Considering Purchasing A Campground Options

[campinngal]

My husband and I are considering purchasing a campground (or dude ranch). My husband has a steady job that he would give up. We are in our 40's. Am just beginning researching this idea and have purchased a book about buying, owning, managing, etc. Have several basic questions and was hoping to hear from campground owners. Hotel values have dropped ridiculously during the recession. My friend in commerical real estate has a resort that was assessed at 10 million, 2 years ago. It's current assessment is 1.5 million. Have the value of campgrounds dropped as well? He says that the standard right now when making an offer is to offer 20 to 30 cents on the dollar and that one cannot judge profits from the last few years in this economy. Thoughts on this (as it would apply to a campground offer)? Would a campground provide a decent living and/or retirement? If you were to have the choice of buying a campground or ranch today, would you do it? If so, would you go for a higher priced campground with a larger profit or a low priced campground with a smaller profit? A seasonal or year round? Both seem to offer the same percentage profit, it's just the numbers are different. Also, what are the benefits and/or pitfalls of going with a franchise (like KOA) vs. an independentally owned campground. Finally, if you can recommend any books, articles, websites, etc., it would be appreciated. Thank you so much. : )

[Lindsay Richards]

BE CAREFUL

[kcmoedoe]

You can make any offer you wish, but be prepared to find a lot of sellers refusing to talk to you if you are considering offering only $.20 on the dollar. Also, most brokers will not work with a client who continually gives lowball offers. I seriously doubt there is any RV park for sale where the asking price is $1,000,000 and the seller would be willing to take $200,000. Profitable, full time campgrounds (that is the park makes someone a full time living) usually sell for between 7 to 10 times earnings (10 to 15% cap rate). Under this pricing, a million dollar park would be earning at least $100,000 per year, I can't see how any sane seller would sell their business for what it earns in less than two years. There is no way any property has lost 85% of it's valuation from a year ago unless there was some serious deficencies in how the property was originally listed or it was a business that has totally crashed in this ecomony (think a sub-prime mortgage company). Prices for businesses have not fallen as far as residental real estate, especially if the income has not fallen in recent times. Me thinks your broker friend is stretching the truth a little. Before making any purchase, You MUST get current financials and verify the numbers. For campgrounds, I suggest you take a campground ownership class, the one offered by Darrell Hess and Assoc. is highly recomended. Their seminar will give you great insight into the ins and outs of campground ownership and gives you insight into correct valuations as well as giving you the information you need to investigate and validate the financial statements on the business. You can make a good living owning a campground, but it will take a considerable investment. Campgrounds can be financed, you will probably need a minimum of 25% down payment and have some reserve funds to make improvements and cover operating expenses. I would buy as much park as I could afford, the more you have the more your potential earnings. Campground ownership is a seven day a week commitment, you might as well maximize your earnings. The true value in business ownership is getting it paid for operating and improving the business over time and then selling it in the future. That is your retirement. Buy a million dolllar park, pay it off over 20 years, get 3% to 4% appreciation on the valuation and you can easily have 2 million or more at retirement and have made a living over those 20 years. If you financed the purchase and made a 25% down payment, that is a very good rate of return on your $250,000 and your labor. If pricing and rates of return are equal, I would clearly opt for a seasonal park, why work 12 months when you can work 6. That being said, seasonal parks generally sell at a premium for that reason. As for a dude ranch, unless you have ranching experience, I would advise going another direction, ranching is really, really tough and the returns are not as consistent as an RV park.

[rgatijnet]

I would think that to some extend a campground is not much different than any other business. The value of the property, as a business, is based on the amount of income that it can generate. There are standard tables used to figure the value of a business based on income. IF the property MAY be redeveloped into something else, other than it's current use, than many other factors must come into play. For instance how much to demo the existing use structures? How much to modernize/rebuild or construct new structures for the new business? Now, you take all of those total costs, and see IF the anticipated income makes it a viable business proposition.
Down here we have many many businesses that CANNOT be sold as a profitable business. They were started when the cost of real estate was lower and the long term owners are the only employees with a small mortgage payment. Once sold, at even today's reduced real estate values, the business can no longer generate enough income to support the new larger mortgage, and the new owner's salary and other payments.

[abbygolden]

You can make any offer you wish, but be prepared to find a lot of sellers refusing to talk to you if you are considering offering only $.20 on the dollar. Also, most brokers will not work with a client who continually gives lowball offers. I seriously doubt there is any RV park for sale where the asking price is $1,000,000 and the seller would be willing to take $200,000. Profitable, full time campgrounds (that is the park makes someone a full time living) usually sell for between 7 to 10 times earnings (10 to 15% cap rate). Under this pricing, a million dollar park would be earning at least $100,000 per year, I can't see how any sane seller would sell their business for what it earns in less than two years. There is no way any property has lost 85% of it's valuation from a year ago unless there was some serious deficencies in how the property was originally listed or it was a business that has totally crashed in this ecomony (think a sub-prime mortgage company). Prices for businesses have not fallen as far as residental real estate, especially if the businesses income has not fallen in recent times. Me thinks your broker friend is stretching the truth a little. Before making any purchase, You MUST get current financials and verify the numbers. For campgrounds, I suggest you take a campground ownership class, the one offered by Darrell Hess and Assoc. is highly recomended. They seminar will give you great insight into the ins and outs of campground ownership and gives you insight into correct valuations as well as giving you the information you need to investigate and validate the financial statements on the business. You can make a good living owning a campground, but I will take a considerable investment. Campgrounds can be financed, you will probably need a minimum of 25% down payment and have some reserve funds to make improvements and cover operating expenses. I would buy as much park as I could afford, the more you have the more your potential earnings. Campground ownership is a seven day a week commitment, you might as well maximize your earnings. The true value in business ownership is getting it paid for and then selling in the future. That is your retirement. Buy a million dolllar park, pay it off over 20 years, get 2% appreciation on the valuation and you can easily have 2 million or more at retirement and have made a living over those 20 years. If you financed the purchase and made a 25% down payment, that is a very good rate of return on your $250,000 and your labor. If pricing and rates of return are equal, I would clearly opt for a seasonal park, why work 12 months when you can work 6. That being said, seasonal parks generally sell at a premium for that reason. As for a dude ranch, unless you have ranching experience, I would advise going another direction, ranching is really, really tough and the returns are not as consistent as an RV park.

What a great response! Lots of info and a great insight into a portion of the industry about which I knew nothing. I hadn't been considering doing anything like this, but if I had I'm now totally dissuaded about even dreaming about it. Great post, thanks.

[Lee and Fran]

I know of a park for sell in Utah and the price I believe is around 1 to 1 and a half mil. It has a store, gas station, restaurant, indoor pool, many rv spaces, some rv type of trailers he has built for travelers to stay in besides rvers. And is in a mountain setting with a large lake the other side of the mtn from it that is very active in summer. He runs this place year round. It also has a house for owner to live in on the property.

[kcmoedoe]

I hope I haven't turned too many people off of purchasing a park. Speaking as a former bank executive, we had several parks in our portfolio. My experience was they all performed well, we never had a default. We limited our exposure to parks that were full time businesses. We had both owner/operator type operations and corporate parks. The profitability of parks rose over time as they were able to raise rates in response to rising costs, while their investment in the property was steady. Over time, several of the parks sold at a considerable profit to the owner, yet remained profitable to the new owner. Also, we had several that sold to developers for higher use conversions. Again, the investment turned a substantial profit to the park owner. We chose not to finance any park where the financials did not support the payments and provide a livable income to the owner. We were not interested in situations where the owner needed to supliment the income from the park to survive. As I stated in the other post, we required 25% down payments as a minimum. We also required the buyer to have financial reserves to allow for any repairs and allow the owner to carry the property through the off season. Among the reasons we favored RV parks were the fact that the clientel was not a function of ownership. There was little chance that the change in ownership would significantly effect sales. This is not always the case in service businesses. In many businesses, the owner may be the primary reason the business has customers (for example building trades, landscaping businesses, medical practices etc all rely on relationships whereas RV parks generally do not). Parks have substantial tax write offs, so much of the profits stay with ownership. They are good investments for hard working people, but they are not get rich quick or even get rich fair fast schemes. They also are not inexpensive to get started in. Individuals that financed with us, typically invested most of their life savings, usually $200,000 and up. Also, the people that bought parks talked as much or more about buying a lifestyle than they talked about all the money they were going to make. Good luck.

[campinngal]

Thank you so much, particulary KCMOE for your valuable insights. Very much appreciated and a great place for me to start. Would love to hear from owners on KOA vs private. Am interested in a pricey KOA in a busy seasonal area and am wondering if it's worth it.

[kcmoedoe]

Thank you so much, particulary KCMOE for your valuable insights. Very much appreciated and a great place for me to start. Would love to hear from owners on KOA vs private. Am interested in a pricey KOA in a busy seasonal area and am wondering if it's worth it.

KOA franchise agreements call for 10% franchise fee on all site rentals that are less than 1 year. There is also an upfront franchise fee. Contrary to some posts you read, there IS corporate good will value to KOA. How much is something you will have to research in the area your are looking at. You need to get an idea of the occupancy of similar quality parks in the area. Are they as full or even fuller than the KOA at any given time and priced similarly? If so, the KOA franchise is not adding value in the area. If the KOA does equal or more business, and supports a higher rate, then the franchise is adding value. KOA is very good at helping the franchisee maximize rental incomes. Their nationwide reservation system is an asset, and they have agreements with many RV rental companies that help drive traffic to their franchises. They also provide training and have a support staff to help the business move forward. All that being said, several park owners told me they were more comfortable having a recognized corporate name, they felt it gave them added credibility in the market. About an equal amount of owners felt they wanted to be completely free of any corporate yokes and wanted to do whatever they felt benefited their business and didn't want to feel like they were being watched. Therefore, I guess it is both a financial decision and an emotional one.

[kcmoedoe]

I would think that to some extend a campground is not much different than any other business. The value of the property, as a business, is based on the amount of income that it can generate. There are standard tables used to figure the value of a business based on income. IF the property MAY be redeveloped into something else, other than it's current use, than many other factors must come into play. For instance how much to demo the existing use structures? How much to modernize/rebuild or construct new structures for the new business? Now, you take all of those total costs, and see IF the anticipated income makes it a viable business proposition.
Down here we have many many businesses that CANNOT be sold as a profitable business. They were started when the cost of real estate was lower and the long term owners are the only employees with a small mortgage payment. Once sold, at even today's reduced real estate values, the business can no longer generate enough income to support the new larger mortgage, and the new owner's salary and other payments.

You are absolutely correct on every point. I want to point out, however, that valuations of businesses based on income may not apply directly to campgrounds and other property dependent businesses. You cannot buy a hotel, an office building or a cattle ranch for example at 4 times annual earnings. A business that relies on rented space (or can be run without commercial space) is usually valued at 3 or 4 times earnings multiple PLUS equipment, inventory and possibly goodwill. A campground is closer to commercial real estate valuations. You could do the same type of calculations (3 or 4 times earnings) but then you will have to add in the market value of the real estate, the value of improvements and the value of the of the living quarters. As you explained, there are many businesses where the real estate valuations have exceeded the income valuations. That is why I have always preferred the income approach to valuation when financing a business. I wouldn't approve any loan for a business where the selling price exceeded the ability of the property to generate the income needed to pay the loans and provide free cash flow for the owner. Any difference in valuations would need to be covered by additional down payments, which usually becomes an insurmountable hurdle to the buyer. In situations where the business valuation is less that the real estate valuation, the business value is lost unless the business can be relocated or the property footprint reduced. However, there may still be value to a business that will cashflow the property allowing the owner to hold the real estate for even further appreciation.

[pogoil]

My wife and I are in our 40s and 5 years ago we bought a park on the Oregon It is a small park, 4 acres and 48 sites. We moved out of California with our 2 children and we have never looked back. The park is a perfect fit for us. We can run it as a family and get away as we have a tenant that is retired look after it when we need some down time. You will not get rich running a small RV park. It is hard work and you become a fix it man. That was no problem for us we are hard workers. But the change from a city of 70,000 to about 2,000 has been a good one. Hopefully when we get older it will be worth more, or one of our boys will want to run it and we can travel more. Time will tell. We have built up a good base of returning retired folks that stay for the summer we have some long term people and have some over night stays. It is a good mix.
I am not sure how a seasonal park can make it but they seem to. We also have 4 rentals on the property that help pay the bills which can be considerable. Cable, water, sewer, electric and insurance. We would not have it any other way. Fuel seems to be what we worry about the most. I tell my wife it would be a shame to do everything right and have fuel cost take us down because people will travel less. But I cannot control that. By the way in the 5 years last year with fuel costs the highest we have ever seen we had our best year and this year has surpassed last. We as Americans like to travel.

[Lindsay Richards]

One thing you must remember in any small business is that many people take cash out of it unreported. This trend has gotten a lots smaller now with so many people using debit and credit cards. People may or may not try to fool you on this point indicating that the park actually generates a lots more than reported. It might and then again, it might just be BS. If the buyer is getting a mortgage, the only income able to be used is from the last several years of tax returns. This skimming is not legal of course, but it is a fact of life and must be taken into consideration. It does open up a big fudge factor for the crooked seller to over inflate the value of a lesser property. Be careful.

[kcmoedoe]

One thing you must remember in any small business is that many people take cash out of it unreported. This trend has gotten a lots smaller now with so many people using debit and credit cards. People may or may not try to fool you on this point indicating that the park actually generates a lots more than reported. It might and then again, it might just be BS. If the buyer is getting a mortgage, the only income able to be used is from the last several years of tax returns. This skimming is not legal of course, but it is a fact of life and must be taken into consideration. It does open up a big fudge factor for the crooked seller to over inflate the value of a lesser property. Be careful.

AMEN!! Beat the tax man, and you will eventually lose to the resale man or the loan man. If income doesn't exist on the books, it doesn't exist. Period, end of story.

[Gunship Guy]

What a great topic. The replies were all very informative. Pogoil, good luck with your park. Nice to hear things are going well.

[pogoil]

What a great topic. The replies were all very informative. Pogoil, good luck with your park. Nice to hear things are going well.

Gunship Guy,
Thank you for the kind words.
Pogoil.