Since 1995

Once you understand how resorts are priced you can plan a workable buying strategy.

Rule #1: You cannot use residential appraisal methods to price a resort.

Rule #2: All resorts are priced for cash buyers, not financed buyers.

Rule #3: Despite rule #2, most resorts sell to financed buyers.

Rule #4: Timing is the decisive factor in financed resort purchases.

Rule #5: Emotion is the decisive factor in cash resort purchases.

A "cash purchase" means the buyer pays all cash for the resort, or a cash equivalent such as a 1031 tax deferred exchange. There are no loan payments which means the buyer keeps a lot more of the gross annual sales.

A "financed purchase" means the buyer makes a cash down payment and borrows the rest of the resort purchase money from a lending institution. Financed purchases result in loan payments which normally take a huge bite out of annual profits.

As a general rule, but certainly not always, a resort sells at a higher price when the buyer pays all cash. This is why sellers understandably price for cash sales. It only makes sense to do so. I'll explain why cash sales usually bring higher prices in a minute.

For a financed purchase, the higher the amount of the purchase price that is financed, the lower the selling price must be. This is understandably why sellers don't price for financed buyers. I'll detail this issue in a minute too.

Cash buyers are not as common as financed buyers. However there are enough cash resort sales every year in the small resort market to encourage sellers to hold out for cash buyers. As a real estate agent I cannot recommend they do otherwise.

Most resorts do end up selling to financed buyers simply because sellers, after a period of time, decide to price for buyers who will finance the purchase. The critical skill needed by all financed buyers is patience. Most sellers will hold out only so long for that cash buyer. If the cash buyer does not come along, and the seller really wants to sell, they will lower the price. As soon as the price drops serious financed buyers move in quickly to make the purchase.

Why Cash Sales Bring Higher Prices
To begin with, it is very important to understand why people buy resorts. It is mostly about emotional satisfaction, not so much about the money. Of course the resort needs to support the owners. And a good operation will make you rich. A good resort operation is an extremely rewarding lifestyle both financially and emotionally. But again, most will buy for the emotional side. Unfortunately with only some 1,700 small resorts left in America, the small resort lifestyle opportunity is rare these days.

There are literally millions of Americans who have stayed at small resorts over the last 30 years. Somewhere around age 40 or 50, many of these guests start recalling the fond moments they enjoyed at small resorts when they were younger. If they can get out of the "rat race" into a small resort, life might be fun again.

Anytime you have something that people want badly, and the desired object is rare, prices are naturally going to climb. Keep in mind that out of America's 80,000 lodging facilities, only about 1,700 of them are small resorts. The number of people who truly understand and desire the rewards of small resort operation is far higher than available resorts!

Keeping this emotional value in mind, now envision a 50-something couple who wants a resort, and they have several hundred thousand dollars in cash. They walk onto a resort. Within minutes they are looking at each other and saying, "This is the one". I see this happen every year.

The couple says to me, "Cooley this is the place we want. How much should we offer?" When I show resorts the prospects will know the numbers before they walk onto the property. They know the gross sales, the expenses, and the net profit before tax. The numbers are behind them for the moment.

I respond by saying, "Offer the price you think would be right for you. But keep in mind others are also looking at this property. I showed it last week, I will be showing it next week. This is not sales pressure, it is the truth. If you really want it, don't play hard ball Donald Trump style. Think it over tonight if you want, and we'll write an offer tomorrow."

These cash buyers don't want "their" resort to "get away". Because they really want it, and because they will not have the large loan payments to deal with, they can afford to offer more money than a financed buyer. They can offer $50,000 or $100,000 or even more than the buyer who has to make loan approval. Cash buyers don't have to run the gauntlet of bank analysists and the bank appraisal.

Banks have to be very cautious with resort loans because all banks have had resort loans that went bad. Believe me, banks are anxious to make resort loans because good resorts contribute a great deal to the economic well-being of this area. But the bankers are not stupid. That brings me to the next point.

The Higher The Amount Financed, The Lower The Price Must Be
Loan payments take all the fun out of life - if they are too high. Most resort purchase loans are considered high risk loans. That means only the most qualified applicants get the good terms, but even then it won't be the sweet deal you got on your last home purchase.

Most resort loans require a down payment equal to 20 to 25 percent of the purchase price. (On top of that you'll also need a capital reserve.) However, the more money you put down the better off you will be as the resulting loan payments will be smaller. You don't get rich paying interest.

So many times I have seen people willing to pay more for a resort than what the bank is willing to lend. Or perhaps the bank is willing to lend the agreed upon amount, but the appraisal comes back at a value under the agreed upon purchase price. In other words, it is not you and the owner setting the purchase price, it is the bank and the appraiser.

In most cases the bank will lend on a purchase price that is considerably less than what the sellers want, and this price is usually $50,000 to $100,000 less than what a cash buyer will pay.

Bankers know that if the loan payment is too high, and if there is a bad year which happens in the tourism industry from time to time (i.e. 9/11), they'll have a bad loan on their hands. Bankers have enough experience to know what the safe amount to lend on a resort property will be in this area. I can assure you, it is almost always way less than what the sellers want!

For Financed Buyers Timing Is Critical
Historically speaking there have been more resorts sold to financed buyers than cash buyers. While cash buyers are uncommon, they are not rare. Sellers know this. The gossip gets around faster than the speed of light - here or anywhere else. It's human nature. When a resort sells for cash, the entire small resort industry here knows it within seconds, I swear!

Thus for a good many reasons, sellers hold out for cash buyers. Then the name of the game for financed buyers is to plan, understand, and wait. This is a tricky game to play, but it is the only way to buy for financed buyers.

At some point in time sellers get tired of waiting for that cash buyer. They give it a real good run, but if that cash deal does not happen, they begin to get frustrated. They see a house they'd love to buy. They want to get back to where they came from to be with their grand children. I get a phone call. They tell me they want to lower the price. They say they feel okay doing so because they gave it a good try at the higher price.

That is all most of them want - a good try at top dollar. If it works, great. But if it does not, then okay, they settle for a little less, or a lot less. The time factor will vary from resort to resort. The record I have personally seen is sellers who held out for ten years. As long as they can afford to, or are willing to do so, there is nothing wrong with this strategy.

Sellers will take a run at the cash market for a year, two years, five years. It depends on how many other resorts are on the market that compete with their sale, it depends on how many showings they have had, or any other number of factors.

As a financed buyer plan to be ready for when I call you and say the price has been lowered. Your key to getting your resort at the right price is not to drag your feet and nit-pick over contract terms. Get all that out of the way well in advance. When the price drops, move fast and buy it! Why?

Keep in mind I have several financed buyers waiting for me to call them to say a price on this or that resort has dropped. The longer a resort stays on the market, the longer grows my list of prospects waiting for the price to drop. Trust me, this is NOT sales pressure! When the price drops you need to be ready to pounce on it. There is plenty of time BEFORE the price drops for you and I to discuss all the contract terms, to line up the loan, and how to handle the closing. Do NOT wait until the price drops to plan what you want to do.

Financed Buyer Strategy
I work with a lot of buyers long term. In most cases people buy resorts about a year after they first come to this area. I've worked with some buyers for several years before they find the right deal. I don't mind these long term relationships as long as the buyers have a well thought out game plan. In many cases I help them make that plan. It's what I do well. I even have certain "trade secrets" in this planning process that I will not cover here for obvious reasons. Phone me and I'll help you work up a strong plan.

Emotions Drive Price
As I mentioned above, emotions play the leading role in a resort purchase for a cash buyer. If it was not for the bank, emotions would also play the leading role in a financed purchase. Yet there is always a certain amount of prudence in a resort purchase, and after emotions, profit plays the supporting role. Here is a typical example.

Cash buyers obviously will not be making any loan payments. If a resort has a net annual profit before tax of $50,000, it looks good to a cash buyer. If a financed purchase results in $40,000 in annual loan payments, then to the financed buyer this same resort is not a smart buy. Loan payments come out of that $50,000 net annual profit before tax, which leaves only $10,000 profit before tax for a financed buyer.

If a resort is successful it is only because the owners love their property. They have a strong passion for the good service they provide. There are many truly rewarding moments with guests. There are many rewarding moments looking at the lake under a sunset, or during beautiful clear spring days. There are many emotional rewards that don't show up in the financial statements!

Remember that all season sellers hear their guests complain about their jobs "back home." They don't want to leave the resort. The week they spent went way too fast. As they leave they tell the owners how lucky they are to have the resort owner's lifestyle. This from educated, successful guests who make a good annual income!

Many owners tell me, "Cooley, it is not so much about the money. We know we will not get rich. We'll make good money, and live well, but we'll not get rich, but we don't care. The emotional rewards are worth more than gold to us."

Sellers know the emotional value of their property. Sellers know there are people who will pay a premium for that emotional value. As a real estate agent I can say that sellers are very right in their opinion. I work with many people who want to own a resort with all their heart, mind, and soul.

And so, like the very old saying goes, "Beauty is in the eye of the beholder".

A Closer Look At 1031 Exchanges
What are the chances of the sellers getting cash? Better than you might think. It is not so much the pure cash transactions that occur, but 1031 Tax Deferred Exchanges, which are equivalent to cash. Yet in addition to 1031 deals, each year I work with a growing number of cash buyers. Some years I see 1 out of every 2 resort sales as cash.

What makes the 1031 a very emotional event is that the buyers have a limited amount of time to act. They can't drag their feet for long. In a 1031 exchange the buyers are selling a property, which is called the "relinquished property". The property they are buying is called the "replacement" property.

From the moment the buyers transfer their relinquished property to their qualified intermediary (QI), they have exactly 45 calendar days to identify three properties they are interested in buying. They have exactly 180 days from the moment they transfer their relinquished property to their QI to purchase one of those properties.

Smart exchangers go looking at properties before they relinquish their property. However, when an offer comes in on the property they wish to relinquish (sell), they'll need to accept it if it is a good one. Now all the sudden they don't have much time. Their clock is running.

This is one of the reasons that 1031 buyers move quickly. Each year I see more and more 1031 deals. I love them. So does everyone else. The word is out on 1031s. If you are a qualified financed buyer who is serious about owning a resort, the 1031 is yet one more reason you need a well planned buying strategy, because the 1031 buyers are as motivated as buyers can be.

Commercial Real Estate Pricing  is NOT Residential Real Estate Pricing!
Where I see both buyers and sellers get all messed up on resort pricing is thinking that commercial property is appraised the same way as residential property. This mis-understanding leads to the biggest mistakes made in resort management. It goes like this . . .

Buyers think "Well, if all else fails, I can sell it. What with property prices on the rise around here, I'll make out okay."

Sellers think, "Well hell! That house down the road just sold for $350,000! Our place ought to be worth twice that!"

Nothing could be further from the truth! Nothing, and I mean NOTHING (except perhaps not having indoor plumbing) will cause you to lose your nest egg faster than assuming that your resort property value appreciates annually just like residential property. While the commercial property land value will appreciate somewhat,   it is not the leading consideration in commercial value. Cash flow is the value leader.

To illustrate this very important point I will use an example of a 3 acre, 10 unit resort, with a commercial boat dock, in the middle of a residential neighborhood. Let's say this resort also has a "killer" lake view to boot. This resort borders three residential single family homes, each also on 3 acres of land, and each also having the killer lake view, and each has a residential boat dock.

Let's say that back in year 2000 those three homes each sold for $150,000. Then in 2006 they all sold again for $300,000 each -that is, they all doubled in value, which establishes an obvious appreciation trend in our example residential neighborhood.

Regarding the resort value, let's say the owner's paid $500,000 for it in 2000. The extra $350,000 is because it not only has a house, but has 10 cottages and the commercial boat dock, and a cash flow. Now let's say the resort owners try to sell in 2006 for $1,000,000. After all, the homes doubled in value, thus in the resort owner's mind, so has his resort, right? Wrong!

Commercial property value is determined by that property's ability to generate a cash flow, nothing more. Location, Location, Location is all about Cash Generation, Cash Generation, Cash Generation when it comes to commercial property. When it comes to residential property, Location, Location, Location is all about Emotional Value, Emotional Value, Emotional Value. I'll give a few examples to make it crystal clear because this difference in understanding is the whole basis for becoming a Small Resort Millionaire - you can't sit back saying time is on your side.

Now you say I speak with forked tongue. Way up above I went on and on about how a resort purchase was emotionally driven. Now I am saying it is cash flow driven? Ah yes! Now we see where the confusion comes in, and why so many resort owners and buyers try to value resorts like homes. Time for a deeper look into the matter.

Pretend we have a three bedroom two bath 2,500 square foot home for sale. It sits on a half-acre lot bordering a large Wal-Mart Super Center, which is only 150 feet away from the house The Wal-Mart is open 24 hours, 7 days a week. Would you want to live in this house? Of course not. Who would?

Now let's say you want to open a 24-7 liquor store. Would the house make a good place for the liquor store? (Assume for the ease of this example the Wal-Mart does not sell booze.) Sure! Bulldoze the house and build the store on that half-acre lot. What a deal!

Why is the house property good for a liquor store and not a family home? Real simple. Again, commercial property is appraised and valued according to its ability to create a CASH FLOW. Nothing else! A private residential home is valued by its ability to provide PEACE OF MIND, nothing else!

Using this concept of cash flow vs. peace of mind, look at our example killer lake view again. Many people today will pay a premium for a home having a lake view. That is because every time they look at the lake, they get enjoyment from it. I live on the lake and I love it. It's that peace of mind thing, and people are willing to pay a premium for that emotional factor.

However, the killer lake view will cause the value of the resort property to rise ONLY if guests are willing to PAY to come see that killer lake view from the resort property. If tourists are willing to pay $200 per night to stay at our example resort because of that killer lake view, but are willing to pay only $100 per night at resorts that do not have the killer lake view, then that killer lake view has high COMMERCIAL value.  You'll make a killing with your killer lake view.

But if tourists say, "Well, yeah, that resort has a killer lake view alright, but I'm not willing to pay $100 a night more just to sit and stare at the bloody lake. Why hell ! I'm out on the lake all day fishing and boating, why pay that kind of price? I enjoy the lake all day anyway."

Now your killer lake view has little commercial value. The residential property right next door with that killer lake view will double in value, but the resort value will not. That is because the same few people living in the residential property find value in that lake view on a regular basis. But unless a LARGE number of people are willing to PAY for seeing that same view at your resort, . . . well you get the point.

Let's escalate the problem.

We'll say not only does this example resort have a killer lake view, but the owners have also spent $300,000 on improvements like remodeling the cottages, putting in a new boat dock, and adding several rental boats.

The sellers then reason that since the real estate has doubled in value ( in their opinion) from $500,000 to $1,000,000, and since they have also spent $300,000 fixing the place up, then it must be worth at least $1,300,000. And their time and work to make all these improvements must be worth something too. So they add another $100,000 for their sweat equity. They want to put the resort on the market, so they get a real estate agency to list the place at a ten percent commission. Thus the final listing price grows to a whopping $1,555,000. Will it sell for that?

Maybe to the right cash buyer, but certainly not for a financed buyer. Look at what happens to the numbers.

Let's say that back in 2000 the gross annual sales for this resort were $75,000, and operating expenses were $45,000. We'll say that each year, because of the $300,000 worth of improvements, sales grew by around 15 percent per year. That is a healthy growth rate. This means gross annual sales go from $75,000 in year one to $86,250 in year two to about $100,000 in year three, then $115,000 in year four, $132,250 in year five, and about $152,000 in year six.

Will this truly admirable growth rate jusifty the asking price to a financed buyer? Is it really a good growth rate? As always, the answer will differ between a cash and a financed buyer, and as always, the seller will hold out for the cash buyer. Watch how it happens.

As annual sales increase, so will annual expenses. More guests mean higher utilities, more sheets to wash, and other related expenses. So let's say expenses increase 15 cents for every additional sales dollar. This means that for our $152,000 in gross sales we have also seen expenses increase by $11,500. That brings us to operational expenses of about $56,500 a year on gross sales of $152,000 leaving a net profit before tax of about $95,500.

Okay, now here you come, you want to buy this resort. That killer lake view really speaks to your soul (emotion). If you live here, you get the best of both worlds - the emotional satisfaction of a lake view like the residential neighbors next door, plus it also makes you money while you enjoy it. What a deal! You decide to offer full price because the owner has made it clear through their agent they just won't take a cent less.

You offer to put 25 percent down ($388,750) and finance the balance of $1,166,250 at 7.5 percent over 18 years. Will the bank make the loan? And if they do, will the property appraise for the purchase price? Not even close on both accounts! Unless you pay cash, this purchase does not work, even after that nice healthy ramp up in annual sales!

First of all, your annual loan payments will come to $118,255 just on interest and principle. That puts you $22,755 in the red. In other words, the $300,000 worth of improvements, and the killer lake view have not earned higher gross sales. Your killer lake view will kill you!

But the cash buyer will come out with that $118,225 in her hand at the end of the year.

In other words, the $300,000 worth of improvements were a bad investment because they did not result in greatly increased gross sales? While sales did ramp up, they did not grow anywhere near what would be needed to justify a financed purchase. However, for the 1031 buyer, this might be a dream come true.

Will the bank be willing to make a higher loan? Not likely. Here's why.

Banks look at a commercial property like a black box designed to crank out cash. Banks don't care what is inside the black box. All that matters to them is if you put a dollar bill in one side of this black box, then two dollars had better come out the other side. And those two bills better show up pretty darn fast at that!

The bank could care less what is inside the black box that converts a one dollar bill into two dollar bills. Nor do they are how much the guts of the box cost. If the black box can take in a dollar bill and kick out two dollar bills every minute, 24 hours a day, 365 days a year, that black box generates a gross profit of $525,600 a year. Not bad - unless it cost $1 million to maintain the box each year!

If you put a dollar bill in and only $1.20 comes out the other side, its not so good. Like I said above, the bank does not care how much it cost to build the black box, or what is in it that makes it work. Banks don't care how much money an owner has invested in new furniture, new boats, etc. Like the black box, those new chairs and those new boats had better increase annual sales.

All that matters is how much money comes out of the black box every time you put a buck in it. If you put that killer lake view and the $300,000 of improvements inside this black box, and only $1.20 comes back out when you put a dollar in, the bank says the sellers made a bad investment on those $300,000 worth of improvements, and the killer lake view is not making a killing!

So, based on cash flow, how much is our example resort with the killer lake view and $300,000 worth of improvements really worth? That is where you, the buyer, come in. Most buyers understandably think only in terms of how much money can they make each year, regardless of that killer lake view. Of course, the amount of annual profit a buyer thinks is enough will vary considerably from person to person.

Let's say you think to yourself something like, "You know, if I could get this place at a price that would allow me to make a net profit before tax of about $45,000 a year, I'd buy it." Well, using the same loan terms of 20 to 25 percent down, 7.5 percent interest amortized over 18 years, the price would need to drop down to around $650,000. Of course with such an offer the seller is insulted. Who can blame them? Yet as insulting as this low ball offer is, it does not change the fact that the seller will need to increase the cash flow to get their price - or sell to a willing cash buyer - if one comes along . . .

It takes keen management and smart advertising to get cash flow and room night occupancy rates up past a certain point. This is where those buyers having middle and C-level management experience have the advantage over owners who do not have similar experience. Knowledge is power in this case.

What would the annual gross sales need to be in order to justify that financed price of $1,555,000 if you wanted a net profit before tax of around $45,000 a year? Gross sales would have to be at least $220,000 a year. That is $22,000 per year per unit for our 10 unit example resort. In an area that has a 150 night season, this means each unit will have to rent for $145 per night. Will guests pay this, or will they go to a competitor offering cabins for less? If guests won't pay your needed price can you offer something besides lodging to compensate? And how much of an investment will it take to put the compensator on line?

What about rental boats adding to the income stream? Okay, let's assume that $70,000 of the $220,000 in annual gross sales is from rental boats. That leaves $150,000 in gross sales from lodging. That drops the needed nightly rate down to $100. As of 2006 the average nightly hotel/motel/lodging room night in America is $86.26. You're over average.

Can you get $100 per night for 150 nights a year for all 10 units in an Ozark resort? That is 1,500 room nights. For average operations, not likely. But some do it. If you are a good manager and a good marketer, yes, it can be done. And this is the risk factor that many buyers come up against. This is why you must have confidence in yourself - because the bank will not.

Cash Flow Measures - The Easy Way To Know What Prices Need To Be
Now that we have been through all the theory I'll give you a quick little formula that is fast, easy, and accurate. It is called the Gross Income Multiplier, GIM for short.

The world of commercial real estate uses about 30 different common formulas to place a value on cash flow of commercial properties. Some of the most common measures are Net Present Value (NPV), Discounted Net Present Value (DNPV), Internal Rate of Return (IRR), Cash-On-Cash Return, Debt Service Coverage Ratio (DSCR), Cap Rates, and so on.

For resort purchases these measures are worthless. They work very well for office buildings, shopping malls, and similar commercial properties where the time value of money is driving the purchase. However, I've never had a resort buyer say to me, "Well Cooley, you find me a resort with an IRR of 9.5% and I'll buy it today."

All you need to know for financial gibberish for a resort purchase is that GIM.

The Gross Income Multiplier (GIM) is one measure that most people love to knock about because it is fast and easy, and does not require an HP 10B2 to calculate. Yet the simplicity of the GIM can lead to very mis-leading market information conclusions. Be careful with it! The old axioms you hear are "A business is worth five times it's net income." or "A business is worth three times it's gross sales". However, there is no universal GIM that can apply to any and all businesses. GIMs are a function of local markets only.

If you don't know what the GIM is for any given market, don't use it.

For example, let's say three similar resorts in an area all sell for about $600,000 each, and each had gross annual sales of about $200,000. Then in this market it is safe to say that the GIM is about three times annual gross sales in this market.

Historically, in my area, many Ozark small resorts have sold for about 5.25 to 6 times their gross annual sales, some a little more, some a little less. Thus if gross annual sales were $100,000, the resort sales prices ranged between $500,000 and $660,000. At these GIMs a person can make a living, and the banks are also willing to make the loans.

The difference in the spread between 5.25 and 6 times gross annual sales comes from the same topic this entire article addresses - cash vs. financed purchases. The higher GIMs result historically from cash sales. The lower GIMs historically result from financed sales.

Using a GIM of 5.25 for a financed purchase is a quick indicator of what the top limit is you can expect to pay for a financed purchase. Using a GIM of 6 will indicate what the top purchase price will be for a cash purchase. Like any rule of thumb, these GIMs are not set in stone. But they will be accurate 95 percent of the time. In the unusual conditions where they are lower or higher, it is due to something very very bad, or very very good.

Always compare apples to apples, and oranges to oranges with the GIM. A good example is some resorts have full-sized convenience sales, gasoline sales, lodging, boat rentals, guide services, a restaurant, a bar, etc. You can't compare a resort like this to one that has just lodging and boat rentals.

Cash buyers rarely pay more than 6 times gross annual sales for a small resort in this area. I see most cash sales come in around 5.75 to 5.85. For well qualified financed buyers the sales price will rarely fall below 5.25 times gross sales. Anything less and the sellers will not agree to the low price. For the bank to accept the higher risk, the borrower needs to be well qualified.

What Next?
There you have it. Now you know why resorts seem so expensive!

If you have questions, give me a call. If my examples seem a little over-simplified, you are right. I reserve my top-shelf knowledge for those who phone me and engage my services. All I try to do in this article is give a general idea of what affects sale price. Besides, I really enjoy what I do. If I give away all my secrets here, I don't get to talk about them with you! Hint: Ask me how to hedge resort property using residential property, and how to make a killing doing it!

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