WHEN THE TIDE GOES OUT YOU SEE WHO’S BEEN SWIMMING NAKED By Frank Rolfe

We get asked frequently about when – and if – mobile home parks ever end up in such bad financial problems as to come to auction in foreclosure or in a distressed sale format. While most mobile home park owners tend to be on the conservative side due to decades of negative stigma, and most banks are only willing to lend at about 70% LTV based on pessimistic underwriting, nevertheless there are some operators who get in trouble through a combination of too aggressive lending, seller financing without a plan when the loan comes due, or basically no management ability or plan. Here's a primer on how these deals come to market and how to take advantage of them.

The most common types of "distressed" deals

The distressed mobile home park business is not one size fits all. Instead there are basically three categories od distress that typically arise:

Poorly managed but fixable. In this instance the mobile home park could be made into a fine investment – only not by the current owner. They ran it into the ground typically through 1) trying to be involved in rental homes 2) not having the capital to make infrastructure repairs or 3) not adhering to basic business fundamentals of collecting rent and keeping costs down.
Should have never been purchased. As opposed to the above type of property, these parks have serious issues that can't be resolved regardless of how good an operator you are. These include illegal parks and parks with non-functioning private sewer that costs more to fix than the park is worth.
Term default. These are most interesting deals as the park's quality is fine but the borrower was unable to find a replacement loan when the note came due and essentially timed out. Why would a borrower do such a thing? Typically it's because they demonstrated lack of common sense in applying for a new loan soon enough, or because they are not personally financeable due to some type of financial reversal.

How they are typically disposed of

When a mobile home park is foreclosed on the lender typically goes down one of two paths: 1) they take the property to auction so that t gets sold and off the bank's books quickly or 2) they list it with a broker and it's often advertised as a "distressed sale" or "make offer" to create a sense of excitement and get it sold faster. One thing's for certain: banks hate owning mobile home parks, even if it's for a short duration. They typically don't understand them and harbor the same stigma against them as the general U.S. population.

Beware inheriting somebody else's nightmare

I can't emphasize enough that you must never think that just because something is in "distress" does that make it a good deal. Buying a park for 50% of value only exists if the supposed value is accurate. It's an old retail trick to mark up prices substantially and then hold a 75% off sale. Don't be sucked into this trap. Many distressed deals are the simple result of bad due diligence in which the buyer failed to realize that the property is a total loser. The classic is the park with the terrible, rural location in which there is absolutely no demand for lots or mobile homes. If you want to buy a park like that, I can tell you where there's one in Indiana that is virtually completely abandoned and in an area so rural that you're 10 minutes to a convenience store. Why does it exist? I imagine there was a military base around there in the 1950's that has now shut down and the whole town disappeared.

Buying at auction

If you're buying a mobile home park auction there are few things you need to know:

You have to do your due diligence before the auction, not after. Many auctions will provide you with the essentials like a Phase I and survey, while others do not. If you really want to bid, you need to do some cursory homework first.
You have to pay 10% the day you win. You don't get a due diligence period, you have to put up the money right then. If you failed to fully understand what you're buying then you may well lose your 10% when you realize there's something wrong with the deal.
You have to pay the other 90% within 30 days. This is a real problem because, although many buyers may have the 10% down, most buyers must get financing to cover the other 90% -- and you'll probably never find a bank and get a loan done in just a month.

Another problem with the auction methodology is that buyers can sometimes get sucked into a trance in which they become so excited about winning the auction that they bid too much. I was once at an auction in which the buyer bid a park with a failed packaging plant (a $1 million fix) up to a price that would be average if they did not have the packaging plant to replace. So I went up to the buyer after the auction and said "what are you going to do about the packaging plant?" and he sad "what's a packaging plant?" Not knowing what you're doing at auction can be suicide.

Striking extremely creative deals

If you're buying th park through a broker, you have other paths to take to get a deal done. The bank I often so anxious to get the park sold that they will make extreme concessions in price or seller financing. So don't be shy about proposing a framework that works for you. The banker will have no problem with evaluating your offer, regardless of complexity, since any offer is better than none. I have found that most banks are great to work with because they understand the simple fact that the numbers have to work for you to proceed and they don't insult you pretending that a 4% cap rate is the new 10%.

Some notes on timing

Many buyers became discouraged when the 2007 Great Recession hit and there were not hundreds of distressed deals on the market a few days later. You have to remember that any lender will try to work with the borrower before the deal goes officially bad, and will sometimes simply extend the mortgage for an additional period hoping the deal will get in a position to be refinanced. In addition, sometimes the borrower fights the foreclosure process, possibly by filing bankruptcy. And then you have the simple fact that most deals go bad only when the loan comes due, so immediate economic paid does not cause an issue until the balloon comes due. Even though there were many properties financed at low rates of 4% or so, that will not become a problem until those rates adjust. So be patient and don't expect immediate gratification.

Conclusion

Buying distressed mobile home park deals can be extremely profitable. As always, the key is knowing what is a good deal from a bad one, and putting on your "creativity" hat to get troubled assets put back together again.

By Frank Rolfe

Frank Rolfe has been an investor in mobile home parks for almost 30 years, and has owned and operated hundreds of mobile home parks during that time. He is currently ranked, with his partner Dave Reynolds, as the 5th largest mobile home park owner in the U.S., with around 20,000 lots spread out over 25 states. Along the way, Frank began writing about the industry, and his books, coupled with those of his partner Dave Reynolds, evolved into a course and boot camp on mobile home park investing that has become the leader in this niche of commercial real estate.