Guide to Financing (or Refinancing) Your Mobile Home Park
INTRODUCTION
If you assume that one of the keys to maximizing your return in real estate is leverage, then correctly financing your mobile home park is a key driver to maximum profitability. There are only two options when financing your mobile home park.
The first is having the seller carry the note on the park. That is not covered here but be sure to check out the many resources available at MobileHomeUniversity.
The other option is to borrow the money to buy the mobile home park through a bank or other lender. That is what this guide is a primer on.
Probably 75% of all mobile home park acquisitions require bank lending as opposed to seller carry, so you will definitely be having to get a loan for a mobile home park at some time in your career. Getting the right loan is essential to making a success of your mobile home park purchase.
We have probably over 50 successful applications and loan closings on commercial loans under our belts. With that much experience, you would think that we know everything about the process. However, with constant changes in the marketplace, such as the current lending crisis, the market is always changing. As a result, what we have outlined in this primer is the basic, essential knowledge, but you will still have to fine-tune it to meet your circumstances and the market conditions. Matching your loan requirements with the marketplace is one of the key ingredients to success, and one of the main reasons we recommend using a loan broker to get the best deal and the easiest closing. A good loan broker is worth every percent that you pay them. A bad loan broker will give you nightmares and miss deadlines and make false promises.
When seeking financing, it is essential to never become discouraged. Many folks, ourselves included, have been turned down repeatedly on loans before getting approved. Banks are not geniuses – the current sub-prime crisis is a testament to that – and they will turn down good loans for no apparent reason frequently. When this happens to you, just go on to the next lender and don’t let it get you down.
To quote the civil war general Nathan Forrest “ your best chance of success is to put your bayonet on and run screaming at the target”.
So it goes for getting that mobile home park loan.
Remember that we are always here to help you at MobileHomeParkStore.
DETERMINING HOW MUCH LOAN YOU CAN AFFORD
Unlike the single family home mortgage business, there is little mystery as to how much you can borrow on a mobile home park. The amount the lender will advance you is based on several criteria:
An appraisal from a certified appraiser which states what the property is worth, less the percentage of down payment you must make.
The financial statement of the mobile home park, and its value derived from its income, as it is applied to various ratios.
How good a job you do convincing the lender that the park is worth more than the current income and appraisal will imply, based on drastic increases in revenue or cost cutting that you can carry out upon purchase of the property.
How comfortable the lender is with making a loan on a mobile home park in the first place, and how conservative he or she wants to set the parameters for making the loan.
There are no zero down or “no documentation” loans in mobile home park land. You will have to have the capital for a down payment (normally 25-35% of the purchase price), and decent credit.
Due to the meltdown of sub-prime lending, banks are more cautious than ever before, although there have not been many repossessions of mobile home park assets to spook them yet. But remember, they are ill at ease making mobile home park loans to begin with – so it doesn’t take much to spook them!
Generally, on a $1,000,000 mobile home park, these are how the numbers work out on how much loan you can afford:
If the appraisal comes back at $1,000,000 or above, then the bank will generally consider that to be the actual value, and you will have no push back from the bank on the total amount you are paying for the park. However, if the appraisal comes in at $900,000, and you are unable to convince the bank otherwise, that will become the new value of the park. You can expect a dollar for dollar reduction in what the lender will give based on this scenario. For example, if the bank offers a 80% loan to value, then they will only give you $720,000 based on a $1,000,000 sales price but $900,000 appraisal. And who makes up the difference between the $800,000 loan you expected and the $720,000 they now offer? You do. You will have to cough up the $80,000 if you still want to do the deal.
Banks, appraisers, and investors often use various capitalization (or “cap”) rates. The cap rates are determined by the market and by applying the cap rate to the income stream a value can estimated. For example, if the mobile home park makes $100,000, and the person coming up with the valuation bases his value of the mobile home park at a 10% “cap rate”, then they would decide the park to be worth $1,000,000. Unfortunately, all banks, appraisers, and investors may use different cap rates and much of the process is based on their judgments. So you must first know the cap rates that the bank or appraiser is likely to use to know where your value is likely to come in at. Most appraisers value mobile home parks at a range of cap rates from about 8% to about 12%. The key is that better located, managed, and attractive properties will sell at lower cap rates. The MARKET determines the cap rate and the appraiser when coming up with a cap rate to use will extract the cap rates from similar market sales and apply an appropriate rate.
Banks have other ratios that they use in deciding what size loan the mobile home park can support. One of the key ones is the “debt coverage ratio" abbreviated as DCR. This is a measurement of an income producing properties ability to cover the monthly mortgage payments. To figure the DCR you take the Net Operating Income and divide that by the annual debt service (principal + interest). Most banks will require a coverage ratio of 1.2 to 1.3, or 120% to 130% of the note payment. Obviously if the DCR is less than 1.0 then the property is not able to support the mortgage payment and not many banks will make this loan.
There are other ratios that the bank may want to see you qualify under. These are pretty much set in stone, and are rarely negotiable.
If you fail at achieving the numbers required to make the loan, you can sometimes negotiate with the bank to loosen their requirements to accommodate the wonderful things you are going to do to maximize cash flow at the park. This is usually a very hard task. You are normally better off going to the next bank in line, or reducing your expectations and negotiating a lower price on the park.
This is a hard gauge to measure, but you will feel, during the loan process, how much the bank really wants the loan. For example, many loan officers are actually hoping that the appraisal and ratios don’t support the loan, so that they can turn you down. Why? Because the loan scared them to begin with.
For example, a perfectly nice loan officer made the appearance of being interested in a mobile home park loan we had, and then when the appraisal showed the value being only that of agricultural farm land plus depreciated improvements (clearly a bad appraisal) he refused to intervene. In reality, we probably went out and had a party to celebrate the death of the mobile home park loan idea. Why did he not just turn the loan down to begin with? Sometimes, its because the bank has other relationships with the borrower and doe not want to offend them. But most the time, it’s because the loan officer has no idea what the bank’s appetite is for mobile home park loans and, after getting the ball rolling, finds it to be negative.
The sum of these parts it the amount of loan that you can afford on a mobile home park.
HOW TO APPROACH THE APPRAISAL
You do not have a lot of control over the appraisal and what price it states your park is worth. But you do have two shots at improving the amount shown as the value. And if the opportunity comes up, you need to be ready for it and take advantage of it.
You will not be able to choose the appraiser for the bank. The bank does this to make sure that you do not hire an appraiser that will give you an inflated, non-impartial opinion of value. Even though you do not hire the appraiser, and probably have no prior contact with them, you will have a chance to put some positive spin on the property when you are contacted by the appraiser for basic information on it. Normally, you will receive a call from the appraiser at the start of the process. You will be asked some basic questions such as the park location, number of lots, etc. The way you answer these questions, and the “spin” you put on your response, can put a favorable first impression on the property, which may translate into a higher value. Here are some of the ways to present the information:
- If you have a fair degree of vacancy, tell the appraiser how many lots are vacant, and that the other parks in the area have a much higher occupancy due to better management. Convince the appraiser that you can, with better management, fill the vacant lots shortly after taking over.
- If the park looks terrible, tell the appraiser that the park needs a lot of low-cost TLC such as skirting, re-painting, pothole repair, etc., and that you already have the bids and you will get the repairs done immediately after closing. Blame it on poor management.
- If the park has a great location, tell the appraiser that the land value alone is worth as much as the park, and you can see a scenario down the road where it will be a hot development property.
- Implant the thought that the prior owner “cooked” the books to hide the real income in order to pay less income taxes.
- If the rents are lower than market, explain to the appraiser your intentions of the immediate rent raise once you take over. Explain to the appraiser that even with a rent raise it will be difficult for the residents to move due to the cost of moving their home.
- If the rents are higher than market, explain to the appraiser that the other parks should and could raise their rents to the same or higher level of rents.
- If the park has several park owned homes and the income from these park owned homes is not going to be included in the appraisal (it shouldn't be), make sure to explain that you are going to sell these homes to the residents and in doing so, the expenses are going to drastically decrease. Even prepare a proforma without the extra park owned home expenses (management, repairs, collections, insurance, taxes, etc).
Even though the appraiser is supposed to be above any corruption on your part, he is a human and, therefore, can be tainted in your favor if you work it hard enough.
Your other chance to affect the outcome of the appraiser is after the fact. Once the appraisal arrives at the bank, you will get a call if there is a problem with it – especially if the value is lower than what you are paying. In that event, you need to make an appeal to the bank for a new appraisal, or to intervene with the appraiser to raise his estimate of value. Be careful when you do this. It is like appealing a decision on a lawsuit. You have to show reasonable grounds for the opinion to be flawed. You will not get anywhere if you appear to be a sore loser.
The most common complaints against the appraisal include:
- Appraiser’s lack of experience in evaluating mobile home parks.
- Lack of reasonable comps for an accurate value to be obtained.
- The park owned home component - dropping revenue without dropping expenses.
- Appraiser not having a handle on the value enhancement of what you are going to do to the property following closing.
If you make your case, not as someone who needs a higher value, but as someone who just wants a fair value that just happens to be higher, then the bank may take your side on the matter. This will result in a call to the appraiser to see if they would reconsider. It may also result in a new appraiser being hired to render a second opinion.
If you make your case poorly, or if the bank just wants a good excuse to turn down the loan, then you it is time to go on to the next lender.
RECOURSE VS. NON-RECOURSE
Recourse debt is a loan in which, in the event of default, the borrower is personally responsible to repay the debt. For example, if you default on your mobile home park loan, and the bank sells the property at auction and there is $300,000 still left unpaid on the loan, you have to come up with it yourself. In other words, if your business fails, it can suck you down with it. Non-recourse debt has no personal liability. If your mobile home park loan goes bad, all the bank can do is foreclose on the park. If they later sell it and lose 99% of the total loan, you don’t have to come up one cent.
Clearly, anyone would prefer non-recourse over recourse loans. However, it is normally very difficult to obtain non-recourse loans unless you are buying a very large park that has had “institutional” quality debt in the past. As a result, you normally are stuck with recourse lending until you become much larger. Some banks will not allow you to borrow money in a non-recourse manner ever. These are normally your small or medium sized banks. Some large banks, especially conduit lenders, allow this type of construction.
Banks dislike non-recourse because not only does it reduce their ability to recover money in the event of a default and loss, it also puts the borrower in a much better bargaining position with the bank when times get tough (“ you better back off, or I’ll just give you the park back”) as well as reduces the borrowers willingness to fight to keep the property afloat.
ESSENTIALS OF THE APPLICATION
The application for your loan is one of the most important drivers to whether or not your loan is approved. A good application can carry a mediocre park, and a bad application can sink a good park. The application forges the first impression of the lender as to both you as an individual and the mobile home park you are looking at buying. As a result, it is an area in which you must do your best work. A mediocre job could ruin your prospects for obtaining your loan.
The parts of the application include:
- A general description of the park, such as number of lots and location.
- The loan request (total amount of loan).
- A map showing the location of the park.
- A map showing the layout of the park and number of lots.
- Financial statements on the park for the last two years.
- Tax returns on the park for the past two years.
- Business tax returns for the past two years
- Personal tax returns for the past two years
- Personal financial statement - current
- Evidence of down payment
- A proforma of what you will be doing to improve the numbers on the park.
- A rent roll
- A copy of the standard lot lease
- Photos of the park.
- Current survey and phase I, if available
- Current appraisal (if it helps your case)
It is essential that these numbers all “tie together”. In an ideal world, the tax returns would exactly match the financial statements, which would exactly tie back to the rent roll. Unfortunately, this seldom occurs, and it is imperative in your request that you explain such lack of conformity in advance – before the lender figures it out for himself. If you try to hide it and the banker figures it out later, you will lose some credibility and the banker will have a bad first impression of you and the deal.
The best loan applications are very simple and easy to read. You application is not judged by the pound! If the application is too cumbersome to read, the lender my turn it down just to get rid of it. After all, bankers are just people, and people like things that are easy to use.
Remember that banks dislike things that are not routine. Be aware that you will not get a favorable response on a property that only has three months worth of accounting, or a rent roll that is missing half the tenants. Sometimes, however, that is all you have to work with. So present it in its best light and appear confident. Remember that getting a loan is often a volume business, and don’t be discouraged by rejection. Just think “on to the next lender!”
HOW TO FIND A LENDER
Finding a lender is not as easy as it sounds. There are plenty of banks out there, but very few of them will even consider a mobile home park loan. When starting your lender search, it is imperative to pre-qualify candidates to make sure that you don’t waste your time. Most loan officers will tell anybody to send in their application, just to appear busy to their boss. Ask them if they have ever made a mobile home park loan before. If not, then the odds are pretty bad. One of the best shots at getting a loan is often the largest bank in the small town the park is located in (assuming your park is not in a big city).
You can also get an advantage in finding a bank from looking in the industry trade publications for lenders who advertise or are mentioned in them. These are often large, national banks that actively do commercial loans. However, they often have very large minimum loan sizes – often $1,000,000 or more.
Another, and often best, option is to use a loan broker. These brokers do almost all of the work for you. They assemble the list of prospective banks, help you build your application, and present it to the banks on your behalf. They then help you gather the responses and help you negotiate rate and terms. And, for all this work, they only get paid 1-2% of the loan amount – and only in the event that it successfully closes. We are so sold on the concept of loan brokers and use them almost exclusively.
If you are looking to get a quote from one of the lenders we have used or recommend, then fill out the short form below to be contacted by potential lenders and brokers.
CONCLUSION
Like riding a bicycle, the worst part about getting your first mobile home park loan is not knowing what to do. Once you understand and master the process, it becomes completely routine.
To maximize your loan, it is important that you know exactly which banks in the U.S. offer the best terms at the moment, and which banks are making loans in your area. Since it is impossible for most laymen to invest the time necessary to know this information, it is often in your best interests to use a loan broker.
Remember than everyone who ever bought a mobile home park, from Frank and Dave to big companies like ELS, Sun, and YES, all began just like you, with their first deal. And they all made mistakes and had rejection. What often separates the winners from the losers in the lending game is appetite for rejection and failure to give up. In reality, it is fairly rare to have a mobile home park that just can’t get a loan on it of some type.
FREQUENTLY ASKED FINANCING QUESTIONS
Can I find financing for a park that has 50% vacancy?
Most lenders require a park to be “stabilized” (not much turnover) at an occupancy of at least 70%. They really prefer, and many demand, 85% occupancy or more. It is sometimes possible to find a loan at 50% occupancy if you can prove out to the lender a rational plan to increase the occupancy following closing. The most common example of this is a park in a great location where all of the neighboring parks are full, but it suffers from terrible cosmetic problems (normally rules enforcement and paving) that you will immediately cure following closing. But such loans are rare, and the interest rates and terms are not favorable. Nobody wants to make loans on poorly occupied parks.
How many park-owned homes can my park have and still be approved for a loan?
Lenders dislike park-owned homes. Their mere mention turns off many lenders. There is a strategy to deal with this that involves separating the homes from the park by placing them in a separate entity. Then you sell the homes and carry the paper, and no longer refer to them as “park-owned” homes. With this strategy, you can have many, many formerly park-owned homes in the park with no financing problem. However, the lender will not be attracted to your loan if you show more than about 5% of the trailers as being park-owned.
In addition, a strategy you can use is to have the seller finance the park owned homes for this separate entity and then get your loan for the park only through the bank.
Can I use rental income from trailers in my revenue numbers?
Generally not. Lenders will only allow you to use the lot rent portion of the rent in your revenue figures. They will not count any revenue related to the home itself – remember, they don’t want you to even have any rental or park-owned homes to begin with. For example, if you have a rental trailer that rents for $500 per month, and the park’s lot rent is $200 per month, then you can count only the $200 in your park’s numbers. The other $300, while it might exist, will not be counted.
Can I count the rental income from other structures?
In most cases, the bank will allow you to include rent from single-family homes, commercial properties and other stick-built structures on the park land, as long as they are not rented by the park itself and have a quality tenant on a legitimate lease. However, they will not allow you to count income any businesses located in those structures that the park may own. For example, if you have a used car lot on the property, that the park owns and runs as a free-standing business, then only the rental amount of the building itself is allowable. The bank is making a mobile home park loan – not a business district.
Can I get a loan even if the homes in the park are really old and ugly?
The key thing most lenders are looking for is “pride of ownership”. What this means is that the homes be clean and painted and skirted, and the yards be mowed and free of debris. In other words, lived-in by people who are stable, and respectful, and going to pay their rent. They will rank an old home with pride of ownership higher than a new home with the skirt missing, and a pile of junk in the yard and a car up on blocks. To many more seasoned lenders, the concept is that an old home is paid for and new home has a mortgage. As a result, a new home is much riskier – it might be repossessed and removed from the park, and the tenant has a bigger strain from paying lot rent and mortgage, so is more likely to be late on rent.
Can I get a non-recourse loan on my first deal?
Probably not, unless it is a very large loan and there is a rational reason for it. Most non-recourse lenders have minimum loan amounts of, say, $1,000,000. As for a rational reason, the most common is when the borrower is a limited partnership made up of many members. In those cases, it is impossible to get 50 people to personally guarantee a loan, so the bank does not even try. Most large corporations only borrow on a non-recourse basis due to these logistics. Given the option, however, every lender would rather have a full recourse loan.
Can I get a loan on a park in a small town?
Yes. But it has to be a very strong application. You probably can’t get a loan on a turnaround park in a small town. But if you have good credit, and the park is stabilized with clean numbers, then your odds are favorable. One great resource is the local “home-town” bank that understands the market and is not afraid of it despite its small size. Every small town has at least one “home-town” bank.
How much down payment will I need?
Typically, the down payment is 20% to 30%, depending on the lender and the quality of the loan. The era of 10% down is probably over for the time being. However, you may find deals still at even 0% down in cases where the seller will carry the financing himself.
Can I get a second mortgage on a property, in addition to the first?
This will depend on your bank and loan agreement. Most lenders discourage second mortgages. Often, the loan documents will specify that none are allowed. Sometimes, the documents do allow it and, in those cases, if it’s legal, then there would be nothing to stop you. However, when you go to refinance down the road, or renew your existing loan, it could cause problems then. It is always best to be above-board with your lender on such issues so that everyone is on the same page. And you never, ever, want to create a condition that puts you in default of your first mortgage.