It can often be a huge shock when you get the seller’s financial numbers during due diligence. And how those align with what they promised you can have some important consequences in your view of the property. In this RV Park Mastery podcast we’re going to explore how numbers alignment can tell you a lot about a property.
Episode 122: When Numbers Don’t Align Transcript
We are all familiar with the term alignment, particularly with our car. We know that if our car is out of alignment, then it's bad for the car, bad for the tires, makes a car often shake, drive erratically. There's nothing good with an automobile being out of alignment. But the same can also be true with the alignment of the seller's numbers versus what they told you. This is Frank Rolfe with the RV Park Mastery Podcast. We're going to talk about what it means based on how far the seller's numbers are out of alignment with what you were told. Let's first start off with all numbers aligning with what the seller says. Let's start with that scenario. So all the numbers that they give you are identical to what you were told. In this case, you have two options. Number one, the seller is a very button down person who really has a good mastery of their RV park and reports the information very accurately. Or also, they've completely cooked the books. It's very rare when the seller's numbers completely align with the promises that were made. So on the one hand, it can be a good thing and the other terrible thing.
It may mean that they are very prudent or it may mean that they are very fraudulent. Let's assume in the next scenario the numbers don't align. So what does that mean? Well, if the numbers don't align, if they told you that the RV park makes $85,000 a year of net income and in fact the numbers they give you, their own P&L and their own tax return show it only makes $45,000 a year of net income, then you realize that a couple things have to happen. Number one, you'll have to negotiate a lower price because the net income is how the price is derived. Therefore, that's not going to happen. And also they may have to go ahead and carry the paper on it, it may be impossible to get a bank loan. How you convince a bank the RV park is worth X reliant on net income of Y when net income turns out to be Z. So it's not uncommon to have the numbers not align. It's really just a question typically of how far off of alignment they are. And the magnitude of that difference is going to yield you to a renegotiation moment and often maybe another moment where you're going to have to go ahead and they'll have to be flexible to carry the paper.
It also in some degree means that trust is lost because the seller lied to you. Although often it's not totally lying. Many of them don't really know what the thing makes. They don't really memorize their numbers that well. So I don't think you can throw the seller completely under the bus when they misestimate what's going on. But it does mean you then don't have great confidence in really any of the stuff they give you beyond that. Now, what if they can't produce numbers at all? That's actually the worst scenario. So scenario one is the numbers align, which can be good or can be bad. Number two, the numbers don't align, which is typical and means you'll have to renegotiate. But what about if they can't produce numbers at all? That is truly the worst case scenario. Now, when the seller can't produce numbers at all, in other words, they don't have any P&Ls, they have no tax returns, they have nothing, then number one, you can't get a loan. I don't know of any bank that will give you a loan on a property that does not have historical numbers. So that's a catastrophe.
And number two, you have to assume the worst. So whatever price they told you on the front end before it was brought to light they don't have numbers, well, that just went out the window. You may literally have to renegotiate that price down 50% or 80% for it still to be compelling. Or you may simply want to just walk the deal. Because if they have no numbers to give you, what can you really rely on? You can't typically see with an RV park all of the historical occupancy for the year. You only see how many RVs are in there now. So how are you going to come to any conclusions of what the revenue might be? Now, there are some things you can do. Like you can say, well, I know what I'll do. I'll take how much electricity an RV uses, I'll see how much power the park worked, and I'll look at that derivative to try and figure out roughly what the occupancy is. But again, we're back into the ballpark land. And when you get into ballparks and you couple that with distrust and worst-case mentality, you're going to come up with a really, really low price.
And maybe the seller just won't simply sell it at that price, even though they caused it, they didn't have any numbers. But that may be where you end up. Now, what are some of the biggest problem areas to watch out for in that alignment and what can those mean? Well, number one, one of the most chronic errors in many RV park P&Ls is repair and maintenance. And that's simply because people lie a lot. And often, even when they don't intend to lie, you never really know if they did a good job, if they hired really good contractors. So you really got to watch that. And many of them will try and classify repair and maintenance items as capital costs. That's one way to get around it on the numbers is to say, no, that road repair, that wasn't repair, that was a capital investment. So it really doesn't show on the P&L. But that's one category that's always been tough. Another one is typically property tax, because in some states like Texas, property tax can be 3% or so. I live in Missouri, it's only 1%. So typically, deals don't die over property tax.
But in taxes with such high property tax rates there, I have seen deals die because no one could come to a meeting of the minds on valuation. And often, the seller isn't necessarily trying to rip you off. They're telling you what the tax is now. But they have to be realistic. If the RV park is on the tax rolls at $200,000 and you're buying that same RV park for $2 million, you would have theoretically 10 times more tax to pay. And in Texas, that could be a really big number. The 2 million valuation could be $60,000 of tax, while the 200,000 would only be 6,000. That is a big difference. So you have to be very, very clear on all of these numbers. When you start to look at the alignment, you need to understand why they don't match. And you need to get a handle on what the numbers would really, really be. There's no number on the P&L for an RV park on the cost side that you can't get the actual numbers worth three bids. So there's no reason you should fail on that part of it. The revenue side is differently, though.
You have kind of a leap of faith. When they say that the revenue was X, you weren't there. All you see is right now what is before you. You can come up with some derivatives, some signs of life to try and prove them out. But again, there's a leap of faith. And when numbers don't align, you don't feel very confident in taking that leap of faith. Right? Because you're not sure if that person told you the incorrect numbers because they were trying to lie to you, or they're just very bad at bookkeeping. But the key item always with any RV park is you can't rely just on the seller's numbers. If you take that tact, you will always end up getting screwed because they will tell you whatever they need to tell you to get the highest price. It's just human nature. When someone wants to sell their RV park, they want to maximize it. They're leaving the business, they're out the door and they want to take as much money as they can and a bag of money when they leave the premises. So instead, you've got to slow the process down and rebuild everything from scratch.
So really, when numbers don't align, it's not the end of the movie because you really weren't going to rely on those numbers anyway. Sometimes when numbers don't align, it actually is an opportunity. Even small aberrations in numbers can often lead to to seller finance, which is critical. And the same small aberrations can also lead to lower prices, even if you can fix the number shortly after purchase. Let's say for example, you have a RV park where you're going to self manage and the manager is being overcompensated. Now, you don't have to share that with the seller. And when you show the impact of that overly compensated manager, you take that money off the table through a lower price and then you self manage. Well, that's money in your pocket. So alignment really isn't always bad. Where alignment is really bad is when you become fully reliant on the seller's numbers. Because just like asking someone, okay, which of these two trails gets me to where I'm trying to get to and they put you on the wrong trail, that always has a bad ending. But don't freak out when seller numbers are not perfect, they're rarely perfect.
The question is just how far off they and what are the root causes? This is Frank Rolfe with the RV Park Mastery Podcast. Hope you enjoyed this and talk to you again soon.