Many investors “partner” to buy properties. But how do you divide up the profits in these cases? In this Self-Storage University podcast we’re going to review the common thoughts on structuring profit splits as well as forging successful, long-term partnership arrangements. As we’ll discuss, there’s much more to partnership considerations than just dividing up the money like a pirate ship. And a strong partnership – one in which all parties feel they are being treated fairly – can be an essential tool to buying storage properties.
Episode 27: Structuring Partnership Profit Splits Transcript
We've all been in situations where we see a deal and we think it has got all the right material, but it is horribly overpriced. So how do you go in? Can you even make a low offer without insulting the seller? This is Frank Rolfe, the RV Park Mastery Podcast. We're going to be talking about this very topic, how to make low offers on an RV park without the seller being insulted and therefore not going to talk to you or debate, or even discuss the possibility of selling to you any longer because you've made them mad.
Let's first start off by why sometimes RV parks are in fact overpriced. Many moms and pops who owned these things failed to really understand the mathematics in the modern world of buying a property. Some of them think their park is seemingly worth a lot because the one down the street just sold for a lot, not realizing that it's larger, has higher rents, or is much nicer. Then there are other sellers out there who have frankly they are just looking for a sucker. They know the correct valuation and they know their valuation is extremely high. It doesn't bother them at all because if they can just find that person dumb enough to pay it, then the money will be in their pocket and they've had a huge success as a seller.
But the truth is that deals that are horrible overpriced seemingly never get done because the buyer fails to get an adequate appraisal. The appraiser can't come up with the number anywhere near where the seller wants, and without the appraisal falling in line the banker won't touch the thing. So in those situations where you have a park that's priced too high, clearly too high, how do you go about then broaching the subject with the seller that the price is too high and having him listen to you?
Well, the first thing you want to do in these situations is you want to start with an affirmation that you are a win/win deal maker. So before you even throw out the price, start off by telling them such things as I understand as a seller you want to get as much as you can for this property. I'm a win/win deal maker and I want you to get as much as you can for this property. At the same time on my side of the equation, I've got to be able to cover that mortgage. I have to have some money held back for a rainy day, and I have to make money too. It's my thought that we can come up with something that is mutually agreeable that's a winner for both of us. It's those kind of statements that tell a seller on the front end that you're not just low balling them because typically people who do win/lose negotiation, these are people who don't care if the seller is happy or sad at closing. They always come off with kind of gruff manner, like, "You know your property is crazily overpriced. You're nuts, so here's what I would throw out." That only works really well when someone is in a bind.
So if someone is about to be foreclosed on, or there's some other issue, then sometimes you can force people to accept a lower price, and sometimes being rude and crude makes it more possible. But the problem is in this case typically RV park owners have no sense of urgency. They normally have all their bills paid, they're older, have no debt. That's just not going to work for you. So the better route is on the very front end, when you first talk to them about their RV park, you let them know that you are a win/win deal maker, and that you very much want them to get as much as they can.
Number two, blame it on the system. Tell them that RV parks are really valued based on some metrics derived by the financial industry, and you can't buy the property for cash you're going to have to get a loan. So there's this reality check called the bank, and that you've talked to some banks and you understand the coverage ratio, you know what they're going to use as an expense ratio, and in fact you know how they're pretty much going to derive what the value will be. So as a result, you have a pretty good idea that the price in this case is going to have to be a little lower not because you say it must be, but because the banking industry says it must be. That you know roughly what it will appraise at, roughly what the banker will allow you to pay for it, and as a result we're all basically at the mercy of the generic lending community. If the lenders just won't touch it, they're not going to bless it, they're not going to say yeah that property now this price makes sense. There's just no way you can buy it.
So it's always good to explain to them where your value comes from, and what it ties to. This isn't something where you're just a speculator buying a painting in an art gallery. The art gallery owner says, "Oh this painting is by a guy who will one day be famous, and I'm asking $2,000 for it." This is different. This is an income property. The value is derived from the income. That's why you're better off investing in an RV park than a painting. A painting makes no income. Pure speculation. Maybe you get it right, maybe you don't. But that's not what good investing is all about. But you have to explain to the seller that there is math involved. There are metrics to create that value, but they're not yours. It's not you making the rules. The rules already exist.
Number three, be inclusive with them at how you arrived at your value. Show them your numbers. Don't be embarrassed, don't be afraid to say here's what I think the revenue is, this is what I'm guessing, this is what you're saying it is, and this is what I think the expenses would be. This is the net income. Bank is going to want to see 1.2 coverage ratio, 1.25 coverage ratio of that mortgage payment. As a result, this is as much as I can do. But if I'm making a mistake here, if I've got these expenses wrong or these revenue numbers wrong, show me where I made my error and I'll happily change it. When you're inclusive, it does strange things to the seller. When you're inclusive, now they're on your team and they're tasked with trying to figure out how you make money with it. You can't insult people when you're inclusive. When you say, "Here's how I came up with it. Show me my error," you're asking them to get in there with you and come up with the value, and it disarms a lot of sellers who might be grumpy otherwise if it was, "Here's my opinion, there's your opinion." But no, in this case you're saying, "Here's my opinion, but it's an open opinion. I'm happily going to change it if you can show me what I did wrong." And if they show you, then go along with it. If you do have your cost structure wrong, then adjust that. If your revenue is seemingly wrong, okay.
Now there's some things you can't bend on. If they say, "Well, no wait, my property tax is way lower than that," you have to say, "But when I buy this the tax assessor is going to know about it, and they're probably going to evaluate it and raise it. So I've got to assume they're going to raise it to what I'm paying," because at the end of the day that's what it should be. Maybe they'll make a mistake and not take it to full market, ,but nevertheless it doesn't make it right. So as a result, I've got to protect myself and use the correct number. But just be honest. Be realistic. Sellers love that. They love honesty. It's a turn on for them because so much of the world today is just a bunch of politically correct nonsense. We are all so conditioned to BS, every day, with what we see and what we hear going on in America that people gravitate, they embrace the good old fashioned principles of the truth. They don't see that much in their day to day life. So when you say to the person here's the truth and you really mean it, that is a turn on for the seller.
I have in many cases forged deals by simply, after going over that review of the numbers, saying to the seller, "So from my position how do we make this compelling? You want a price of X, I don't see how I can make any money paying X. How do I make any money at X?" Often when you turn it around and put them in your shoes, they're willing to bend a little because they say hm, okay I have empathy for this buyer, I can see where they're coming from.
One other magical ingredients in all of this when talking to the seller is if you can, before you give them your price, try to do a little bonding. Everything we talked about so far certainly stems from conversation. From conversation comes bonding. I've a million stories of bonding. What is bonding? Bonding is when the seller sells to you because they like you. Often at a lower price, seller financing, simply because you're more than just a number to them. You're someone who they like, you're a friend. Maybe you remind them of one of their kids. Maybe you remind them of themselves when they were younger. Maybe they just kind of like you in general. But the more you talk to them, the more that bonding can grow. Often getting that price reduced all will tie back to your ability to bond with that seller. But don't be afraid to make those low offers. The one mistake many buyers do, and it's sad, is they don't make offers, they just pass on the deal. They don't want to insult that seller. For all they know, if they'd made that offer the seller would have taken it and it might have been the perfect property for them.
So make those offers. Make those low ball offers. But do it the right way. Forge good deals. It's all about win/win deal making in the RV park industry, and you should adopt that too. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.