October 2008
Newsletter
This issue of the MobileHomeParkStore.com and MHBay.com Newsletter includes:
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LET’S GIVE UP ON THE STAR SYSTEM When I first got into the manufactured home community business, everyone was obsessed by the concept of a “star” system – 1 for poor, 2 for mediocre, 3 for average to good, 4 for better and 5 for best. Owners would love to outdo each other by boasting “my property is a four-star, how many is yours?” Of course, the system was highly flawed, and there was definitely star inflation (people always seemed to add a star or two to their score), but it made for some apparent meaning to somebody (I’m not sure who). Unfortunately, unlike the hotel business, which takes it’s star system seriously, and has many independent judges who allocate them and promote the highest winners, the manufactured home community star system has long been a joke, and about as accurate as a world atlas printed before WWII. Why does there have to be a star system? Star systems are very useful if they are consistent and monitored by an impartial source. The best example of this is the hotel industry. When I am picking out a hotel on hotels.com, the first level of screening that I am interested in is number of stars. I have no interest in staying in a hotel with less than three stars. How do I know that the three, four and five star hotels are superior? Because I have confidence that the system is being monitored by every travel agency and AAA-styled travel group in the world. I believe that the trust in the system is such that everyone feels confident placing reservations in hotels that they know nothing more about than the number of stars. The goal of a similar star system for manufactured home communities is no different. The concept was to be able to rank, sight unseen, communities from bad to best. This system would be helpful for customers, banks and buyers, at least theoretically. Why does the system not work? If you gave a test to a group of students without any oversight, and allowed them to grade their own papers, what do you think they’d get? That’s right, they would all get “A”s. The first problem with the system is no different. There is absolutely no oversight as to who gets what number of stars. Every owner is free to pick their own number, and it’s about two times the real number. Since no group with authority manages the star system, there is no tangible value to having a certain star score. If the guy with dirt streets down the block claims to be a four-star property, then why bother re-paving your old asphalt to get a higher ranking? It’s like having a game without scoring, or a debate without a judge. There has to be leadership that monitors results, reward the winners, and penalizes the losers. Why it will never work. Before you can institute a real star system, you have to have commitment from all the community owners to embrace the concept and not cheat. Getting the manufactured home community owners in the U.S. to agree about anything is nearly impossible. With around 50,000 communities in the U.S., realistically, you are never going to great consensus on anything. And as long as there are enough rogue operators to claim more than their fair share of stars, the system will immediately break down. Who is going to hurt their business by claiming two stars, when everybody else is illegally claiming four and stealing their customers, lenders, and buyers? Nobody. The other reason why any type of rating system will never work is that there is no funding to create a group to standardize and enforce the system. Let’s face it folks, this industry is in terrible shape financially. The last time I checked my local Manufactured Housing Association, their dues received could not cover Denny’s Grand Slam Breakfast for a family of four. In an industry that has been on the ropes for almost a decade, especially on the retail side, who is going to pay for this group of inspectors and enforcers? Nobody. Why the system has been turned upside down. You know, it’s really a good thing that there never will be a star rating system for manufactured home communities. Why? Because the whole star system does not really work on communities. In fact, it distorts the truth and is a disservice to, if not customers, then definitely lenders and buyers. You see, in all other types of real estate, from hotels to office buildings, the higher the star rating, the better the property. This formula, however, falls apart on manufactured home communities. The communities that are struggling the most right now, in my opinion, are the four and five stars. These are the ones that have pools and clubhouses and big lots. They have everything – except a winning business model. Most of these properties have lot rents so large that they are no longer affordable housing. When a customer is paying you as much in lot rent as a decent apartment costs, then you are definitely in uncharted territory as far as affordable housing goes. In addition, many of these same properties have rules on how old a home can be. As a result, there are very few “paid for” homes. When you add the home mortgage and lot rent together, and get a number above $1,000 per month, then the customer has many, many housing options available to them. This leads to reduced demand and, often, customers walking off and leaving their homes. I have met many four and five star owners who churn 25% of their tenants per year. That is a terrible statistic. Often they resort to buying these homes to keep them in the community. Maybe I’m old fashioned, but when you have to pay your customers to live there, you’ve got a big problem. On top of that, they are constantly involved in some type of large capital expense project to maintain all of their amenities and perks. The properties that some would call one-star, or even no-star, often have stable tenant bases and are virtually full with affordable housing clientele. They produce consistent income with little capital expenditure. They’re not pretty, but they are highly profitable. Based on this data, which would you rather buy or make a loan on? Which is more desirable – the five star or the one star? That’s right, the one-star is often many times more secure and profitable for both lenders and buyers. So do you see the problem? Why it’s best just to let the star system die and never talk about a rating system again. Clearly, the star system is not working, nor will it ever work for our industry. I often retort the question “how many stars is your park?’ with the answer “it has five star cash flow and that’s all that’s important”. And that pretty much sums it up. You know, sometimes things just don’t work out. The 8 track tape quietly disappeared off shelves and now is only available at garage sales. “New Coke” quietly disappeared out of the grocery store freezer, and nobody ever talked about it again. So let’s have a moment of silence for the star system and move on. There are plenty of more important concepts to worry about – like sales. |
BEWARE OF THE SELLER FINANCE TRAP There are few things more attractive about the mobile home park business than seller financing. Non-recourse seller financing allows the buyer to escape the hassle and scrutiny of bank lending, while at the same time offering some degree of insurance against fraud (you have not yet paid the seller in full), the ability to give the park back and walk clean in the event of catastrophe, and often includes a below-market interest rate and longer loan term. That being said, there is a trap often used by sellers that is baited with seller financing, and it is important to always be aware of, and stay clear of, this danger. The trap begins with a seller who is having trouble finding a buyer. Maybe the park’s vacancy is too high, maybe the location is too rural or in obvious decline. Whatever the cause, the seller can either sit on the park for an eternity, or find a creative way to attract a buyer. And what can be more attractive to a buyer than an easy to qualify, below market interest rate loan. Of course, there’s nothing wrong with a below-interest rate seller note. But not when it is used as a trap. And many times, that’s exactly what is being set. You see, the seller knows that the park will never hold up to the scrutiny of a bank – the appraisal, the independent review of the numbers, even the negative logic of the loan officer. To keep you from finding out that the park is overpriced, or in a bad neighborhood, or basically completely unable to be financed, the seller offers to carry the loan and cuts the bank out of the loop day one. That’s the first leg of the trap. The second part of the trap is to bait the deal with a super low interest rate to make the park look like it is a profitable investment, even though it could never carry a regular bank debt load of the same size. If a park is a 4% cap, then what better way to disguise the poor performance than with a 2% interest rate on the mortgage? The seller is effectively cooking the books with the buyer’s blessing. When you accept a cash-on-cash return that is spiked by ridiculously low interest rates, then you may be getting into trouble. The final part of the seller trap is to offer only a short loan term, maybe two to five years, and the below-market interest rate for only the first year or so. What this does is to put the buyer in a negative cash-flow situation almost immediately, and force the round of bank loan requests that normally end in nothing but rejection. Faced with the loan coming due, and no bank loan prospects, the buyer often gives the park back to the seller, less his 20% down payment. There are sellers out there who have sold the same park two or three times under this framework, garnering 60% of their purchase price in down payments, and still owning the park. So how do you avoid this trap? It’s easy.
Seller carry should be treated as gravy – an extra perk – but not a structural part of the deal’s economics. If the park could support an 8% interest bank loan, and the seller offers 4%, then that’s an extra spike on your yield until the loan runs out. But you should always run the financials as if a bank loan is involved. So the next time you see a deal with seller carry, make sure you don’t get sucked into a trap. Stay conservative and rational, and run your numbers based on a real bank loan. Because, sooner or later, that’s how your deal will ultimately be judged by a buyer or lender. |
John Turzer of JLT & Associates presents the: 2008 National Manufactured Home Community Rent Survey Summary - pdf |
Announcing the First Ever Mobile Home Park Summit Anaheim Convention Center February 20-22, 2009 Brought to you by Mobilehomeparkstore.com Mobile Home Park Strategies For the U.S. Recession Your Hosts: Frank Rolfe and Dave Reynolds This is the first of a series of annual meetings for our clients, subscribers, and those interested in the mobile home park business in which we analyze the greatest single issue in the industry, and how to adjust your business to harness the power, and avoid the problems, of these “megatrends”. Our theme this year is “Mobile Home Park Strategies For The U.S. Recession”. Clearly, this is the biggest single problem facing the entire industry. Speeches will include the impact of the recession, and strategies to beat it, in the following categories:
In addition, each participant will receive additional written documentation, and some special new releases to supplement the speeches including “How To Launch Rental Battleships” and “How To Get A Mobile Home Park Loan”. With the recession upon us, can you afford to miss this program? The hosts will be Frank Rolfe and Dave Reynolds, who together have owned and operated over $100,000,000 in mobile home parks. No punches will be pulled, and no sacred cow ungored. This is not a time for positive chatter, but a time for a solid defense and a solid offense. If you want to prosper in the mobile home park business in 2009, you must make this event! Find out more about the Inaugural Mobile Home Park Investors Summit |
| Find out More about the Next Upcoming Mobile Home Park Bootcamp! |
| Find out more about selling your mobile home park! |
Are you a manufactured home owner or community owner with homes or lots for sale or rent? If so, then you can list your new and used mobile homes for sale or rent and lots for sale or rent for FREE at MHBay.com Tell us what you think! We'd love to hear what you think of this issue! We need your articles and press releases - send your articles to dave@mhps.com to be included in upcoming newsletters. Where else can you put your press releases and articles in front of thousands of people for FREE! 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 |