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A Publication of Starker Services, Inc.

SHOULD MY CLIENT CONSIDER AN EXCHANGE?

This is an individual decision based on the investor’s overall retirement plan and investment goals. Although they may have a financial or tax advisor, ultimately the taxpayer will be writing the check to the Internal Revenue Service if they decide to sell and pay the capital gains tax.

WHAT IS CAPITAL GAINS TAX?

Capital gains  is the difference between what a property sells for and the ‘adjusted basis’ in the property.  To put it simply, when investment property is purchased, the purchase price becomes the initial cost basis. If your client makes capital improvements to the property, the cost of those improvments will increase the basis in the property, adjusting the basis upwards. Depreciation is a benefit to owning investment property which allows for a yearly deduction of a portion of the value of the property improvements. Depreciation cannot be taken on land. Any depreciation taken is a reduction in the basis of the property.

ISN’TCAPITAL GAINS TAX ONLY 15%?

No. Gain from appreciation (the increase in your client’s property value) is taxable currently at a maximum of 15%. However, the gain from the depreciation is taxed at 25%. In addition, most states will charge state tax as well.

WHAT IS THE DIFFERENCE BETWEEN A SALE AND AN EXCHANGE?

A sale is an exchange of property for cash or other property which is not “like-kind” to real estate and therefore taxable. An exchange is a non-taxable sale because the taxpayer will sell investment property and replace it with property which is like-kind.

WHAT DOES LIKE KIND MEAN?

IRC §1031(a)(1) allows for the exchange of property held for productive use in a trade or business or for investment for like-kind replacement property. A myriad of court cases and IRS rulings have established the definition of “like-kind” real estate to be very broad. Examples of like-kind property include single-family rentals, multi-unit housing, commercial or industrial properties, ranches, and bare land. Provided a property has not been personally used, such as a principal residence or second home, it should qualify for exchange treatment.

WHAT IS A TAX DEFERRED EXCHANGE?

Internal Revenue Code Section 1031 allows taxpayers the opportunity to defer taxes owed upon the sale of investment or income property by exchanging the property for other like-kind property. Certain guidelines must be followed

WILL MY CLIENT BE AUDITED BY DOING AN EXCHANGE?

No more than if they just sold the property. The tax deferred exchange has been a part of the Tax Code in one form or another since 1921. Just like Individual Retirement Accounts (IRA’s), if your client follows the rules and guidlelines, thelaw allows for tax deferral until the property is ultimately sold and your client receives cash..

WHAT’S THE BENEFIT IF MY CLIENT WILL EVENTUALLY HAVE TO PAY THE TAXES ANYWAY?

With proper estate planning, your client may never pay capital gains tax! There are many tax-planning vehicles that allow taxpayers to relinquish their low basis assets (such as real estate) without paying taxes. Gifts to loved ones, charitable contributions, and certain irrevocable trusts are just a few options available to savvy taxpayers.

Even without a complex estate scheme, a client who exchanges instead of sells will benefit their heirs once they pass away. Any property included in a decendant’s gross estate will be transferred to their heirs with a basis “stepped-up” to fair market value. This means that all capital gains in the property will be wiped away provided the estate’s value does not exceed the statutory exclusion limitations.

WHEN AND HOW SHOULD MY CLIENT BEGIN THE EXCHANGE PROCESS?

Your client must first select a Qualified Intermediary (“QI”) to facilitate the exchange. A QI is a professional company that specializes in processing 1031 exchanges. The QI’s services must be retained prior to the closing of the exisiting property. Waiting until after the closing will be too late!

The QI is hired to prepare the exchange documentation and to hold the sale proceeds during the time between the sale of the existing property and the acquisition of the new property. The law requires the proceeds from the sale of the existing property be kept from the control of your client until a suitable replacement property is identified and ultimately transferred to the client by the QI.

HOW SHOULD MY CLIENT SELECT A QI?

Your client should select their QI based on its expertise, experience, integrity, and years in the exchange business. Starker Services, Inc. (“SSI”) is the nation’s largest and oldest independantly owned Qualified Intermediary. SSI facilitates thousands of exchanges each year and has been doing so for almost two decades!

HOW ARE MY CLIENT’S EXCHANGE FUNDS PROTECTED?

With longevity comes stability. SSI offers its clients almost two decades of exchange accommodation experience. In addition, SSI maintains a $5,000,000 fidelity bond to protect its clients from loss. Each exchange account is segregated which adds another layer of security making SSI one of the safest QI’s in the nation.

AFTER THEY’VE CHOSEN A QI, THEN WHAT?

Upon closing the sale of the relinquished property, your client must adhere to two timetables which both begin on the date the existing property is transferred. First, they must identify in writing possible replacement properties within 45 days of the closing. The QI will provide them with a form on which they may list up to three potential replacement properties of any value.

Once they have completed the ID form, they must fax or mail it to the QI by midnight on the 45th day.

Second, your client must acquire at least one of the identified properties prior to the expiration of the 180 day replacement period. Again, this period begins on day the relinquished property was transferred. Your client may buy more than one of the identified properties provided they all close before within the 180 day period.

The inability to acquire any of the identified properties will cause an exchange to fail. There is no mechanism for alternative property selection once the 45 day identification period has elapsed.

CAN MY CLIENT TAKE SOME CASH OUT WHILE STILL DOING AN EXCHANGE?

Yes. Any cash received will be subject to capital gains tax. Your client may take cash out at the closing of the sale property or upon completion of the exchange. Since they will be taxed on any proceeds being removed from the exchange, it will also be necessary to determine what their capital gain would be had they simply sold their property. This is because if they take cash out equal to or more than their capital gain, then they will be paying all the tax owed. An exchange at this point would be a useless exercise.

Clients considering the sale of investment or income property should first consult their financial or tax advisor to determine if a tax deferred exchange will benefit their long-term investment goals and retirement plans. Ultimately, your client must decide whether to take advantage of an IRC Section 1031 exchange or write a check to the IRS.

For more information call toll-free: (800) 332-1031. We will forward to you at no charge our informative Tax Deferred Exchanges brochure.

This material is provided for informational purposes only and is not to be construed as tax advice. The reader is strongly advised to speak with a tax consultant before attempting to employ any of the concepts stated herein.

The wind and hail months are here. It’s the time of year insurance companies, property owners, and business owners dread. Historically, one half of all wind and hail losses in the U.S. outside the coastal areas occur between April 1st and June 30th. The past three years in a row have been particularly painful across middle America. Oklahoma, Arkansas, Kansas, and Nebraska are on multiple year destructive weather streaks. And the South and Mid Central U.S. have seen some of the worst tornado activity ever in the past three years. In addition to disciplined regular prayer, here are two things business owners should do in preparation for the wind and hail season.

First, reassess your property insurance coverages. Do you have loss of business income insurance with extra expense, as well as extended loss of business income insurance? The latter is particularly important for any community owner in the wind or forest fire states. Are your buildings and contents insured to their true replacement cost? Many people grossly underestimate their true replacement costs. Do you own a utility system, utility poles, fences, signs, or maintenance buildings? If so, add them to your covered property schedule. Losing one or two small items to a fire or wind gust isn’t so devastating. But losing all of them at once is typically a “bankruptcy” event.

Second, if you haven’t already, take time now to prepare your own Disaster Recovery Plan. My company has done this. If we have an emergency, it will be the most valuable asset I own at the time. Here are some of the key elements that should be in your Plan:

1. Employee contact numbers and a meeting plan. Have a shared list for all employee phone numbers. Remember that in the event of a widespread disaster, land lines will most likely be down, cell towers overloaded, and gas will be scarce. Texting may be the best way to communicate. Assign each employee a buddy they can reach – preferably someone who lives close to them. That way if you can reach one of them, they can hopefully reach the other. And have a pre-described time and place to meet post disaster presuming all communications are down;
2. Know how to forward calls, faxes, and email communications to an alternative location. You’ll need to know your phone and data carrier’s contact information and the process for doing so. All tasks should be assigned to a particular person;
3. Have a “Key Contacts” list prepared that includes your insurance company’s(ies’) and agent’s (s’) phone numbers as well as your policy numbers. You also want to include your utility companies (water, sewer, electricity, phone, internet, cable…) and your account numbers for each. Being first in line for repair services due to a quick contact is much better than being 103,434th in line. Fire and Police Department contact information should be included. Key business suppliers need to be added. Finally, include the contact information of key contractors that can help you start with repairs sooner. Your computer and phone system servicers should be at the top of the list; and
4. Name and plan for a temporary work location. A location some 50 plus miles away is best in the event of a widespread disaster such as a hurricane or nuclear blast.

We learned some of these tricks after our headquarters was hit by Hurricane Ike. Experience is a great teacher, but I promise that learning these things via a business article is a lot better way to do so.

Statistics from the National Association of Small Businesses reveal that absent proper insurance and disaster planning, four out of five small businesses hit by a disaster don’t survive. If your business is worth protecting, now is the time to prepare for any future disasters. Set aside a half a day in the next few weeks and prepare for a disaster that might hit you. It could very well save your business.

Kurt D. Kelley
President
Mobile Insurance
Kurt@mobileagency.com

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

Mobile Home Park Tip #11

Comment & Question from Prior Tips:

Hi Dave,

It’s always nice to see paperwork.  Thanks for sharing Sharon and Dave.

Is anyone doing “subject to’s” (taking over homeowner loans “subject to the existing financing”) purchase agreements with mobile home conventional lenders? If so, how is that working for you?  Any problem with Lender’s then calling the loan due?

I’ve taken over Lender loans subject to for years, but not yet done any on mobile loans.  Usually, the balance is too high, but I’m seeing a few opportunities now.

In Texas, unlike in Florida, where I began my mobile home buying, we get a statement of location instead of a title, which a seller could easily sign and hand to me when doing a “subject to” deal, so I felt secure and in control.  Not sure how best to handle a “subject to”  here or in situations where the title isn’t being handed to me.  Any comments and help from the audience will be appreciated!

Thanks Dave ..you guys are doing a great job 

Holly

Holly,

Thanks for the comments on the tips and you are welcome.  As far as your question, I have not been doing subject to’s on mobile homes but I know people do it from time to time.  I would be very cautious in doing this.  Hopefully our audience will have some other thoughts and comments for you.

Dave

How do you get Financing for Mobile Homes to Fill up Vacant Lots?

This is a question many people are struggling with right now and finding financing for homes to fill vacant spaces either to rent or resell is difficult, time consuming, and all out frustrating.

Even if you have perfect credit, try calling up the local bank and ask them for a $100,000 credit line to buy mobile homes that you are going to turn around and rent or resell.  I would estimate that at least 50% of the banks will not even look at it.  So what do you do?

When we had the tornado that wiped out about 40 of our homes in a small town in Texas we had buyers and had to get homes quickly and did not really want to tap into our personal savings accounts.  We purchased about 25 homes using OPM (other people’s money).  Who were these other people?

1.  We had a private source of financing and he agreed to loan us $100K to buy homes.  This money came at a price though.  About 15% interest.

2.  I went around to every bank in town and asked them for $50K in credit lines to buy homes.  What a frustrating process.  About 6 banks and only 1 taker for $50K and 1 for $35K.  However, this money was much cheaper (about 9% with a 5 year payback).

3.  Seller financing.  We did buy a couple of homes using seller financing.

By reinvesting the down payments and the homes we sold for cash we were able to hit our mark of buying the 25 homes and filling the park back up.

Over the years since, I have used the private financing aspect a few times and also received small credit lines from other banks.  I still have a credit line with the two banks that started it all and anytime I want to buy new or used homes I have this money to tap into if needed.

I think the key is that you have to start small… Maybe one loan from 2-3 local banks and then work your way up.  If you build a good relationship with the loan officers and banks you should have a great source of funding.

Mobile Home Park Tip #12

Here are some comments and great additional information from the prior tip from a fellow mobile home park investor… Bret.

Dave,

Here are some ideas to share with regard to raising cash to buy mobile homes. Over the past 6 years we have purchased approximately 50-60 homes and this has been the key to generating good cash flow for our parks:

1) Family loans – this works especially well for older family members who would otherwise buy CDs or similar investments. We usually work in increments of $15K since this is roughly what we spend to buy and set up a mid 1990s home. We pay around 10% and pay back over 5- 10 years. I like to structure the terms so that the payment we bring in from the occupant is close to the loan payment we make to the family member (approx $300/ month).

I too have used these family loans.  The first 4-5 years I was able to work my way up to a $200K credit line with one of my relatives.  I paid 10% interest and he was very happy to be earning twice what he could in the bank.   I also found some private lenders (a couple of people that I had purchased their park and paid them off as agreed).  This netted me another credit line of as much as $500,000 to buy homes or even parks.  The interest rate was 15% but well worth having this additional funding source.

2) Credit cards – This method requires close attention to detail regarding terms and transfer fees, etc. Over the years we have accumulated 10 -12 cards with sizable limits that have allowed us to purchase many homes. We try to take the offers that give the lifetime interest rates – then you don’t have to worry about transferring the balance to another card after the teaser rate expires.  Our blended rate for all cards over the past few years has been around 4-5%.  One downside is that this can tend to lower your credit score – too many credit cards. One way to mitigate this is to use credit cards that are in your relatives names – then it does not affect your score. You can even give your relative a “spread”, ie pay them the 10 % described in item 1 (assuming the card rate is some lower number).

Great point with the credit cards.  I am sure many people have read my book on how I started in the business and it was through the use of credit cards and the teaser rates.  I used to keep a spreadsheet and see how low I could keep the blended rate.  At one time I had a couple hundred thousand dollars in credit cards with a blended rate of under 5%. 

You make another valid point about how the credit cards can affect your credit rating.  Even though you pay them as agreed, the higher the balance in proportion to your credit line will lower your score.  Not to mention that each time you apply for a new card, it can ding the score as well.  I too have amassed some generous credit lines and they are mostly in various businesses.  After the initial shock to your personal credit report after applying for these, they don’t show up on your personal credit report anymore as long as you pay them as agreed.

And finally I also agree that it is better to get the cards with the low rates that stay with the life of the cash advance.  You don’t want to pay 3% for 6 months and then see it jump to 18% without having a way to transfer the balance or pay it off.

3) 2nd mortgage on the park – last year I took out a 2nd note on a park that we owned for about 4 years. The strategy was to buy 10 more homes and increase the occupancy of the park just before doing a refi on the park (we have a 5 year call on the first note). The bank was happy to do the loan since we had a 4 year history and they used the park as collateral for both notes. Now I expect to get a stronger appraisal due to the 10 more occupied pads.

Excellent point.  Many investors do exactly this and it is probably the best way to go if the equity is there.

4) Here is one that I have not tried so am curious if it has worked for others: Report the payments to the credit bureaus for payments you are getting for homes you have sold so that the occupant can raise their credit score and then go out and get their own loan.  They would then pay off the loan you are making to them on the home which gives you cash to buy another home. This one might be a long shot but might be worth a try.

I think this may have some merit and it will be interesting to see if anyone else has tried it before.  If you ever go to sell the notes it should be a great plus especially if they have been making the payments on time and the note buyer can check the credit bureau. 

I have never tried this but have done something a little different a couple of times.  I had a bank agree to finance some homes to my residents and I stayed on as the guarantor.  I agreed to make the bank whole in case one of the residents would default and take the home through foreclosure and then resell it.  This worked well the couple of times I did it.

5) Sell the notes you create when you sell homes – again I have not tried this one yet but am preparing a package to be quoted by a note broker. You might need to season these notes for a year or so.

I know many people have tried this and it has worked.  I have sold a few notes to relatives and other associates and agreed to guarantee the notes.  I was able to sell close to face value.  If you are looking to sell to the typical note buyer, I have seen the discount to be around 75%.  I try to sell all of my homes to my residents without a huge markup so that they can build equity quick and have a reason to follow through.  I have not been willing to give up 25%.  However, it is a very viable option if you can find a good buyer and the notes have good seasoning.

6) Has anyone tried to work with Great Northern Mortgage? They advertise bulk chattel loans for park owners.  I started an exchange to get things rolling but they have been very slow to respond.

They have been advertising on our website for many years and I have not used them personally.  I have talked to them and heard a few success stories.  However, I have heard other cases in which they could not help.  If anyone has any experience on this we would love to hear it.

Bret

Mobile Home Park Tip #13

How to convince the seller to sell at your price

The first thing to remember when trying to convince a seller to sell at a 10% cap is to make him think that it is still a 7 or 8 percent cap or less.  The seller has no right to know your numbers — they are yours because you have taken the time and effort to learn them.  You are putting these numbers together to represent your best estimate of the income and expense you will incur when you take over.  You will not run the park the same way as the seller.  Therefore you base your decisions on these numbers (just as the Seller would if he were buying the park).

Once you have completed your diligence and have a tight, 100% accurate budget, you know what the park can really produce in cash flow.  Normally, this is much less than the seller told you.  Sometimes, in rare cases, it is higher.  In any event, to achieve your 10% cap, you are probably going to have to get the seller to reduce his price.

The first step is to “cook the books” yourself.  Look at any expense item that the seller gave you that is higher than what it should actually be.  Leave all of those numbers at the seller’s level.  Next, tack on some more expenses for the “grey area” numbers such as administrative, travel, and management.  And then add on a ton of proposed “essential” capital expenditure items, such as re-building the roads and utilities — even if you have no interest in ever replacing them.  You are about to enter in to a negotiation, and you need room for the seller to enact some negotiating.

Once you have all the pieces, arrange to meet with the seller.  Have a complete set of your numbers to show him (bring two sets).  Pick a neutral area to meet, like at a restaurant, so that you have his sole focus.  If you meet at his home or office, you may get constantly interrupted.

The first key is to get him in the habit of saying “yes”.  Go down the numbers with him, starting with the revenue numbers.  Start with easy assumptions like “the rent is $200 per month, right?”  And get him to say “yes”.  Get him to say “yes” many times before you hit the “increased” expense items such as administrative and capital expenditure reserves.  He may start disagreeing with you at this point, that’s only natural.  Be sure not to put a final tabulation on the sheet you have given him.  He’ll go straight to the bottom and know what you are up to.

Once you have gone down all the numbers, show him a second, new page.  This one will have the totals and also the amount of debt these numbers will support.  Use the bank as your negotiation weapon.  Tell him that you would like to pay him more, but the bank will only loan so much based on the real numbers.  Explain that whether he sells it to you or some other guy, the numbers will still be the same and so will the banks loan amount.  Hopefully you have left some “wiggle room” in these numbers.

Continued on next tip, be sure to watch for it.

Mobile Home Park Tip #14

How to convince the seller to sell at your price…Continued

With the ball in his court, four things may occur: 1) he storms out of the room 2) he says the price is firm 3) he agrees to your price or 4) he agrees to a lesser price but not as low as yours.  If he responds with option 1 or 2, and your diligence shows that at the asking price it is less than a 10% cap, then you need to move on the next deal.  If he goes with 3 or 4, then you are still in the game.  Now the test is whether or not this new number he has proposed will give you a 10% cap (remember your wiggle room).  If it still does not yield 10%, then you have four possible options 1) walk the deal 2) tie it up anyway and try to renegotiate him again during the examination period 3) propose that he carry the paper to avoid the bank’s limitations (this is my favorite) or 4) ask him to take a 0% interest second lien for some period of time.

Remember that you have a second shot at negotiation during the due diligence period.  Sign him up, even if the deal needs fine tuning now, and then re-approach him during the exam period.

The worst thing you can do is put him in a “I’ll think about it” funk which will waste your time with perpetual follow-up calls.  A firm “no” is way better than a weak “maybe” that goes on for years.

Mobile Home Park Tip #15

Protecting Your Mobile Home Park Investments: Setting up an LLC

As you go about finalizing a deal on the purchase of a mobile home park, you need to take into consideration whether or not you want to set up a separate business entity through which you will own the property.  In this regard, an ever growing number of men and women who are investing in multi-family properties today are setting up limited liability companies in order to provide a vehicle for ownership of their investments.  Through this article, you are provided with an overview as to how establishing a limited liability company or LLC  can be a positive step when it comes to mobile home park real estate investment.

Men and women who have extensive experience are now nearly universally setting up a separate LLC for each of their mobile home parks or other types of real estate investments.  There are a number of reasons why they are taking this approach.

First, an LLC is very easy to establish.  In most states, you merely have to spend a few minutes online to set up an LLC.  And, the annual fee associated with an LLC really is minimal in the vast majority of jurisdictions.

Second, the annual filing requirements associated with an LLC is very simply to complete.  Unlike a more traditional corporation or a Sub Chapter S corporation, the paper work associated with an LLC almost is non-existent.

Third, an LLC will provide you with liability protection in regard to your mobile home park residential real estate investment.  In this regard, if some sort of liability issue arises in the operation or ownership of the real estate investment, an LLC will protect your personal assets from attack in such an instance.

Finally, there are some tax benefits that you might also be able to realize through the establishment of an LLC to deal with your ownership of a mobile home park.

If you have any additional questions pertaining to your mobile home park or other multi-family real estate investment and the benefits and protections that can be realized through the establishment of an LLC, you should consult with a qualified attorney with experience in the real estate arena.  A reputable lawyer can assist you in making certain that you do everything you need to undertake to get your LLC in place and to keep it up and running from a legal standpoint into the future.

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Dave Reynolds
MobileHomeParkStore.com
PO Box 457
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Our Weekly Mobile Home Park Investing Tips.  Along with comments from investors.  Enjoy!

Mobile Home Park Tip #21

Keeping in Contact with your Manager:

I have to admit that I have made some mistakes in the past with communicating with my onsite management. For the most part, I let the managers run the park and assumed that if I did not hear from them, everything must be going well.

This approach has come back to bite me a couple of times and I have since resolved to have myself or someone in my office talk with the manager at least once per week. I have adopted the following strategy and it appears to be working.

Each week, I have the manager write down any problems or issues in the park, and then fax them or email them to me every Monday morning. This is working great so far and now I have a paper trail of everything important that is going on in the park.

Then on Thursday or Friday of every week, we call the manager just to see how things are going. The managers like to know that we are thinking about them and appreciate these calls. In the past, I had some managers that we talked to only once per month when there was a problem. It is much nicer to talk to them now and find out that there are no major problems.

Mobile Home Park Tip #22

Types of Mobile Home Parks to Consider:

When deciding on purchasing a mobile home park, you can basically look at four different types:

Building a New Park:  This is starting from scratch and will take time, money, and patience.  This is usually the riskiest and drawn out option but can be potentially a great opportunity.

Buying a Stable Park:  These parks usually have low vacancy, are operating smoothly and have rents at or near market.  You are buying a cash flow that should increase as rates increase over time.  You will pay a premium price for this type of park.

Buying a Park that is mainly filled up but is not running efficiently.  In these types of parks you want to buy them based on the current income and expenses and then increase the value through such things as raising rents to market, collecting rents, sub-metering utilities.  This is the type of park that I am on the lookout for.

Buying a Turnaround Park:  In addition to increasing rents and reducing expenses this is the type of park that is either half vacant and needs rent to own homes or the type of park that the owner has forgot about and is run down.  This type of investment usually has the best potential to increase in value for existing parks but will take the most time, money, and efforts.  Make sure that the extra time and efforts will be worth it.   Turnaround parks are often better deals as the owner may have lost interest or is having financial difficulties.  The opposite is true of the stable parks.

Mobile Home Park Tip #23

When looking for a park, you can basically choose:

Large Metro Areas:  There is usually more competition here from investors but they are generally regarded to have greater stability and less market fluctuation.

Small Cities & Rural Parks: There is generally less competition here from investors and you will usually be able to buy the parks with a higher cap rate.  These parks will typically have a larger risk due to dependency on one or two major employers.  However, in the right cities and markets these will often represent great investments.

Adult & Senior Parks:  These are usually more desirable as your tenant base willl have greater stability and tend to care for their homes and lots better and pay their rents on time.  However, many of the residents in these parks will have a lot of time on their hands and require more amenities and offer more resistance to rent increases.

Most REIT’s (Real Estate Investment Trusts) and larger mobile home park investors are looking to purchase parks that are in the 150+ site range so the competition and pricing is generally higher for these larger communities.  I would suggest you focus on the parks that are in the 25 to 150 space range.  Lower than 25 spaces if you live nearby and are able to manage the park yourself.

Any size of park can be run efficiently and profitably.  Some 10 space parks are easier to run from a distance without a manager than one that is 100 spaces with a full time manager.  There are many factors.  Some parks require weekly visits, monthly, yearly, or whenever you are bored.

When deciding what type of park to buy, you need to decide on your investment goals, evaluate the amount of time you have, talk to others in the business about the time requirements for your potential purchase and then begin your search for parks that will fit with those goals.  Make sure your goals are reasonable.  It is not likely your are going to buy a 100 space park in a good market operating well for a 15 cap and it is not likely you will find a park operating well in a good market that will be purchased for no money down, etc.

Mobile Home Park Tip #24

The Double-Wide Two Step:

What to expect when one half of a multi-section home is destroyed.
By Kurt Kelley of Mobile Insurance in Texas

When one section of a manufactured home is destroyed, the question becomes -”What is the extent of this loss? Half the home or the whole home?” The destruction of one-half of a multi-section home can be more traumatic to the home’s owner than the destruction of the whole thing.

Today, in most circumstances, manufacturers refuse to build a replacement section. Manufacturers report that if they rebuild one section of the home it will not match the remaining section(s) like it would have if built at the same time. Carpet colors, paints, etc. can vary slightly and create product quality and image concerns. Furthermore, sections may not match-up at the marriage line accurately.  Nevertheless, the retailers that own a home which has had one section destroyed, and their respective insurance companies, only want to pay to replace half the home, not the whole thing. To make things more interesting, many manufactured home physical damage policies only offer to pay for the physical damage to the home.

Thus, if an insurance company pays to replace a destroyed section, the insurance company may have technically satisfied its policy obligations, whether or not the home owner can actually replace just one section of the home. This leaves the home’s owner with a large uninsured loss. In the battles over the years between insurance companies and manufacturers on whether to build a replacement section to home, both have prevailed.
To protect yourself from a large uninsured loss, make sure your insurance policy has specific language in it stating that if one section of a home cannot be rebuilt, then the home will be considered a total loss.

Furthermore, you should demand that all hired transporters carry a “cargo insurance policy” that includes a “pair and set” or “multi-section” clause.  If you do these things, you may not limit your time on the dance floor doing the double-wide two-step, but at least you know you will have a chair when the music stops.

(For a copy of a model Transporter/Installer agreement, visit www.MobileAgency.com  and go to the forms section).

Contact Kurt at 281-367-9266 or email Kurt@mobileagency.com

Next 5 Mobile Home Park Tips – link will be placed soon!

This tip of the day is brought to you by:
www.mobilehomeparkstore.com

For this month’s special offers.
Click Here

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

Dave Reynolds
MobileHomeParkStore.com
PO Box 457
Cedaredge, CO 81413
PH: 800-950-1364
FX: 970-856-4883

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?

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.

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.

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

Next 5 Mobile Home Park Tips

This tip of the day is brought to you by:
www.mobilehomeparkstore.com

For this month’s special offers.
Click Here

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

Dave Reynolds
MobileHomeParkStore.com
PO Box 457
Cedaredge, CO 81413
PH: 800-950-1364
FX: 970-856-4883

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

Mobile Home Park Tip #6

Another important question that I receive quite often is do you treat your managers as employees or as independent contractors?  The answer to this question is almost always that I treat them as employees.  You can check the different ways the IRS gives you to choose between an employee vs independent contractor but in 99 out of 100 times the typical manager should be treated as an employee.

If you treat an employee as an independent contractor and get caught you are liable for penalties and interest and the back taxes.

Most people that are asking this question want to hear a different answer because they would rather just write on check to the manager and be done with it.  Some people may only give their manager free lot rent.  They don’t want to have to set up state and federal payroll taxes which they are responsible for as an employer and hassle with all the reporting.  I will admit that I didn’t like the answer either but it is the right way to do things.

If you want to take your chances with the IRS you may never be caught but there is something that is more important to consider other than just the hassles of setting up the payroll taxes.  This has to do with the potential of your manager getting injured on the job.  Even though you have them sign an independent contractor agreement and it states that they are not an employee, what happens if they get hurt performing their ordinary management duties?  That agreement will often be thrown out in court when it is determined that they meet all of the IRS guidelines (or state guidelines) of being an employee.  So not only will you then be responsible for the back taxes, you will most likely be a defendant in a lawsuit.

Since you treated them as an independent contractor you probably failed to get worker’s compensation insurance and will now be held liable to pay for their medical bills, lost wages, and other damages.

It doesn’t matter whether you give your manager $50 off of their lot rent or $2,000 per month, you need to setup your payroll correctly and obtain valid worker’s compensation insurance.  The risks are not worth taking.  If you don’t want to hassle with the payroll, there are services out there that will do everything for you.

Mobile Home Park Tip #7

Comment from Last Tip:

Dave – I really enjoy these tips also.  We are out of town owners and we have a park manager that lives in our park.  We have a local bank account and all of our residents make their deposits directly into our park account.  The manager does not handle the rent or security deposits.  We also do all contracts (MH rental, lot rental, home sales agreements) either by mail or in person.  For us it is better if it takes a few weeks for the paperwork to get done rather than have a mistake on a legal document.  This system gives us some sense of control and also eliminates the possibility of theft.  Although we do have to follow up on collections, this is actually rather rare and we don’t mind doing it.  Our bank is extremely cooperative and mails us every deposit slip with the tenant name or unit number.  We also get electronic copies of all deposit slips with our statement – just in case something gets lost in the mail (which can happen).

Thanks! 

Amy

Amy,

Thanks for the comments on the tips and for discussing your system.  It seems that it is working well for you and I have tried similar strategies in the past.  The problem I usually had was with the bank wanting to work with me on this.  I am assuming your park is in a smaller town and you have a small town bank.  Keeping the rent collections and paperwork in your control will definitely cut down on opportunities for theft and mistakes.  If you are not more than a few hours from the park and have the time to do so I would also agree with this system.  Thanks again for the comments and continued success with your park!

Dave

Another Comment/Question:

Dave & Frank,

On the issue of contractor vs employee, perhaps you can also address casual labor. We sometimes use park residents for lawn mowing, snow plowing, repairing park owned homes, and odd jobs around the park so they can earn money and it is usually cheaper for us than hiring from the phone book. Do we have to add all of these people to the payroll even if they only work a few hours per month? I’m guessing other park owners are also in this situation.

Thanks,

 Bret

Bret,

This is an excellent question and I have struggled with this as well over the years.  I have used so-called part time labor many times.  There are really two issues to look at.  The first is whether or not you have to collect payroll taxes on this casual labor.  The general rule for the IRS is that anyone that should be treated as an employee should be setup as such and payroll taxes should be withheld.  In the real world, if you hire the teenager down the street to pick up trash or mow a lawn in your park, you will probably not set him up on your payroll system if it is a one time occurence where you pay them $20..  However, if they are doing this type of work every week, then it would be advisable to go by the letter of the law.  Here is a link to Publication 15 on the IRS website for more info.

http://www.irs.gov/pub/irs-pdf/p15.pdf?legacy=1

The real issue to me is whether or not this casual labor person will be covered in case they get hurt.  If you are going to hire this casual labor then make sure you have worker’s compensation and that your policy will cover this labor.  If you have a worker’s compensation policy that covers your park manager that policy will be assigned a class code that covers certain types of work.  If your manager does only office work and your policy is assigned the class code that pertains to office work, then you may not be covered if you hire other types of work done.  If Mr. Bailey in space 15 is looking for some extra money and says he will go through and cut down some branches or install some skirting on one of your rental homes and cuts off his finger or worse, you better hope that you are covered for this under the worker’s compensation insurance.  My insurance agent in Texas said it all boils down to the class codes of the policy and I would guess most states will have similar rules.

In summary, I would guess many park owner’s out there have these little instances of casual labor and the real issue to me is that I don’t want to risk a large lawsuit just because I was helping out a resident or teenager earn some extra money.  Be sure that they are covered in your worker’s comp insurance policy.

Thanks,

Dave

Another Comment:

Dave,

It has always been my understanding that the key factor in determining an employee from an independent contractor is the amount of control you exercise over their day to day activities. Do you set their hours of work?  Do you direct the method in which they work? Have you given them a guideline of policies and rules that they must adhere to?  If so, they are probably an employee.  In my parks, my involvement is basically in setting business objectives and reviewing results.  Are my rents collected?  Is the park clean and safe?  Are the homes in good order?  Are expenses in line with my projections? My managers work as they deem necessary to accomplish the objectives, are given no instruction on how to accomplish their tasks (unless help is solicited) and are paid straight commission on the rents they collect.  It may sound like a loose run organization, but for me, it has been effective.  The key and the challenge is in finding the right manager who is experienced, self disciplined and honest with a strong work ethic.  If you do the hard work on the front end of hiring right, and you may have to do it several times before finding the right fit, your manager would pass muster on an IRS review of their independent contractor status.  The primary benefit though is not in the ease of pay and being able to forgoing withholding, etc.  The primary benefit is the peace of mind derived from having a competent individual who absorbs the headaches for you.

As always, I enjoy reading your tips and find the thoughts expressed interesting.

Best regards,  

Brian

Brian,

Thanks for the comments and you really hit the nail on the head.  If you find and hire the right person for the job, you will be on the right track.  Just as in buying the park, you need to spend the time and diligence on finding the right manager.  In my experience, a good manager will be the determining factor of whether or not I enjoy owning a certain park.

Great comments and insight!

Mobile Home Park Tip #8

Comment From Last Tip

Dave,

The next step from Amy’s rent collection system is to have each resident set up an automatic transfer from their checking account to the owners on or before the ‘rent due date’ and, of course, give them a discount on the rent for their help in doing this.

Glen

Glen,

I agree this is a great logical next step.  It seems like many people already have their bills automatically withdrawn from their checking account already, and it would be great if we could have all the rent in by the first automatically.  Thanks for your comments!

Dave

Another Comment:

Dave,

As always, I enjoy your tips and all you do for the business. One issue that owners should be aware of. When you treat a manage or anyone that only works under your direction, that is not licensed. If they ever go to collect unemployment benefits, the state will make you go back and pay all the taxes (even the employees share) not sure if all states apply to this.  With my experience I have all of my employees on payroll.

Thanks,  

Duane

Duane,

Great point and another reason one should make sure they follow all the laws Federal and State!  Thanks for the comment!

Dave

Mobile Home Park Managers… Continued

How Much Should You Pay the Manager?

First and foremost, the answer is that you should pay them enough to keep them motivated to complete the jobs you expect to be done.  If you want them to keep office hours for 40 hours a week and be on call every night and on the weekends, they should be making at least as much as if they were working full time as a receptionist in a typical office.

I think the first step that you should take is to decide what you expect of the manager.  The basic duties will fall into office and maintenance.

In the office category this will include such things as collecting, logging, and depositing rent, answering questions and dealing with emergencies, calling plumbers & electricians, renting lots and homes and filling out the paperwork.

In the maintenance category this will include preventative maintenance (caps on sewer drains, filling in potholes, heat tape, etc), routine maintenance (mowing, cleaning up trash and tree branches, fixing small plumbing problems, etc), and in some cases more specialized maintenance (digging up water & sewer lines, running a sewer auger, trimming trees, and so on).

For the office category, I will typically come up with a level of time that I feel needs to be spent on this item on a monthly basis and then multiply this by $8 – $10 per hour.  So, if I feel like a 100 space park will require 80 hours per month for office work, the pay would be $640-800 per month.

For the maintenance category I use the same rationale but increase the pay rate to $10-$12 per hour.  So, if on average the park will need 40 hours per month of preventative and routine maintenance, then the pay would be $400 to $480 per month.

If the manager or maintenance person is qualified to do the more specialized maintenance, I would not have a problem paying $15 per hour on this type of work.  A typical plumber will charge at least $100 for a visit and one hour of work.  The key here is that you only have your maintenance personnel do this more specialized type of work if they are QUALIFIED and your carry the proper Workman’s Comp.  I have done this both ways in which I would put them on a salary based on the average extra work they will complete or else on an hourly wage for these duties.

For the added grief of being on call on the nights and weekends, the manager will typically get free lot rent and possibly some utility allowances.

When all of this is said and done, this all boils down to about 5-7% of the gross monthly income.  In the case that the park has several rental homes, then it may be as high as 10% with the extra job of cleaning and repairing these homes.

One mistake that I have seen many park owners make is to require that their managers hold office hours from 9-5 every day during the week.  I have been into many of these offices and other than the manager playing computer games or watching television, the office is empty.  On most of my parks, my manager’s either do not have designated office hours or they have them for an hour or two a day during the first week of the month.

Mobile Home Park Tip #9

Comments from the Last Tips:

Hi Dave,

I have  a small park in PA and I live in NY I send the tenants pre addressed envelopes, I send them 13  envelopes in January of every year, I have a PO Box in NY it works great,   we handle all of the funds.we also use the rent manager computer system to keep track. I have been enjoying  your cds as I drive to work, I noticed you do a lot of park flipping, what about buying and enjoying the cash flow.

Thanks, 

George

George,

Thanks for the comments on the cd’s.  I am glad you are enjoying them.  As far as your comment, I have tried this a few times in the past.  On one park where we had a very limited type manager, it worked great.  I even had a few people send me 12 checks for the year all dated the first of each month.  They must have liked the extra 11 envelopes with postage.  Most of my parks now I have a manager collect the rent.  However, in your case as with many other owners, this can be a good way to collect the rents.  As far as the Rent Manager program, I have used it to varying degrees of success.  When we ran it from my office it worked well.  When I had to train the managers to run it, it was not as successful.

As far as keeping some parks and not flipping them, I will eventually find a few parks I really like and take it easy.  But for now, I am having too much fun with all the challenges of turning them around!

Thanks again for the comments!

Dave

Another Comment:

One person suggest automatic transfers from the resident’s account to the parks.  Beware that if an automatic transfer is set and there is no money in the account, both the park and the resident’s accounts may be charged bank fees.  And the charges are steep-could be $40, a lot for a $150 rent.  Many residents don’t always have money in their account on the 30th depending if it falls on a Thursday.

Rob, thanks for the comment and observation.  The automatic transfer option would work a lot better when you have responsible residents and this is not always the case.  You would have to educate the residents and make sure they authorize the transfers in writing and agree to pay any bank fees if the money is not in the account.  Great Observation!

Dave

Another Comment:

Dave,

Re: employee payroll,

This is a frightening subject for almost all employers – – – – as well it should, be due to the “alphabet soup” of gov’t requirements and timeliness of making the tax deposits.  The risks involved when people do their own payroll are very high for the employer.  Especially if a disgruntled employee or contractor wants to cause a problem.

Suggestion: Have owners look into using a Professional Employer Organization (PEO) to administer their payroll services.  [Google PEO]  It can be a very pleasant surprise for both the employer as well as the employee(s).  The PEO will handle all the necessary reporting paperwork, W2′s, tax deposits, Workers Comp insurance and claims and, very often, can offer a complete benefits program as well.  (This may take a little shopping around because most PEO’s want clients w/ an employee base of 10 employees or more.)

Very few people take time to truly understand the concept of PEO’s and the protection they give to small business owners.  Please keep in mind this is NOT “just a payroll service” that writes checks.  When payroll is outsourced to a true PEO, the PEO really become the HR department for the employer.    

Lee

Lee,

Thanks for another great comment.  I have used a company called Paychex (at Paychex.com) a few times in the past and have been very satisfied.  This or a similar PEO is a great way to take the nuisance of payroll checks and other HR issues out of your day-to-day operations.

Thanks again for the comment and participating.

Dave

Mobile Home Park Down Payments – From Steve Murden of Star Capital

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.

By Steve Murden of Star Capital Corp – 1-877-297-2230

Mobile Home Park Tip #10

Comments From Prior Tips:

Dave,

I noticed some of comments and questions this week were about Leases and Rules.  We purchased a park from Dave almost 6 years ago and he had in place the best set of Rules and Regulations and an excellent Lease.  I have used almost sentence in them for my benefit in applications, moving homes in, evictions, going to court, automobiles, pets, junk, yards, leaves, water etc.  They have been looked at by the County Attorney and he says it is the best he has read.

I have attached them for Dave (in case he forgot which ones he left here).

I would recommend them and use them to the 9th degree.

I also have a great plan for asquiring abandoned mobile homes in Kentucky.  We have taken over at least 7 abandoned homes through the court system with no problems.  Other park owners who have been here 30 and 40 years come to me and ask how to go about acquiring an abandoned home.  It’s working!

I have forwarded the Lease you left in place here and the Rules.  I have forwarded the Lease with Option to Purchase also, BUT, have changed it and removed all the words that said, buy or purchase, as that was a real source of contention with the Judge and with the Kentucky State Manufactured Home Inspector.  It cannot contain any words that refer to purchase or buy.  Can only say Lease with option and that it can be sold for $1 at the end of the lease.

Just thought these things might come in handy.

I really enjoy the tips and comments emails…..they are great.

I don’t quite agree with the commentary on being softer on the Rules.  We have been hard and it’s worked and we haven’t lost anyone.  And we have been able to really clean up the park since we have been strict and our abiding by those Rules and not backing down.  It gets them out if they don’t want to be clean….

Just a thought. 

Sharon

Sharon,

Thanks for taking the time to respond to the tip program and for the great comments.  I appreciate you positive feedback on the Leases and Rules that I left at the park you purchased.  I need to take you and the county attorney out to lunch!!!

I can’t take all the credit for the lease and rules as I had a prior manager and an attorney help in writing them.  I have revised them a little over the years and usually to conform to different states.  As in your experience, I have never had a problem in court with the language.  I have also removed the language you mentioned “buying or purchase” in my lease options.  While I never had a problem in court, I found out that language was not appropriate in most states.

As far as being hard on the tenants I agree with you that you need to lay out the law and set an example for people to follow.  You had quite a bit of work to do when you bought the park and maybe I will be able to visit and see how the park has come along.  It was a nice piece of property for sure and I learned alot from my experience in owning it.  My biggest mistake as you are aware was in looking entirely at the low down payment aspect and not really thinking about the other terms (especially the long term prepayment penalty) with the previous seller.  I will apologize publicly for that one.  I wish you continued success with the park and look forward to your comments and insights in the future.  I am sure we would like to hear more about your program for acquiring title to an abandoned home.

Also, I am going to post a copy of the lease and rules on the site.  Here is the link…

http://www.mobilehomeparkstore.com/ebooks/lease-download.htm

Thanks,

Dave

Raising the Rent when the Rent is Way Under Market…

I have purchased several parks in the past in which the rent was way under market.  For example, the rents in a park that I am buying are $110.00 per month.  The average rents in the market are closer to $185.00 per month.  For the sake of comparison, in the park I am buying, the residents pay all the utilities.  In addition, in the comparable parks, the market rent of $185.00 per month also assumes that the residents are paying all the utilities.

The first issue is how much should I increase the rents and when?  While there is no right answer I am planning to raise the rents on day 1 to just below the market rents ($175.00 per month).  Next year I will raise them again $10 to $15.  The only reason that they are not up to market in the first place is that the prior owner’s never implemented a standard rent raise program and soon were outpaced by the market.  Their last rent raise was last year ($10 per month).  Before that, they had not raised rents in 6 years!

I am not worried about losing any of the residents for a couple of reasons.  First of all, why would they move to the park down the road that is already charging $185+ per month?  Most of the parks are comparable in the area and the occupancy is high.  Secondly, most of these residents know that they have been getting away with these low rents for years, and while they may fuss a little, they will expect an increase.

I ran into this same situation a few years ago in another park I had purchased and I decided to increase the rents to market in 3 steps.  I purchased the park and the rents were $105.00 per month.  The rents went up to $150.00 right away, to $200.00 one year later, and will be going to $240.00 this coming year.  Then they will be at market.  During these rent raises we have lost about 4 out of 100 residents and have filled those lots from people bringing homes into the park.

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Dave Reynolds
MobileHomeParkStore.com
PO Box 457
Cedaredge, CO 81413
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