April 2008

This issue of the MobileHomeParkStore.com and MHBay.com Newsletter includes: 

1. The Marketing Contest!!!
2. Updates and Other Announcements and Results of Bus Trip in Dallas
3. Mobile Home Park Due Diligence - Article and New Diligence Manual - "30 Days of Successful Due Diligence"
4. Mobile Home Community Pride of Ownership, by Frank Rolfe
5. Comments
6. Questions and Answers with Dave
7. Mobile Home Park Bootcamp with Frank & Dave
8. Tell us what you think and send us your articles!

The Marketing Contest: The results are in... In last month's newsletter we had some suggestions from several individuals out there on marketing your community to fill vacant lots.  We took a vote and the winner is... Number 6 - Lee N - Here are Lee's excellent suggestions:   Dave, Personally, I think that all too often we take our current residence (customers) for granted and don't thank them for their business.  These solid customers are the real bread & butter (CASH) of all businesses. There are many, many ways of doing this and the methods will depend on the size of the park(s). For example: 

• Yard of the month award.  Nothing expensive just a little award for them to show the neighbors 
• Park newsletter sent out monthly or at least quarterly w/ free "in-park" classified ads
• Thank you notes for "little" things that are not often seen (Clean yard award, etc)
• Cash awards or gift cards as commission for helping rent out a space or sell a home
• Small fruit baskets or fresh baked apple pie when a new residence (customer) moves in
• Baby gift for a new born (no matter if the parents are legal or not)
• An 8 or 10 dollar frozen turkey or ham for Christmas for all tenants
• A $20 dollar Walmart gift card for renewing a one year lease.
• Every spring give away bulbs, small plants and maintenance free shrubbery to plant on their lot
• A park sponsored Bowling Team
• A free B-B-Q & watermelon for the 4th of July for park residents only

None of these things will cost more than few dollars and will help create a sense of community to the park.  When you can get get neighbors watching out for neighbors, and their children, then the entire park will begin to jell into it's own little community where people really want to live. Dave, I have other ideas but those are enough for the moment. Lee N   I want to thank all who participated in the contest and voting. And for Lee, I will be contacting you soon with your prize.  I will be sending you a copy of our new Due Diligence Manual as well as $100.00 gift certificate to a restaurant in your area.

Dave/Frank:Thanks so much for your informative seminar on Saturday. I feel fortunate to have gotten all this knowledge for the inexpensive price you were charging for the first one! I see where your next seminar is going to be much more expensive. Being a guinea pig is not always a bad thing!Seriously, you guys did a great job, and I left with the confidence to take the next steps to put me in business. The best thing about your seminar is the total lack of pushy sales talk or techniques, which truly put it on the level of a professional workshop. When I got home yesterday, I drove through that park I mentioned to you during dinner (the one that's run down in an upscale town, yet I believe to be way overpriced), and everywhere I looked I saw new things to consider because of what I learned in Saturday's seminar. I'll be faxing in my choice of the free gift in a day or so. Thanks for that offer as well.Alice

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Good Afternoon Dave & Frank, I would like to thank you for an interesting and informative MHP tour last Saturday, which I enjoyed. It was great to finally meet both you in person.  Thanks, Barry V

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Hi Terri, You asked for feedback last week so here you go. The event is Dallas was excellent and I really feel like it was worth the cost.  My flight with AA was cancelled and I drove all day to get to the event and I still feel like this trip was worth the effort.  We pounded the pavement pretty hard on Saturday and I learned a lot from listening to Frank and Dave and both of them know what they are doing.  They are real and just great guys.    I also enjoyed meeting the people who attended the event and I made some great connections with others in this business.  I learned from the people who were on the bus and made some new friends along the way.  Honestly, I would do it again because of the people I met.  I also enjoyed visiting all of the MHP’s in Dallas…that was very good and I learned a lot.  Frank and Dave wore everyone out and I must admit, I was exhausted by the time we arrived back to the hotel.  Frank and Dave gave all of us our money’s worth!    I would like to have spent more time with Frank and Dave but I am not all that good at butting in and with 50 people, that was a little tough.  It was a great event and Frank and Dave did a great job!  Dana

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Hi Dave,

You guys did a great job on the bus tour! It was nice meeting you and Frank.

Cheers,

Stephen

Mobile Home Park Due Diligence

By Dave Reynolds

When I first started in the mobile home park business I really had no idea of what it meant to do due diligence on a mobile home park. The very first park that I purchased my due diligence consisted of about 30 minutes of driving through the town and park and another 30 minutes looking at the proforma income and expense statement provided by the seller.  I did not see any problems with the deal and it wasn't long before I put down about $60,000 and assumed some mortgages of over $200,000. I had heard about home inspections (like you get when you buy a single family home) but I had never heard about inspections on mobile home parks.  Such things as checking out the water and sewer lines and the gas and electric systems were foreign to me.  It never crossed my mind.  Luckily on this first mobile home park, all the utilities were in fair condition so I didn't get burned.  As far as verifying the financials, I just took everything that the seller said as true and went full speed ahead.  It was not long until I found discrepancies in the seller's numbers.  Again, with this park, I was able to work through the numbers and make the park work. In retrospect, I could have verified and renegotiated and saved ten or twenty thousand dollars.  It could have been worse. As I have continued to do deals, I used this same approach to doing diligence on the parks I was buying and it was not long before my luck started to run out.  Here are just a few examples of things I missed which ended up costing me hundred's of thousands of dollars: 

1. Market - I purchased a couple of parks that were in really bad markets that were declining.  Even though the parks penciled out at the current occupancy, I found out that when people left it was hard to find new residents to rent the lots.  Estimated Losses - $100,000
2. Private Sewer System - I purchased a park with a private sewer system that had not been properly installed and was not meeting the permit for effluent - After spending about 2 years trying to fix the current system without success, I ended up putting in a new plant - Estimated Cost - $225,000
3. Private Water Well - I purchased a park with a private water well that had inadequate pressure and poor water quality - Instead of replacing the system I sold the park to another investor at a discount so he could put in the new well - Estimate Loss - $50,000
4. Drainage Problems - I purchased a park that had a terrible drainage system and every time it rained about 1/3 of the park had several inches of standing water - it made the residents very unhappy and I spent about $25,000 trying to fix the worst of the problem - Cost $25,000
5. Flood Plain - I purchased a park in the 100 year flood plain.  The sellers took steps to hide this fact and I took their word for it.  This park was one that I sold shortly after closing to another investor and soon thereafter it flooded and has since flooded 3 more times.  Since my buyer's were able to prove fraud on the seller's part I did not lose any money on the deal and they recouped most of their investment.  However, a park that should have been worth a couple hundred thousand dollars more today has not appreciated like it should and this does not even take into account all the headaches it has caused.

I have made many more mistakes in buying parks and missing things that would have been revealed with proper due diligence, but these are the ones that stick in my mind. Back when I started in the business of buying mobile home parks there was no reference materials out there that would make me aware of the potential problems that can occur.  However, today there is such a manual. Frank and I just finished creating this manual and have made it affordable for anyone out there that is looking to buy a mobile home park.  It is a step-by-step guide to doing the diligence organized in a manner to spot the problems as soon as possible to save money on all of those third party reports. It has taken us over 10 years, a couple of hundred parks, and close to a million dollars in mistakes to put this together.

HOW TO BUILD PRIDE OF OWNERSHIP IN YOUR COMMUNITY

By Frank Rolfe

I will never forget my first drive through of one of my communities with a conduit lender. The property was about a one-star in quality, but was a cash-flow wonder. I wasn’t sure what the bank’s reaction would be to my down and dirty “family” community status. As we drove out of the property, I nervously asked the lender “so what do you think?” His response: “well, they seem to have a pride of ownership”. With the loan in hand, that term has grown to sum up what I feel is the most important in any community. Even a lower demographic property like mine can be redeemed and affirmed through “pride of ownership”. So what is “pride of ownership”? To me, the answer is when all of my tenants make the best of what they’ve got. They may not be rich, or have nice homes or cars, and their yard furniture may not be out of the Frontgate catalogue, but they make the best of it. They have clean, orderly yards, keep their homes painted and touched up, have all their skirting up and in line, and keep their yards mowed. These are all items that are earned with sweat equity – not dollars. Anyone can aspire to these things regardless of income. It’s really a mindset. So how do you get “pride of ownership” from your tenants? Unfortunately, it’s not the easy way of just asking them nicely and they’ll do it. It takes a definite strategy to jump start and maintain a “pride of ownership” program. The first step is to clean up your act. You cannot expect the tenants to put in any effort when the community common areas are a shambles. Before you even ask the tenants to pitch in, you must: 

• Make sure all common areas are adequately mowed
• Make sure all streets and curbs are professionally edged and cleared of any vegetation (using Round Up, etc.)
• Fix any fencing that is falling over or rusted and unsightly
• Trim and remove all dead branches and trees
• Install a new, professional quality entrance sign and other signage throughout
• Patch and repair all potholes in your roads and parking pads

Once you have set the tone, send a letter to your tenants, telling them that, effective immediately, you are going to try to turn the community into a nice place to live. Explain what is expected of them, but keep it pretty basic – no big trash in yards, no non-running vehicles, 100% skirting installed, houses attractively painted, etc. The next step is to have an all-community “trash day”. Rent a commercial roll-off dumpster, and send a note to everyone that you are going to have available a huge dumpster so that they can finally get rid of that old rusted swingset, etc. And explain to them that, by Sunday, if their yard is not clean, you are going to through some of the stuff out yourself. Impress on them that this is a one-time only thing, and that it is in their best interest to take advantage of your hospitality. Hopefully, a ton of the trash in the yards will be gone by Monday. Starting Monday, you need to make  list of every house and yard that offends you, and send a letter to each of these tenants stating what you want fixed. Give them only a week to comply, because they never will anyway. You are simply setting them up to get ready for some executive action. Now comes the time that separates the successful operators from the failures. You can either spend the rest of your life threatening the tenants to do what you want, which never works anyway, or try a new approach. The new approach is to send them a letter stating that you are going to do the work yourself, and bill it back to them, to be spread out and paid over the next twelve months on their rent. For example, if total repairs on a certain lot are $1,200, then you will add $100 per month to their rent for the next year. Don’t expect to get this in writing, and don’t expect to be able to collect it in court. If you try and get it all neatly signed up, it will take months to accomplish just that step, if you can get it done at all. Think of it this way – if you made the necessary repairs normally, it would cost you 100% of the cost. Maybe you can get 50% of it back from the tenants. That’s a lot better than the other option. The expense you will incur is in one of three categories. 

• The cost of repainting or touching up their home.
• The cost of fixing or replacing their skirting
• The cost of removing even more debris from their yard

Since you will probably have several of each, you can get an attractive “volume” deal from a contractor. I have found that you don’t want to put in a lot of effort in getting input from the tenants, such as coordinating around their schedule. It is one of those times when “shoot first, ask questions later” seems to be the best course of action. Have the contractor speedily get everything done while the tenants are at work. And if anyone complains, tell them that they have no right to say a word since they never bothered to lift a finger on their own. Once you have artificially jump-started the pride of ownership in your property, keep the momentum going by sending a thank-you letter to the tenants, and celebrate their additional work by having a “yard of the month” program where the tenant wins a free gift. Stay vigilant so that the property never falls back into disrepair. You  can have tenants who have a pride of ownership. You just have to give them the first nudge. And then keep on nudging them.

4-10-08Terri, Would you kindly mark my ad as SOLD! then remove it at your convenience after 4/15/08. I settled on 4/2/2008!! Thanks again for your service…an amazing marketing tool! Best regards, Dan

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4-2-08 (2 Hours After sending to our early access investor list).

Hi Terri, Thank you again as always! I have already had some of your investors calling. Thanks, Greg

Q&A with DaveQuestion: Dave, What do you look for when you are visiting a mobile home park to buy? Thanks, James S. Answer: James, This is a great question and one that is best answered in the form of a checklist.  Here is my basic checklist of things to look for: 

• Entrance - is it inviting?
• Location - is it in a good neighborhood
• Roads - how much work do they need
• Size of the lots - how close are the homes to each other and the property lines
• Trees - they look nice but are expensive to trim and remove
• Vacant sites - are they ready for a home
• Age, year, and condition of the homes
• Adequate parking
• Is the electric underground or overhead - age of boxes - are homes underneath the power lines - is it individually metered
• Is there natural gas or propane - is it individually metered -
• Water and Sewer - are there any puddles in weird places - is it submetered - do the vacant lots have sewer caps
• Recent excavating of underground utilities
• Security lights - are there any - do they have bulbs in them
• Do any homes appear vacant
• Dumpsters or individual trash pickup
• Community or individual mailboxes
• Is there a home or ancillary structure that can be split off
• Are there any apparent drainage problems
• Does the park have nearby rivers or lakes that may flood
• Any gas stations or dry cleaners nearby
• Does the park exhibit pride of ownership
• Any code violations or other problems

This list should get you started and I would always suggest that it is better to walk around the park rather than just drive through.  Walk behind the homes if possible because this is where most of the problems are. Hope this helps. Dave

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Question:  Dave, I am a partner in a mobile home park.  When we purchased the park two years ago, the former owner retained nine homes in the park as rentals.  For the past two years he has rented the homes out and paid us the lot rent on the homes.  About he year ago, he out the nine homes up for sale as an investment package and has been trying to get us to purchase them.  Recently, he has listed the vacant ones for sale individually and is starting to get offers.  As of this morning, he has received an offer to move one of the nice homes out and called to give me a courtesy, last chance to buy the package.  I can get the package for $50,000 from him.  Most of the homes are in pretty nice, one is a double wide, and a few were manufactured in the 1990's.  I think I can make money from selling these homes and will certainly get rental income.  What are your thoughts?  We need to buy this package to protect the homes from being moved out. The homes, with three vacancies, are currently netting around $1500 per month after expenses.  Any advice for a young, somewhat new park owner would be greatly appreciated.  Thanks, Craig Answer: Craig, I would definitely make a deal with the former owner to buy the homes.  Hopefully he will sell them to you and finance the balance.  Either way, you don't want to lose the homes from the park.  Each occupied lot that becomes vacant reduces your equity by $10,000 or more in the park. I would not worry too much about making a bunch of money on selling the homes (just get your money back plus a grand or two per home).  The real value in the park is in the lot rental income. Thanks, Dave

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Question:  Hi Dave, How do you evaluate a lot value currently occupied by a RV? The lot is a good size MH lot and say that RV has been there for a couple of years. The fact is that I try to figure out a reasonable offer on a park which has several RV's in it. Even though the owner charges much higher lot rent on them, I still hesitate to put a full valued price (= lot rent *70) given their higher mobility factor. Another question derived from this same concern is how the occupancy should be calculated? Which number I should use to count for the total number of occupied lots, the total number of MH's only or the total number of MH's and RV's combined? Please depuzzle me when you can, appreciate that! BTW, I fully enjoy listening to your show with Frank. And I can not wait to receive my Bundle material in the mail next week! NH Answer: NH, This is a good question and you almost have to take it on a case to case basis.  I have been burned valuing RV's on mobile home lots too high in the past.  It is very easy for them to move.  However, if the occupancy looks like it should continue well into the future and there is a good history of occupancy by the RV's there is value there. Part of it will also depend on whether the RV renters are there for a job or as a permanent residence.  If they are there for a job, then they will be moving at some time in the future. My normal valuation will be to take a cap rate of 1 to 2 points higher on RV income than mobile home income.  I also like to use an average occupancy rather than what is there now.  So, if there are 10 RV's there now but the average for the last 12 months is only 8 RV's, then I would base my valuation on the 8 occupied. Hope this helps and thanks again! Dave

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Question:  Dave: I have a question: I noticed when you value a park you take the yearly gross income, add any other misc. income ( utilities, rental storage, laundromat ) etc. then subtract for the vacancy allowance to come up with the effective gross income. Once  you  have the effective gross income you subtract the expenses to come up with the net operating income. Then when you  have the net operating income you multiply that number by the cap rate to determine a value of the park. My question is I don't see any place where you value the extras in the park valuation.(Extras I mean the value of storm shelters, snow removal and lawn care equipment, storage sheds used by the park, the value of the empty lots etc.) Thanks Jerry Answer: Jerry, Thanks for the question.  It is a good one and I may have some people out there that disagree with my opinion.  I do not place any value on thisextra equipment, storage sheds, storm shelters, etc to speak of. While some of these items may be necessary to run the property, they are not what I would call income producing.  An extreme example of thiswould be if the park has a beautiful home right in the middle of it and there is no way to separate the home out and sell it separate.  If that same home would sell for $300,000 in a subdivision in town, this does not mean that you can put a value of $300,000 on it in the middle of the park.  You could put the value of it in terms of the income (rental income) it would generate but this would not be equal to $300,000. With that said, lets take a park that has all the tools (tractors, mowers, storage sheds, snow plows) and compare it to the same park without all this extra equipment. Obviously the park is worth more with the extras than without.  What I do when I value a park is also take into account the capital expenditures that Iwill have to make right away.  If I need to buy the extras and it will cost $10K to do so, then I will want that discounted off the price. I had a partner once that was really into construction and such and he found a park that included a backhoe.  Instead of looking at the park and what it could produce he was more interested in the backhoe and how much fun he could have with it.  Not a good business model. So with all my rambling I do not necessarily place a value on the extras but I would discount the value if the extras were absolutely necessary and I had to buy them to operate the park. Thanks, Dave

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Please send your comments, questions, articles, and ideas for upcoming issues to us at: dave@mhps.com Your feedback matters to us! Visit us at www.mhps.com   or www.mhbay.com 

Until Next Time! Dave Reynolds MobileHomeParkStore.com 18923 Highway 65 Cedaredge, CO 81413 PH: 800-950-1364 FX: 970-856-4883