Many RV Parks are sold utilizing seller financing. But on those deals your negotiation does not just revolve around the purchase price – the way you negotiate the seller’s note is just as important. In this RV Park Mastery podcast we’re going to review the key points of negotiation for seller notes.
Episode 99: Seller Note Pressure Points Transcript
A huge number of RV parks in America are purchased using seller financing, and often when you buy an RV park under that situation, you think your negotiation only revolves around the price that you're going to pay. But if you think that you're going to miss out on a lot of opportunities to even further better the deal through properly negotiating those note pressure points. This is Frank Rolfe with the RV Park Mastery podcast. We're going to talk about negotiating the note.
Now, we all know about negotiating the sale. We want to get the price of the RV park as low as we humanly can, acknowledging the seller is probably not going to agree to our low ball price, so we're going to go somewhere in the middle. But there's some items in the note you need to know, because not all of those do most buyers really think about on the front end, but they're hugely important to your deal after closing.
The first one is the amount down. Remember that most banks in America have a down payment threshold that runs typically 20% to 30% of the price, but there's no law regarding that when it comes to sellers. Sellers can go with much lower numbers with no pushback from some committee or some bank president because they are the committee and the bank president.
Very first deal I ever did was only 2.5% down. Why so low? Well, the seller knew the property needed some fixing up and he liked to have as much note as he could get, so he had no problem in doing a note with only 2.5% down. We've done other deals with 5%, 10%, 15%. We've even done 12 deals at 0% down. So the amount down is critical to you as the buyer. If you can get that price reduced, though, that's great. Getting your down reduced in some cases is even more important to you. If you don't have a lot of capital, it's maybe one of the most important parts of the discussion.
Another item you can always negotiate on the seller note is the interest rate itself, not just the final rate. So if the seller says, well, I want at least 6%, and you say, well, don't you think five is more fair and you end up at 5%? That's not always the end of the discussion because in some deals, particularly deals that have some turnaround required, it's possible to have the interest rate not start at that amount but stair step up to it.
We've done deals where interest rate in year one is 1%, year two is 2%, year three is 3%, year four is 4%, year five is 5%, and then year six and on the state remains at 5%. So you can get creative on the interest rate beyond just the numerical number of interest rate percent, it's how that is applied. Is it all that same rate on day one or does it vary?
Another item to negotiate is the balloon or when the note comes due. Because in every seller note, traditionally they're not normally self-amortizing. They don't typically go out 25 or 30 years. Instead, they normally come due and you have to pay off the whole note in one whack, which is called the balloon. And I would say in the US, typically that number is between five and 10 years into the future. But what a huge difference that is between five and 10.
Think about this for a minute. If you do a five year note, that means you're only going to get half of the pleasure of the seller note before it comes due. And often the seller, if you really push the length of the note, you'll find they're a little more variable than you think. Let's say the seller wants to do a five year note and you say, gosh, seller, I'd rather go 10, because the way banking works, I'll have to start refinancing a couple years ahead of the balloon, which means I only have three years to really get the park up a little bit from where I want it to be before I have to start hitting the ground running to try to find the new lender. Couldn't we go a little longer? Let's assume you convinced that guy to go to seven years. Well, that's a great job. You did a terrific job there, because what a difference that little extra time gives you.
On a seven year note, you have five full years. That means a whole presidential term plus one year before you really start looking for the replacement loan. Also, don't forget, you can always refinance properties early. So when you have the seven year note, it gives you extra comfort. Because let's say there's a banking crisis three or four years from now. You can skip that moment and go on. But let's say instead there's the optimal time to ever refinance an RV park. Interest rates plummet because of the new great recession, and you can always refinance early. So you need to get as much time on the balloon as you can.
Another item to discover is the ability to buy an option to extend the note term, the balloon, if you need it. So how does that work exactly? Well, what you do is you offer to give the seller some amount of money towards the principal, so it's not a penalty fee. Let's say you agree to give him $15,000 towards the principal at the end of the note in year five. And let's say that doing that buys you two more years of note. It doesn't really cost you any money, but it's a nice insurance policy in case the lending market is in turmoil at that point, you would sure appreciate having that option for only $15,000 when that fifth year comes around.
Also, don't forget the fact that you often want to have release prices if there's any additional item that comes with the RV park, such as additional land that you don't need or can't use any other assets. The release price allows you to get rid of things which are not income producing without having to go back and renegotiate the entire loan later. So if there's anything that comes with that RV park that you're not going to want, the time to negotiate that release price is on the front end, not coming back to it later.
Also, you have assumability. There's nothing that makes an RV park more liquid than the ability for the next buyer to already have built in debt. It's the dream situation for most real estate investors. No one likes to go around and get debt on anything. So if you already have built in debt, all they have to do is sign the agreement and they can not only buy the RV park for a set price from you, but step into your shoes on the debt. That's just the best way to build liquidity known to man. And many notes can be assumable if you just ask. Remember that the seller, what they want is they want that regular monthly payment to pay their bills. They want it a higher interest rate than they can achieve in the banking system. They don't want that to end.
Now by the time you were to sell, if they say, well, but what if you do assumability? I know you. I don't know the next person. Well, let's think about this for a minute. You probably would not sell for someone for, let's say, five years into the future or so. At that point, you've paid down a lot of principal. Also, you've increased the net income a lot. So the person buying it is probably going to not be that bad a credit risk to them. And even if they were a little more concerned since they had not bonded with them, they have less exposure because you've paid down a lot on the note.
Finally, and I cannot emphasize this enough, and this is not really negotiable, but something that always must be mentioned on any seller note is you have to have a cure period in your note agreement. Now, what the cure period allows you to do is if you default on the loan for any reason, it gives you a period of time, typically 14 to 30 days, to fix the issue so the loan does not go into default. In most notes, in many states, if the seller does not receive your payment even though you sent it, they can declare the note as being due in full, that you have failed in your agreement to make regular monthly payments. Even though you did, even though you mailed it, the post office lost it, it doesn't matter in many states. It's a much better way to live when you have a cure period, which means that anything that goes wrong you're given due notice so you can fix it.
In that example, you would then get a cure period notification saying that you had not made your seller note on the RV park and then giving you some period to come forward and to correct that. And that is a very, very important item for most people because you don't like to live in danger. Nobody does, and no one likes to be falsely accused of defaulting on their note when they didn't. So as a result, it's very, very important to try and get in in all notes that cure period language.
The bottom line to it is that when you're negotiating an RV park with seller financing, you need to utilize your negotiation talents not just on the price, but also on the terms of the note.
This is Frank Rolfe, the RV Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.