is Frank Rolfe for the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.