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BUYING AN RV PARK? BEWARE OF COOKED BOOKS.
IT'S A RECIPE FOR DISASTER.
America is fascinated with shows about
cooking. Chef schools have popped up in almost every major city.
But there is one type of specialty cooking that is growing in
popularity in all parts of America, and that's cooking the books
on RV parks that are for sale. And unless you know what you are
doing, your financial ruin is on the menu.
What are "cooked books"? Basically, it's
inaccurate revenue and expense numbers, generated by the seller.
These numbers are normally relied on by the buyer, and their
lender, to make decisions on the anticipated amount of income
the park will generate and, accordingly, how much can be paid
for it. When these numbers are wrong, all of the other numbers,
such as purchase price and loan size, are wrong to. And the end
result is that there is not enough money each month to pay the
bills and the note payment.
Why do sellers "cook their books"? That
question is easy. Since real estate is normally sold based on a
cap rate of income, and assuming that the cap rate is often 10%,
then every $1 that they show of income is an extra $10 in their
pocket. Basically, the key driver is greed. But often, the
seller misrepresents things based on their own bad accounting
practices, or even not thinking about the value of their own
time. So cooking the books is not always deliberate - but the
end effect is the same.
The key areas of "cooking" include:
·
Incorrect numbers on revenue. It is rare for a
seller not to overstate revenue. Since most RV parks work
on a cash basis, it's easy to pretend that there is more income
than there really is. And, if pressed for bank receipts, the
seller will say he doesn't deposit all the cash - he spends it.
And to cover his trail, he will also tell you that he cheats on
his income tax (it's a good thing the IRS doesn't buy RV parks)
and does not report all the cash on his tax return, either. And
then to really make matters tough, he has no formalized
accounting system at all, he just takes in cash and spends cash,
so it is impossible to attempt to build a paper trail.
·
Not telling you the truth about repair and
maintenance. Many RV parks have substantial problems in their
water and sewer systems, but hide that fact by "capitalizing"
the repairs and not showing them on their income and expense
statement. They put them on their balance sheet as a capital
investment, and then you never see the balance sheet (they know
that, that's why they do that). You think you have a
well-running system, and in fact you have the plumber out on day
one.
·
Misleading you on the amount of time, and cost, of
managing the property. They will tell you that they only spend a
few hours a day, when in fact it's eight hours. And they leave
out their staff of three family members that they pay under the
table. And forget about revealing the cost of mowing the park,
because they do that themselves. These numbers can lead up to
many thousands of dollars per year.
·
Property Tax. Don't ever let the seller tell you
that the property tax will remain unchanged after the sale. You
must use 100% of the tax due based on an appraised value of the
park at the price you are paying for it. Period. If the tax
rolls show the park at $100,000, and you are paying $400,000,
then you must calculate 400% of the existing tax amount. I don't
care if it is a non-disclosure state (states that do not require
you to give them the exact purchase price amount), they will
ultimately find you and raise it. And by then, the seller, and
his assurances, are long gone.
So how do you protect yourself? We urge
you to buy our book Thirty Days of Due Diligence,
which tells you every step to take every day of your standard 30
day due diligence period. It is inexpensive and just may save
your financial life. And if you decide to go it alone, by all
means, check out every possible number on that income and
expense statement to validate it. Go to the source on utility
bills. Talk to the existing plumber on repairs. And ask to see
the real revenue for at least the time that you have the park
under contract.
Will using the real numbers tank your deal?
Possibly, but would you rather have a park that sinks you in
hand, than looking for another opportunity in the bush?
Eating people's cooking is one thing, but
buying their book cooking is another. One tastes good, and one
leaves a terrible taste in your mouth - and your wallet.
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