I looked at a deal yesterday. Someone brought it to me excited, good location, decent revenue, motivated seller, and a price that was at least a starting point worth the conversation. And sitting right there in the property description was a detail that changed the entire conversation.
The park had its own wastewater treatment plant.
Not a septic system. Not a municipal sewer connection. A full commercial wastewater treatment facility on the property that the owner was responsible for operating, maintaining, and keeping in compliance with state and federal environmental regulations.
That single detail did not kill the deal. But it changed everything about how you have to look at it. The capital exposure, the regulatory risk, the operational complexity, the insurance implications, the cost to remediate if something goes wrong. A wastewater plant that fails or falls out of compliance is not a $50,000 problem. It can be a $500,000 to $1,000,000 problem and it can shut your park down while you fix it.
The buyer who walked into that deal without knowing what to look for would have seen a park with good bones and a motivated seller. The buyer who knows what questions to ask sees a completely different asset.
Here is how to put eyes on a deal before you fall in love with it.
Step 1: Run the Red Flag Pass First
Before you rebuild a single number, before you model the debt coverage, before you think about what you are going to offer, run a red flag pass on the deal. This is a quick but deliberate scan of the property, the financials, and the operational setup specifically looking for the issues that can make a deal uninvestable or require significant price adjustment.
The red flags fall into five categories and you need to check all five before you go any deeper.
Financial red flags are the ones hiding in the numbers. Is the NOI missing a management fee because the owner self-manages? Is the owner working full time in the business without drawing a market rate salary? Are the utility costs suspiciously low? Is maintenance running below 4 percent of gross revenue, which almost always means deferred capital is building up? Does the revenue show a declining trend over the last three years? Any one of these changes the value of the deal.
Operational red flags tell you whether the business actually runs without the current owner. Is there a manager in place or does the owner handle everything personally? Are there documented systems and processes or does the institutional knowledge live entirely in one person’s head? What do the online reviews look like over the last two years? A park with declining review scores is showing you the early signs of a revenue problem that has not shown up in the financials yet.
Infrastructure red flags are the ones that cost you the most money and give you the least warning. When was the septic or wastewater system last inspected? What is the age and capacity of the electrical distribution system? Are the roads maintained or are there signs of deferred grading and drainage issues? What is the condition of the bathhouses? Every major system has a finite lifespan and a replacement cost. Know where each one sits in that lifespan before you make an offer.
And then there is the wastewater plant situation. A private wastewater treatment facility is a category of infrastructure risk that goes beyond a standard septic inspection. You are looking at regulatory compliance requirements, operator licensing, ongoing testing and reporting obligations, and capital exposure that is difficult to estimate without an environmental engineer on site. If a deal has one, it needs a specialist assessment before you can price it accurately. Do not guess on this one.
Legal and compliance red flags include zoning that has not been confirmed in writing, permits that may not transfer to a new owner, open code violations, environmental concerns including flood plain designation and wetlands, and any pending or threatened legal claims. Zoning nonconformity in particular is one of the most dangerous and least visible risks in any RV park acquisition. A park that has been operating for years without anyone ever confirming the use is legally conforming can face serious exposure if the municipality ever decides to enforce.
Structural red flags are about the deal itself rather than the property. Is this an asset purchase or a stock purchase and do you fully understand the liability implications? Has the revenue mix been verified and does it create financing challenges with your lender? Are there advance reservation deposits that are not properly accounted for? Are there OTA contracts with auto-renewal clauses or rate parity requirements that limit how you can run the park after closing?
If the red flag pass surfaces more than two or three significant issues, that does not automatically mean you walk away. It means you need to understand the cost and complexity of each issue before you go any further. A red flag with a quantifiable cost is a negotiating point. A red flag with an unknown cost is a reason to slow down.
Step 2: If It Passes, Underwrite It
If the red flag pass comes back clean or with issues you understand and can price, now you underwrite the deal.
Start by rebuilding the NOI from the source documents. Not from the broker package. Not from the seller’s summary. From the actual bank statements and tax returns. Three years of each.
Pull the gross revenue from the bank deposits and confirm it matches what the financials show. Then rebuild the expense side from scratch. Add back every missing expense, the management fee if the owner self-manages, market rate compensation for any owner labor not reflected in the books, normalized maintenance to at minimum 4 percent of gross, a capital reserve contribution of 5 percent of gross, and any utility costs that have been understated or absorbed.
What you are left with after that rebuild is the real NOI. Divide that by the cap rate appropriate for the market and the asset quality and you have your supportable value. Compare that to the asking price and you know whether you have a deal worth pursuing or a price negotiation to have.
Then model the debt coverage at the financing terms you can realistically obtain. Does the rebuilt NOI support your loan payment with a DSCR of at least 1.20 to 1.25? What does your cash-on-cash return look like on your total capital deployment including down payment, closing costs, reserves, and any identified CapEx?
If the numbers hold up after that analysis you have a deal worth making an offer on. If they do not, you have the information you need to either renegotiate or move on.
The Most Expensive Mistake in RV Park Investing
The most expensive mistake buyers make is doing these two steps in the wrong order. They underwrite the deal first, fall in love with the numbers, start imagining what the park could be, and then run the red flag pass as a formality rather than a genuine investigation. By that point they are emotionally committed and the red flags become obstacles to rationalize rather than signals to respect.
Run the red flag pass first. Every time. On every deal. Before you model a single number.
The wastewater plant deal I mentioned at the top? The buyer is still evaluating it. It may still be a good deal at the right price with the right environmental assessment and the right capital budget. But they are going into that assessment with clear eyes because they ran the flags first, not after they had already decided they wanted the park.
That is the difference between a buyer who knows what they are buying and one who finds out after they close.
If you want a second set of eyes on a deal you are evaluating, reach out at pvifinancial.com. Acquisition underwriting and red flag review is exactly what I do.
And if you have not grabbed a copy of my book yet, 𝗙𝗿𝗼𝗺 𝗢𝗳𝗳𝗲𝗿 𝘁𝗼 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗼𝗻: 𝗧𝗵𝗲 𝗖𝗼𝗺𝗽𝗹𝗲𝘁𝗲 𝗥𝗩 𝗣𝗮𝗿𝗸 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿’𝘀 𝗚𝘂𝗶𝗱𝗲 ($49), it covers the full red flag framework and underwriting process in detail, plus a bonus report with 34 specific red flags to verify before you close. You can get it direct here: wendipvifinancial.gumroad.com/l/kqmyb, or Amazon has it too, just search author Wendi Rook.
Leave a Reply