The Anatomy Of Zero Down Deals

Episode 11: The Anatomy Of Zero Down Deals Transcript

Zero can be a bad thing. Like when you're 0% charged on your cell phone, or you have zero amount of gas in your car, or $0 in your bank account. But zero can also be a great thing, like when you have zero calories in that piece of food, or when it's the down payment on an RV park.

This is Frank Rolfe, the RV Park Mastery Podcast. We're going to be talking about the anatomy of zero down deals when buying an RV park. There's basically four things necessary to have the basic ingredients to have a zero down deal. The first thing, bonding. You have to bond with the seller.

Now, what is bonding exactly? What does that mean when I say bonding? Well, I'm talking about that kind of magical thing that happens when two people like each other, respect each other, and most importantly, the seller wants to help the buyer. Normally this is because the seller empathizes with the buyer and says, "Wow, this person reminds me of myself when I was younger," or maybe remind them of somebody in their past, childhood friend or family member. And they just think to themselves, "You know what? I really want to help this person out." I've never seen a zero down deal that really came off unless there was bonding or relationship between the buyer and the seller.

How do you get bonding with an RV park deal? Well, my favorite question to ask is, "So how did you come to own this RV park?" The answer can take hours sometimes. And in it, you'll learn a whole lot about the seller and the seller will learn a whole lot about you, mainly that you're nice enough person to listen to the story. So bonding is very, very important.

The second ingredient you have to have is the ability for the seller to carry the financing. If you have to get a bank loan, then you won't be able to get zero down because the bank will require 20 or 30% down. So you have to have a seller that owns the property free and clear, or who has a small enough remaining mortgage they're just going to go ahead and pay that off at closing, but seller financing is critical. Now the good news is most moms and pops own these things free and clear, so they can do a seller finance deal on their RV parks and normally that isn't going to trip you up that badly.

Third item, you got to have problems to solve. Now, what do I mean by problems to solve? What you have to have is a RV park that doesn't look exactly perfect, because if it looks perfect, you're going to have some buyer out there who's going to outbid you. They're not going to want seller financing. They're not going to need zero down. So the argument typically at an RV park deal at zero down is, I got to put my down payment money, I have to put my capital into fixing up the RV park because it's got this problem and that problem.

Now what you're looking for, hopefully, are RV parks that don't need a lot of actual heavy lifting cap-x items. You don't want something where you have to go in and replace the electrical system. You don't want to have to come in and replace the pool. What you want are ones that are just nickel and dime aesthetic issues, but really weigh the property down. Bad mowing, bad signage, all things that you can fix fairly economically, mostly with a lot of intelligence and sweat labor. But you need to have those kinds of rough and tumble deals typically to get zero down. It's too competitive out there on the better properties to obtain that. So normally there has to be some kind of issue to get it.

Number four, you have to have an older seller. Now, most of the people out there selling their RV parks are what is known as the greatest generation or the silent generation. Now, who are those? Well, greatest generation people are becoming few and far between. Those were the ones typically born before the Great Depression of 1929. Now your silent generation, those folks are from about 1930 to about 1945. So those are your people today who are like 75 approaching 80 years old, that group. And those are the two most common groups. And when you reach those people, the greatest generation and the silent generation, you find something very important. They don't plan on spending down all their money in retirement. They want to leave their money to their heirs. They want to have a legacy that they can pass on to the next generation. So as a result, even if you buy that RV park for a million dollars, they have no interest in spending the million dollars. They're very patient with their money.

So as a result, they don't need the cash. They're not going to go out there and buy a bigger house, not going to buy a boat, none of these items. What they do want to do is get a good return on their investment. And your note that you're going to do with your zero down, that can often pay the best rate of anybody. If bank interest rates are at 5% right now, and you pay mom and pop 5%, there's nowhere you can get 5% in America today. Check out your local bank. What are you getting a CD at your local bank? Oh, maybe 1%, if you're lucky. And moms and pops, they typically don't want to go play the stock market. They don't have any faith in it and it doesn't normally pay out any dividends anyway. So when you have that older seller who doesn't really want the money, they're looking at the monthly amount. And if you're going to give them 5% interest, well, that's maybe five times more than the alternative of a CD.

Now there's also some things to worry about when you do zero down deals, I know zero down deals sound all kinds of sexy. And my partner, Dave and I have done 12 of those since inception. But here's the big danger you have when you have zero down, what do you do when the note ends? What do you do when suddenly you're thrust into having to get a bank loan, but you're used to paying zero down. How in the world do you adapt to a bank?

Let's model this out for a minute. Let's assume I found an RV park to buy for half a million dollars. And if I was to go to a bank, it would require 20% down or a hundred thousand dollars. Mom and pop we'll go ahead and do it for zero down because they like me, and they want to carry the paper and they want to get 5% interest and the park looks kind of ugly. So they say, "Okay, well we'll do it if you just give us nothing down." Okay, and let's say they, "Yeah. We'll give you a three year note on it." Okay. Well, what do you do three years later? We always recommend people refinance about a year out. So, that means you start refinancing at the end of year two.

Well, I know that when I go to get a bank loan on this RV park, I'm going to have to come up with 20% down or that a hundred grand. If I don't have the hundred grand, I'm in a real pickle because I got to pay the guy off and just one more year and I don't have the money down to qualify for the actual mortgage on the property. That's what I see is kind of the zero down trap for some buyers. They don't think long enough term. They think, "Well, I want to get my foot in the door. Don't have a lot of capital. I'll do a zero down deal." Nope. The final ingredient you have to have to get out of the danger zone, you have to have a really, really long term on that note.

Now, how log is long enough? Well, there's never too long, right? I'd like a fully amortizing 30 year note. That would be great, but you never get that. But try shoot for at least 10 years. And if you can't get 10 years, if they'll only go five years, see if you can get the right to buy a two year extension if you need it. Now, what I mean by that, is that thing comes up to be due, what you do is you give them a little extra money towards the principal, five grand, 10 grand, and that buys you an extension of let's say an additional two years. So you haven't lost any money doing it. Number one, you don't have to trigger it unless you need it. And number two, the money you're giving them that goes towards the principal. So there's no penalty in it, but you need that extra time. You need that extra time because you're going to have to keep grooming that property up and up and up if you want it to appraise for enough to minimize your down payment.

Now, if you time it just perfectly and we've done this before. If you get a long enough seller note, typically about five, seven years out, you can do what's called a cash out refi, which in case means you had zero in it and you have zero in it again with a conventional lender. You'll have to do that though by having that property go up at least one third in value so that when they make you put up 30%, you don't have to because the amount of 70% loan to value is the same as what you paid for it. But again, you've got to buy yourself some time to make the necessary improvements.

Also remember, that lenders like to see the last two years of operating performance. So if we're using that notion that on that seven year seller note, I'm going to have to be where I want by the end of year five, so I have two years to season it. But wait, that's right. I want to start a year ahead at least, so I have to be there by year four.

The bottom line is really short zero down notes really don't do anyone any good at all. So when you're talking a zero down deal, if you're not getting at least a seller term of maybe five years with an option, then I'm not really sure you should be doing the zero down deal maybe from the beginning. You might be better off trying to get a bank loan on that deal or doing something different because there's nothing worse than getting in that zero down trap.

Now you'll say, "Well now wait a minute. Now I'll go ahead and set aside the money. I'll set aside the 20%." But what's going to happen is you're going to find something else in the interim that you want to buy or invest in and suddenly you don't have the 20% in the bank because you keep telling yourself, "Oh, it'll all work out okay and it's years into the future," and then one day that year comes up. So just be very, very careful. If you can not put the money down to replace that zero down deal, you'll end up with a term default and then you'll lose the property altogether. Don't let that happen to you.

Again, zero down deals are a great idea. We've done them 12 times. They're a beautiful rate of return because your return is infinite, since you have no money in it. You'll have to have four things to make it happen. Bonding, seller financing, problems to solve, and an older seller. And you also have to beware, be very aware of the dangers of when that note comes due. You need something that's at least long enough you have the ability to improve the property enough that when you get to the real world of banking, at 70 or 80% loan to value, you don't have to come out of pocket with a lot of and that you know that you have the money to come out of pocket when you need it.

This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.