The Mobile Home / Manufactured Home Community Industry Turnaround Plan

Our industry continues to be plagued by declining sales of new manufactured homes going into mobile home parks and communities nationwide.  With only around 50,000 new home shipments in 2009 we need to figure out how to get those numbers back up to 100,000 for 2010 and steadily grow back to 200,000 plus home sales per year.  How do we do that?

Before I answer that question consider why someone would want to live in a mobile home park or manufactured home community in the first place.  This is relatively simple mobile home parks are (or should be) the most affordable detached form of housing there is.  In most cases, they are still the most affordable detached form of housing, but in some markets this has changed due to high monthly lot rents and mortgages on the homes themselves.  At a lot rent of $500.00 per month and a mortgage also of $500.00 per month, our customers have a lot of options especially with low interest rates.  They can buy single family homes, townhomes, condos, or rent nice apartments.

In many of the markets with these higher lot rents, many of the newer communities are struggling while the older mobile home and trailer parks are still doing quite well.   The difference here is due to the "package" of" lot rent plus home mortgage".   This has become apparent at our mobile home park investing boot camps that we have held in Denver, CO over the past couple of years.  You will see a nice 4 star community with 30% vacancy nearby an older 1 star park with only 5% vacancy and in many cases the monthly lot rent is about the same!  The big difference between the two is that the older park has homes that are paid off and the newer community has homes that are upside down on their mortgages and continue to get repossessed as the homeowners get frustrated with the monthly rent hikes and the time it is taking to pay down their mortgages.

This repossession problem has been plaguing community owners for the past 10 years and it has forced many of us to either "buy our occupancy" or see the park owner across town go to Greentree or 21st Mortgage and buy the home to move to their community.  There are many park owners out there that have just given up and stopped buying all these repossessed homes as they were tired of seeing their cash flow go to buying homes or they just ran out of money to buy the homes.  The newer communities that have kept high occupancy are those that either had deep pockets or else were able to keep their rents lower in order to push the value of the homes up.  In most cases, the value of the home is indirectly proportionate to the lot rent.  Higher lot rents = lower home values.  As an example, I have been able to purchase many late model singlewide homes in the Denver market where rents approach $600.00 per month for under $10,000 each.  I can buy these homes and move them 200 miles east and sell them for $18,000 to $20,000 all day long in parks where my lot rents are under $200.00 per month.

Back in the late 1990's and early 2000's we all got real greedy and started to put into action the problems we face today.  Park owners started raising rents like crazy and in the meantime played hardball with all finance companies trying to force them to pay all the back lot rent and move the homes out of the community so they could fill the lot with another new home.  This caused a lot of bad feelings between the finance companies and dealers.  The dealers were greedy because they could get just about anyone financed for a new home at whatever price they were asking for the home.  And the lenders made a too large a percentage of their loans to those that were unqualified.  The manufacturers started building more doublewide homes and homes that were more upscale and pricey that would net them a better profit per home.  We all messed up to varying degrees.

The smart park owner would have forged a relationship with the reps of Greentree, Conseco, 21st, Chase, and all the other lenders out there.  They should have forgiven the back rent and offered some type of incentive to forgive the back rent and try to keep the home in the park.  The park owner could have helped in securing the home, cleaning it up, showing it to prospective buyers in order to help offset the losses the banks were carrying around.  However, just like anything that involves dealing with the government or large companies, trying to cut through the red tape was a hassle and who knew that new homes would no longer show up in our communities every month.

This business was built around the affordability concept and we need to get back to our roots of being affordable especially with the recession in full circle right now.  People need affordable homes to live in.  As long as the homes are affordable we then need to focus on financing.  We need lenders that will do chattel loans for homes that go into parks.

Fast forward to 2010 and beyond.  Park owners are tired of having to buy occupancy, retailers are tired of losing money or closing shop because they can't sell homes and get them financed, and manufacturers didn't really want to go bankrupt due to the same problems the retailers have, and the prior lenders are really tired of getting burned on a home that they repossess and end up selling for 30% of the remaining loan amount plus getting stuck paying back taxes lot rent.

So how do the manufacturers get back to shipping 200,000 homes per year with 25-50% of those ending up in communities to fill those vacant spaces?  I think that we all need to band together and come up with some type of program that is a win-win for all parties.  I have given this a lot of thought and have come up with an idea that I think would work but it will take action from Manufacturers, Retailers, Lenders, and Community Owners.

First of all, manufacturers, let's focus on building affordable homes.  I would define an affordable home as a 16' x 80' three bedroom and two bath home in the $25,000.00 to $30,000.00 range setup and ready to be lived in.  This will include the markup for the retailer.

Next, park owners will need to play a huge role in all of this.  Why?  Because we as park owners are going to have the long term benefit of the homes coming into our parks in the form of lot rent and increased value by renting those extra lots.

So the park owners, manufacturers, and retailers are going to have to work together and create a package that will attract lenders that will make loans with reasonable terms.  How about 10% down with an amortization of 12 years at 8.5% interest for a total loan of $27,000?  That would equate to a mortgage payment of $300.00 per month.  With a short term and good interest rate, the consumer will be getting a good deal and will be building equity instead of losing it.

The next step will be to create an insurance policy or fund for the lender so they do not repeat the process of getting burned on repossessed homes.  This insurance policy will be paid for by each sector of the industry with the majority of it being paid by the manufacturers, retailers, lenders, and park owners.

Using our new pricing model of $25,000 to $30,000 homes with the previously mentioned loan terms, we come up with an estimate of the default ratio.  In this case, let's estimate that 1 out of every 10 homes will end up being repossessed and for the sake of simplicity estimate that each repossessed home will cost the lender $20,000 by the time they pay attorney fees and resell the home for a loss.  So, in this sample scenario, we have a loss of $20,000 for every 10 homes or $2,000 per home.  If we come up with a way to insure against this loss of $2,000 per home with all sectors still making a reasonable profit then we have solved the entire problem.

Going back to the insurance policy or fund, as a park owner I would gladly contribute $2,000 to the fund for a brand new home that is moved into any one of my parks all day long as long as the home is in this price range with the loan terms previously discussed.  I believe that just about every park owner out there would do the same.  However, on a home priced in the $50,000 to $75,000 range I would not want to contribute one penny to the fund because I don't think that home will ever be paid off in greater than 95% of the communities out there.

However, we have to hold everyone accountable.  So, manufacturers, retailers, and lenders should also contribute something as well.  I would propose that the park owners pay  of the cost and the other three sectors share the other of the cost.

I would also propose that park owners work closely with the lender when a home is repossessed to help get that home ready to be sold again as quickly as possible.  First off, the park owner cannot charge the lender the back rent or any rent until the home is sold again.  So it will be in the best interest for the park owner to get that home ready as soon as possible.  There are several potential solutions to minimize the loss to the lender as well as the park owner on lost rent.  Remember, we allocated $20,000 in losses for every home that is repossessed.  So, if we can minimize this loss, then we are a step ahead already.

• Solution 1:  Lenders can sell the home to the park owner for somewhere in the 50-100% of the outstanding balance due on the loan depending on the home condition and remaining balance due on the loan.  The lender will finance this amount to the park owner who will in turn either rent the home out to cover the payments or sell the home with owner financing so that it covers their loan payments to the lender.  In this scenario, if the park owner pays $15,000 for the home, the lender will probably cut their losses from $20,000 to $10,000.
• Solution 2: Park owners will work with the lender to get the home ready to sell and then will bring potential buyers to the lender for approval.  Once again, the lender will sell the home for 50-100% of the outstanding balance due on the loan depending on the home condition and remaining balance due on the loan.  The new buyer will step in and make payments to the lender and once again the lender should be able to cut their losses down to $10,000 or less by offering financing on these repossessed homes.
• Other Solutions:  There are several variations of how this may or may not work so let's get creative.  We can enlist the help of the local retailers to help sell these homes located in parks as well.  We just have to get away from the model of park owners requiring lenders to pay back lot rent and then pulling the homes out of the park to be placed on a retailer or storage lot.  The smart park owners want to keep good homes in the park and will work with the other sectors to accomplish this goal.

Once we come up with a plan that works to get new homes coming to our communities again, we can't stop there and the park owners need to avoid getting greedy again.  To enact this plan successfully, we may need to reduce our monthly space rent on those lots that are being filled by the new homes.  If our new customers are going to have a $300.00 per month mortgage for 12 years, we can't price them out of the market.  On a park that has lot rent of $600.00 per month, the rent may have to drop to $400.00 per month with a limit to how much it can increase per year while the home loan is being paid down.  Remember, that you would never have rented that lot in the first place had that new home not come in under this new program so it is time to face reality.  And the same goes for those park owners that have rent at $200.00 per month.  Don't think that once you hit that 100% occupancy mark that you can double your rent over 2 years.  It didn't work the last time so it is time to learn from our mistakes.

I am tired of hearing about a decrease in shipments to all time lows and a manufactured housing corporate stock prices falling, and manufacturers filing for bankruptcy, and seeing many beautiful communities seeing a net loss in occupancy year after year.  Mobile Home Parks and Manufactured Home Communities should be offering the BEST VALUE to the consumer for AFFORDABLE HOUSING.  We are in a recession and what better time to go back to our roots and glory days and not gouge the consumer and lenders and make reasonable returns on our investments.

If you have any thoughts or suggestions on this article feel free to email Dave Reynolds at dave@mhps.com or call 1-800-950-1364.

It is estimated that 5,000 mobile home park transactions have been completed through the use of the website alone and Dave was able to observe and learn the business, markets, values, and the entire industry.  In June of 2008, Dave Reynolds and his partner, Frank Rolfe, another experienced mobile home park investor, started conducting Mobile Home Park Bootcamps held 4 times per year.  These bootcamps have been well received and sold out each time.

About the Author

Dave Reynolds is a successful real estate investor that has specialized in the acquisition of Mobile Home and RV Parks for the past 12 years. He has the keen ability to quickly assess deals, cut through hype, measure upside vs. downside risk, and make sound decisions. He has owned and operated over 60 Mobile Home & RV parks over the past 12 years in 16 different states.

Dave received a B.S. in Accounting from Mesa State College in Colorado in 1992 and attended graduate school majoring in Accounting and Taxation at Colorado State University in 1993-1994.

In addition, he acts as a consultant and educator for other mobile home park investors, has authored 4 books, and developed the largest and most respected websites dedicated to Mobile Home & RV Park Industries. These websites which receive over 10 million hits per year can be found at www.mobilehomeparkstore.com, www.mhbay.com and www.rvparkstore.com. Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.