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Everyone loves the old adage "buy low and sell high". But when you buy "low", that often means buying an asset that is not working properly. So how do you value an RV park that is not running on all eight cylinders. It's a lot more difficult than you think.
You cannot overpay for an RV park and succeed. In real estate, you make your money on the front end, by buying the property at a great price. So how do you determine how much to pay?
An RV Park is More Like a Restaurant than an Office Building
RV parks are one form of real estate in which the commitment of the tenant is measured 24 hours at a time. In an RV park, unlike office buildings, apartments and shopping centers, the tenant can cancel their lease and leave at any time with no notice. So customer retention and demand is much more vital - and occupancy and revenue is much more unpredictable.
RV parks are very much like a restaurant in that it is a business with a lot of small sales (nightly revenue at most RV parks is around $30 per customer) and the quantity of sales changes every day. So the only way to determine the normal revenue of an RV park is an average of prior periods - normally months and years. Without prior period information, it is impossible to truly know what amount of income an RV park will produce. So you can never pay more for an RV park than what it's average prior performance can support. If an RV park had $100,000 of net income per year over the past three years, then it's a reasonable bet that it will produce that income again this year. If the seller cannot supply prior year performance, or the net income was only $40,000 per year for the past three years, then you can only pay a price based on $40,000 of net income - even if the seller claims that it has the potential of making $200,000. All that matters is past performance. That's all you can pay for.
What is Replacement Cost for the RV Park?
Another benchmark in buying a turn-around RV park is getting a handle on what the replacement cost of the property is. An RV park is made of two things: 1) land and 2) improvements. Replacement land cost is based on comps of recent land sold in the same general location, normally on a per acre basis. So let's assume that an RV park is on 10 acres, and that the price of a similar acre of land is $10,000. In that case, the replacement cost of the land is $100,000.
The cost of improvements is more complicated to calculate. The normal improvements in an RV park include electricity, water, sewer, roads, parking pads, swimming pool, office/store, clubhouse, pavilion, fishing lake, etc. A standard rule of thumb is a cost of around $8,000 per lot, not counting the amenities such as pools, clubhouses, etc. So a 100 space RV park would cost around $800,000 to build, plus the cost of land.
Knowing the replacement cost of an RV park does not determine its value. America is full of failed real estate projects that cost more to build than they were worth. But it does give you a handle on how good a buy you might be making. One of the signs of a good buy is often buying a property for far less than construction cost. If you can buy an RV park for less than construction cost, it at least means that the likelihood of somebody building a new RV park is diminished, as they will not be able to compete with you financially, under the burden of a mountain of debt.
Comparable Sales
A good source of value are comparable sales of similar RV parks in the immediate area. The reason this information is valuable is two-fold 1) it suggests what a similar property's average income is when running properly and 2) it shows you what the RV park might be worth once you get it back in good running condition.
But it's important to remember that the sales price of the RV park down the road does not justify the price you are paying unless you are basing your price on current performance.
Conclusion
You can only pay a price for a turn-around RV park that is based on its actual, past performance, averaged over a period of years. The current owner should not be rewarded for potential value that they are not currently harvesting. The replacement value and comparable sale information is a good resource, but at the end of the day, you can only pay based on current and past reality. Don't listen to the seller's pleas that they could have had much higher income if they only had put in more effort. If there is more income to be had, then it belongs 100% to the person who can make it happen.
