Mobile Home Park Investing Tips

Our Weekly Mobile Home Park Investing Tips. Along with comments from investors. Enjoy!

Mobile Home Park Tip #16

Mobile Home Park Down-Payments

The source of down payment funds to purchase a mobile home park is a question posed by a number of investors on a regular basis. There are many creative buyers looking for ways to acquire a property with as little out-of-pocket as possible. The general rule in commercial lending is the funds for down payment must be in cash, 1031 exchange accounts, or open lines of credit and evidenced prior to closing. The closing attorney or title company will require that the funds required for closing determined by the settlement statement are to be deposited into their escrow account in order to record the note and disburse funds.

We have seen many investors use equity lines or business lines of credit as their source of funds for down payment, closing costs, and reserves. These are considered equivalent to cash in a bank account. There is typically no seasoning requirement on these lines as long as they can be proven to be accessed by closing. Since mobile home parks are an income producing property and the net income they generate is typically required to support the debt service, the additional personal liability the borrower will be taking on by accessing the line of credit will not affect underwriting and is taken into account when the final approval and loan commitment is issued. We have closed loans in which the property does not support the debt and we take into account the borrower's personal income and liabilities to approve the loan. In this instance, the additional monthly payment on the line of credit does have an impact and must be considered in the debt-to-income calculation.

Many times a borrower will ask whether they can collateralize unrelated real estate that they currently own. This is not an acceptable structure in traditional commercial loan programs. A local bank may consider this on a case-by-case basis. We suggest that the borrower work with their bank to create an equity line or cash-out refinance on their property prior to closing. Based on the current lending environment, there is very little "out-of-the-box" flexibility when it comes to the amount of cash in a purchase. Prior to the sub-prime mortgage problem, a few lenders would consider up to 10% of the purchase price to be collateralized by an unrelated property as a note created by the seller.

In circumstances where the borrower will take title as an LLC, partnership, or other corporate entity, lenders are able to take into account the total liquid assets of all members/owners of the entity. We have closed loans where one or more of the members of an LLC want to contribute a portion of the down payment funds, but do not want to be personally liable on the note. If these individuals have less than a 10% ownership position, we do not require that they sign as a personal guarantor, but will evidence their liquid assets and use these funds to meet the down payment requirements. The borrowers with 10% or greater ownership will be documented and will sign as guarantors.

We are continuing to finance smaller parks up to 90% LTV at higher than market rates where this makes sense from a cash-flow basis. For competitive interest rates, expect to have 20% to 25% in cash at closing for the down payment.

Mobile Home Park Tip #17

Comment from Prior Tip: In our quest to purchase, we will need to liquidate around $ 250K worth of developed lots in a gated retirement community near Beaumont TX. Would the owner be able to take them as the down payment by transfering title to the owners.

Your insight is appreciated

Art

Art,

The lots would have to be sold to the owner in advance of closing on the loan for the MHP and the funds either escrowed or transferred to the buyer. Lenders want to see the actual funds and are not allowing exchanges of properties for equity. This would require the owner of the MHP to either pay cash for the lots or obtain financing for them. If the seller wants to refinance his park and create an assumable loan, the buyers could take over the new loan on assumption and the seller would then have the flexibility to accept the lots in lieu of cash.

I hope this answers the question.

Steve Murden Star Capital Corp.

New Manufactured Homes versus Old Trailers

If you had a choice to buy a mobile home park with brand new single and multi section homes versus one with 20 year old mobile homes and trailers, which one would you prefer?

I believe most people out there would initially think that owning a beautiful 4 or 5 star community would be preferable to owing an older trailer park. If I were to drive my grandma through my property I am sure she would rather see the nice park and big clubhouse with flowers everywhere.

However, after seeing many other investors and myself chasing these new parks with new homes I have come to the conclusion that I would rather own the park with the older homes.

New and Nice is not always better when it comes to owning mobile home parks. Especially when you are talking about the homes. In this tip we are talking about the homes only.

Lets take a 1988 16 x 70 mobile home that you can buy for $5,000 and compare it to a new manufactured home of the same size that you buy from the dealer and move into a park.

1988 Home: Price at $5,000, down payment of $1,000 and payments on the $4,000 at 9% interest of $250 per month for 17 months. It will be paid off in less than a year and a half.

2008 Home: Price of $35,000, down payment of $1,000 and payment on the $34,000 at 9% interest of $305 per month for 240 months. It will be paid off in 20 years.

From the buyer's perspective, they will have lot rent plus the home payment until it is paid in full. For the old home, it is paid off in 1.5 years and the new home it will be paid off in 20 years. Their vision is to get it paid off so that they will only be paying lot rent thereafter.

From the park owner's perspective, your renter's will pay the same lot rent whether they have an old home, a new home, a big mortgage or no mortgage. You would probably feel like you have a better shot at your residents paying you the lot rent if they have a smaller mortgage payment and term.

It has been my experience that these $5,000 homes are less likely to be repossessed by the lender than the $35,000 homes. Even when the $5,000 home is repossessed the lender (who is usually a private party or you) will be able to resell the home again close to the $5,000 price. However, when the $35,000 home is repossessed, the lender, which used to be companies like Greentree and now are those like Clayton or 21st Mortgage, will have a difficult time selling the homes for even half of the loan balance.

In the case that the $35,000 home is repossessed, you will then have the option of buying it from the lender or seeing it pulled out of the park and you just lost that space rent.

I will elaborate more on this in the next tip but for now know that I usually like the parks with big lots, good infrastructure, and Ugly Homes!

Mobile Home Park Tip #18

Comments from Previous Tips:

Dave,

In my experience there is and upside and a downside either way you go....new homes or old ugly homes.

We had a park full of 1970's vintage homes as that is when the park was built/filled. In the late 1990's we found that loan programs for the $5000-8000 "pre-hud" homes had evaporated leaving us with the problem of tenants abandoning their homes when they were unable to sell. This created another problem of home prices then falling to a level where prospective tenants could pay cash ($1500 to $2500) which created the problem of dealing with a different type of tenant--the type that had little invested and therefore little owners pride. This increased management requirements.

We informed our tenants that we would buy the homes from them (to avoid time consuming and costly legal action to obtain title in abandonment) but were then faced with having to finance the homes ourselves on the resale end, not to mention the liability of selling an older home. Better than empty lots, but once one tenant sold their home to us, others came to me to buy their homes without making a valid effort to sell it themselves--taking the 'easy out". This tied up a lot of money and caused some hard feelings when we had to "draw a line". We decided that we would only purchase a home after the tenant had made a true effort to sell the home themselves..say 4-5 months of listing, and we never bought homes during the slow sales season of Nov-Feb as the lost rent for those months tended to eliminate profit.

The other difficulty we found was in owners of older homes having difficulty in obtaining insurance, and if they don't have calamity insurance, they sure don't have liability insurance. Our own insurance company was also concerned by the number of older homes and the lack of individual insurance. We require our tenants to carry insurance and provide proof upon lease renewal.

We started selling new homes, since our lot rent is very affordable, rent and home payments should have been easily affordable. We found abandonments decreased until around late 2001 when we had our first foreclosure on one of the new homes. Many abandonments later.. due to deaths in the family, job losses, divorces, and frankly something I call "buyer's fatigue" ( "I've paid for this thing for 10 years and still have 10 more to go? No way!)we began to wish we still had all older homes. We could buy and carry 4 or 5 older homes with the funds that we had to tie up in one newer home and not have to deal with the banks' foot dragging tactics.

Either way you go, there is an upside and a downside. I recommend never going for a park that has all older homes.... if you do want to sell newer homes in the future those first few homes are going to be VERY difficult to sell. A park that has a nice 60/40 or 50/50 blend of newer and older homes is best in my opinion....newer homes look nicer and stabilize the value of the older homes and the presence of a good mix of older homes gives you an affordable housing alternative for first time buyers. If in the future you have to fill a few lots with some 1980's vintage homes in order to get the rent rolls up, they won't look completely out of place in a mixed park.

Just my experience, but it's good to here your ideas.

Thanks,

Dawn

Dawn,

Thanks for taking the time to respond to the tip. You make some great points and I agree with you that it is better to have a good mix of homes. I think 50-50 is good. I had a park once with all old homes and I thought I would go out and buy a couple of new homes to make it look nicer. I ended up losing some money on these sales. Nobody wanted to buy a new home in an old park. Had I put the home in a 50/50 park, I doubt that this would have happened.

One point you made about buying the homes from your residents instead of them selling them to the end user was something that I have dealt with as well. The problem has been that they are typically wanting too much for the home to start with and so you have to negotiate them down to a fair price. The thing that I have done is to only buy the homes at a steep discount (so I was sure to break even on the resale) or to buy the home with little money down and let the seller finance it. They usually think the park owner is good for the payments and will go this route. Then you can resell the home, offer financing, apply the payments you receive to the note you own and you are not out that $5,000 or so to buy the home.

Also a great point on the insurance. It is hard if not impossible to get insurance in some areas on these older homes.

Thanks again, Dave

Another Comment:

Dave,

While I understand your logic with regard to older parks, wouldn't the park with newer homes tend to attract a little higher quality of tenant? I know that it works that way in stick-built subdivisions. My philosophy has always been to buy the cheapest home in the best area, so that I have neighbors who have all of their teeth and you can't smell them from across the street!

Glen

Glen,

I appreciate your comment and for taking the time to respond. When you are talking about subdivisions I agree with you on your philosophy of buying the cheapest home rather than the most expensive (not usually because of the teeth or bad breath, but more so because it is easier to profit from the cheapest home rather than the most expensive one). But I do like the analogy.

With the mobile home parks that I have had (about 50 of them), I have not always found this to be the case when you are considering a mobile home park in which the tenants own their own home. When you are talking about a park in which you are renting homes, I have never found a type of resident (other than seniors), that really is good. Sure, every once in a while you will get a good renter, but for the most park, when someone goes to rent a mobile home, they can't afford anything else and so you will be attracting the worst quality of tenant (above those that rent the weekly apartments in downtown).

When you are talking about the type of park where the residents own the homes (or are buying them), I have not seen a big difference in the overall quality of resident. Sure, if the homes are all older and worth just a few thousand dollars, you won't be attracting young professionals and those people respected in community circles, but my point on older homes was more about being able to run a profitable mobile home park. When you put in a set of rules and screen the new residents, it is usually much easier to get rid of a bad tenant by making them sell their home to someone else than it is to see a home with a $20K mortgage get repossessed, pulled out by the lender, and then try to put another home into that lot. I would rather deal with the older homes than the vacant lots.

This is not to say that I want to own only parks with old homes and Dawn was right on with her suggestion of having a good mix of newer and older homes. The main point I wanted to get across was that you have to be aware of those parks out there that sell at low cap rates, have nice clubhouses, beautiful homes, and upside down mortgages. Many of these communities were full 7-8 years ago and they have been losing homes ever since due to repossessions and the tightening of financing for new homes to go into MHP's.

I was hoping to get someone that owns a park like this to step up with their story. I have talked to many of them in the past with this exact scenario.

Thanks again,

Dave

Another Comment: (on mobile home park down payments):

Art (Dave?) Title to the lots could go directly to anybody you want, and a good experienced escrow co./lawyer could handle this like any other 3 way transaction.

An escrow practice lawyer would be my first choice, over the big national T & E offices (First American, Chicago Title, etc.) as those people are more robotic in their non-thinking and in their primary goal of towing the national "line". I've started various escrows with those outfits over the years and then pulled my docs from them and taken to a pvt escrow that I know will listen to ME, not their national office.

Good luck in your maneuverings, sounds like you're a sharp guy.

John Merchant

John,

Thanks for your suggestions. I will forward to Art as well. Dave Tip #18 - Continuation of #17

Last time I talked about how I would rather buy a mobile home park with older homes than new ones. The real idea behind this was that I don't want to have a bunch of repossessions. In this tip I will expand on a few other things about older parks that you have to be mindful of.

One problem with buying a older park as compared to a newer one is that often times these older parks will become obsolete at some point in the future. As these old homes start to fall apart beyond repair, you will have to replace them at some point. When you start replacing these homes, you may run into a problem with finding homes to fit in these old and smaller lots. There are small homes that are still being built but for the most part homes are getting bigger and not smaller. This is something to keep in mind.

Another problem with these old parks is that the infrastructure will be older and in most cases be made out of inferior materials. The sewer lines may be clay and the water lines may be galvanized pipe. It is not fun when you have to go out and replace these old lines with new ones and the repairs are costly as well. So unless you can go out and buy a newer park with good infrastructure with homes that or older or have smaller mortgages you can't get the best of both worlds.

So when you are out there hunting for a mobile home park to buy, you should keep these other factors in mind. You should check out the utilities and make sure to budget for future repairs and replacements. You need to make sure that if a lot becomes vacant in an older park that you are able to replace that home with the new setback requirements. And so on.

So far I have done much better with these older parks than the newer ones when it comes to collecting rents, keeping occupancy up, and reselling them in the future. Many parks in large metro areas will not allow homes into them that are older than 10 or 15 years. By owning the older park in town, you can fill that niche that nobody else wants. I have had several parks with nearly 100% occupancy not far away from the beautiful park with 50% occupancy. And my rents were the same as that park with all it's amenities.

Dave

Mobile Home Park Tip #19

Comment from Previous Tip: Dave and other readers,

Regarding the issue of old homes vs new, I have found the middle ground works well for us. For example, my ideal home is early to mid 1990s preferably with vinyl siding and 3 bedrooms. Since these homes are now 15 years old, you can get them at a reasonable price, typically $5k - $10k. You do, however, have to shop a little harder these days to find these homes. I have never bought a brand new home, and the reasons discussed below reinforce the idea that it is probably not the best approach (although very tempting at times when I can't find a decent repair person).

Another idea for the older homes in the park (70s and some 80s) is to give them away for free to a handy man (assuming he plans to stay in the park). These are usually homes that might be otherwise junked, so there is really nothing lost if he gives up on the remodel after 6 months. We usually waive lot rent for the first few months to give them a chance to get it fixed up. If the outside looks really bad, we will either put it in the contract that the home needs to be painted, etc by a certain date or we will go ahead and do the outside repair and then charge them $75 - $100 per month to pay off the cost of the repair.

Bret Yetter Bret, Thanks for the Comment. Dave Another Comment: Varlay's Trailer Tips of the day. Getting rid of older mobile homes that you do not want in your park is EZ. The Indian Tribes will come and get them and you can get an IRS and state tax break for their assessed or market value for your charitable donation. Have them sign a waiver on their condition and pre 1978 formaldehyde in the insulation. Richard Varlay Thanks Richard. Dave Mobile Home Park Tip #19 Mobile Home Park Utilities: When can the Mobile Home Park owner relax and pass the responsibility on to the Resident?

This is a question with an answer that is not always the same for every mobile home park, but is common among most. Most of the time if you use common sense and discover the real issue the answer will be clear. Other times, the issue may be clouded. There have been times that I have owned a mobile home park and did not clarify my policies with my manager's and I ended up paying for many mobile home repairs that were not my responsibility. I assumed my manager would understand and that assumption has cost me thousands of dollars over the years. It was not their fault but mine.

Let's look at each different type of utility.

1. Water - there are a few different types of water systems and the park is usually responsible for the water lines underground up to the point of the water meter. If there is not a water meter, then up to the point of the shut off valve. If there is not a shut off valve, then it is the responsibility of the resident at ground level where the resident connects his home to the water line. It is my policy that the resident must heat tape and insulate the water lines (and meters) on any exposed area.

What about frozen water lines? My policy here is that it is the resident's responsibility to heat tape and insulate the water lines from the point they are exposed in the ground throughout. Most of the time when the water line freezes up, it is because the heat tape is not working, is not plugged in, or is not there at all. A park owner/manager should inspect these periodically and spell it out clearly in the rules. If a line breaks or a meter freezes up and it is due to their negligence, then I bill them for that repair expense.

Note: in some cases, for those lucky park owners out there, the city will own and maintain the water lines all the way to the meter. In this case, the park owner will have little or no exposure to repair the water lines. The resident will still be responsible from the point of connection throughout the home.

2. Sewer Lines - with the sewer, the resident is responsible from the point that their sewer line is connected to the sewer line owned by the park at ground level. That would include any sewer lines running under their mobile home. With sewer, there are additional issues that come up with plugged lines that run from their connection and underground to the main lines (lateral lines). Using common sense and rationality (if there is such a thing), the sewer clogs or problems that are caused by the resident (personal items, grease, baseballs, toys, etc) should be the resident's responsibility. Problems with the sewer that are caused by collapsed lines and tree roots would usually be the park's responsibility.

Note: again for those lucky park owners out there, the city will sometimes own and maintain the sewer lines all the way to the point at ground level where the connection is made by the resident. In this case, the park owner will have little or no exposure to repair the sewer lines. The resident will still be responsible from the point of connection throughout the home.

3. Septic Tanks - with septic tanks this will often depend on the circumstances and state of repair that the tanks and leach lines are in. It is my policy that I will have a septic tank pumped one time for each resident. After that time, it is up to the resident to pump it as needed. If the septic tank or leach lines are bad, then it would not be fair to pass this constant pumping on to the resident. However, if the resident has leaks all over the home and the water is constantly running then a tank that is filling up is most likely caused by their negligence. The easiest way to find out whose problem it is would be to monitor the water consumption by reading the meters every day or so where you suspect a problem (more rationale for water meters).

Some of these items will depend on the rules and your lease and in some cases local or state law will prevail. It is important to make sure that your lease and rules are in compliance with the local and state laws to avoid any issues that may arise.

If you have any thoughts about this article or have any circumstances to add, I would appreciate hearing from you. Once I have all the comments and additions I will include them in a future updated article. You can email your comments to dave@mhps.com

Mobile Home Park Tip #20

Continued from last tip.

Mobile Home Park Utilities: When can the Mobile Home Park owner relax and pass the responsibility on to the Resident?

Let's look at each different type of utility.

4. Electricity - with electricity the resident's responsibility will begin at the point where they connect to the meter or fuse box. In the olden days this was where the resident plugged in their home like you do an extension cord.

In some cases, the city or electrical company will own the meter and if a meter goes bad, they will replace at no charge to the resident or park owner. With sub-master metered electric, you will own all the meters and all the electric lines from the master meter throughout the park.

There are additional issues with electricity and I will touch on just a couple of them here. Suppose that your fuse box or meter goes out and a sudden surge of electricity goes through the home and blows up the computer and television and whatever else. Is this the park owner's responsibility or the residents? I think it will again vary on a case basis. If it is due to faulty electrical lines on your part, then it may be your problem. If it is from a surge of lightening, then it is an act of God and would be covered by the homeowners insurance or be their responsibility.

In another case, suppose that your electricity goes out in the park due to a widespread power outage in your city. Would it be your responsibility to reimburse the residents for spoiled food in the fridge? I think not. The electric company is not going to reimburse the people in single family homes due to a power outage, are they? On the other hand, suppose that your park has a power outage due to your backhoe operator digging up a sewer line. Would you be liable to reimburse for spoiled steaks and milk in this case? Once again, I doubt it as long as you give the resident's warning about the problem and you work diligently at getting the problem fixed. Sidenote have you ever noticed that when the electricity goes out it is often the day after your resident just went shopping and bought a side of beef and about $1,000 in other groceries? It is amazing that it seems to happen this way!

5. Gas Lines - with gas lines this works very much like electricity. With gas metered individually to the residents by the gas company, you will typically have zero responsibility. The gas company owns the lines with an easement through your park up to and including the meter. The resident hooks up to the meter and then is responsible for the line from the meter throughout the home.

With sub-master metered gas (the worst case), the mobile home park owner will own all the gas lines underground from the master meter up to and including the sub-meter and the resident will have the same responsibility from the meter throughout the home.

6. Cable TV & Telephone - this is usually not an issue of responsibility for the mobile home park owner or the resident. The cable company and telephone company like to have customers and will run the phone and cable lines all the way up to the mobile home. The only time I have had to fix a cable or TV cable was when we happened to be digging and cut into one of the lines. This can be alleviated by getting locates done before you dig.

To see a list new and used mobile home dealers. Click Here To view the newest Mobile Home Parks for sale. Click Here To get a fast quote on Mobile Home Park Financing. Click Here By Dave Reynolds and Frank Rolfe Dave Reynolds and Frank Rolfe are mobile home park investor and together own and operate over 100 parks. Frank also leads regular Mobile Home Park Investing Bootcamps through www.MobileHomeUniversity.com.

Mobile Home Park Investing Tips - 16 to 20

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