Lower Occupancy Mobile Home Parks

Many mobile home park investors are looking for parks with a lower than stabilized occupancy in order to take advantage of the infrastructure in place and increase the value of the property with their own efforts. Purchasing mobile homes and either renting them or selling to tenants is the most common approach. This strategy makes sense where there is a demand for these units and the investor has a supply of mobile homes and a means to pay for them. Many lenders will not consider financing a park like this, but we have worked with several clients accomplishing this goal.

Parks where stabilized occupancy has never been achieved or due to a variety of circumstances, the current vacancy exceeds the 10% maximum many lenders consider stabilized can be financed through both a real estate loan and a credit line on the homes. Investors are typically negotiating purchase prices for parks based on their current cash-flow and paying a reasonable CAP rate regardless of the number of pads on site. As mobile home parks are different from any other type of income producing property, the vacant pad sites do have value, but no ability to generate income without a mobile home in place so they would not have equivalent value to an occupied pad. Vacancy issues with other property types are remedied with improved management or improvements to the existing structure. In the case of parks, there is no structure to better manage or improve if the pad site is vacant. The financing for the parks is determined by the appraised value and limited by the debt-service-coverage. At a typical loan-to-value of 75% on the real estate, the price of the park needs to be based on the current income to support the debt. The lender will amortize the loan on the park up to 20 years (25 year case-by-case) and charge an interest rate around 7%. Many times the first two years of the loan can be paid as interest-only.

The least expensive mobile homes to purchase are either repossessed or in another park that may be restructuring or changing use. The costs involved include the purchase price of these homes, transporting them to your site, and any improvements to the homes. On average we see investors using a figure of $15,000 per home for their estimates. Once these homes are in place, the plan is to either rent these units, sell them to the tenants by financing them, or selling them on a rent-to-own program. The terms offered to the tenants vary as to the market demand for the units. Most park investors want the cost to maintain these homes passed on to the tenants. Renting them and maintaining the repairs can, at times, be more costly than a vacant site.

The financing for these homes is available at minimum credit lines of $500,000. The loan is amortized over 10 years with a 5 year term. The loan floats at WSJ Prime + 2% with a floor rate of 7%. The repayment of this loan is based on the amount drawn from the line. The minimum increment that can be drawn at one time is $50,000. The release of the funds is based on 75% of the cost of the homes to included purchase price, transportation, set-up, and any improvements. The mobile home needs to be in place and leased or sold with a tenant in the unit in order for the bank to release funds. To make this financing work, the investor would need to make certain the tenant is paying a rate of interest or rent that will off-set the cost of the line.

There are few changes to a mobile home park that will significantly improve its value. The main improvements are increasing pad rents, separately metering utilities and passing the cost to the tenants and improving occupancy. With the limited amount of chattel financing available, advertising for tenants to move their homes into your park or to purchase a new home from a dealer and moving to your park are rare occurrences. A park owner willing to purchase the units and make them available to tenants is now the standard in improving occupancy. Financing is always an issue and with funds available to purchase the park and fill it with homes, there is a tremendous opportunity for creating a great amount of additional value.

As an example, a park owner recently purchased a park with 312 pads at 70% occupancy. The acquisition price was based on the net operating income from the occupied pads at a CAP rate of 9%. The park was financed at 75% of the purchase price and a line of credit for the mobile homes set up for $1,000,000. This not only allowed the investor to acquire the park, but also have an immediate avenue to improve value. The park is located in area with a high demand for these homes and he plans to add approximately three homes per month. This would allow for full occupancy within three years. This improvement should increase the value by close to $2,000,000.

This financing can be for park acquisitions or refinancing a park currently owned that is in need of additional units. If there are existing units in a park, the credit line can be drawn at closing to cover up to 75% of their value. When a park is being purchased with park-owned homes, this can be very helpful in maximizing the amount of financing and lower out-of-pocket costs as well as eliminating the need for a seller to carry financing on the homes.

Steve Murden
Star Capital Corp
(540) 342-6520
(703) 991-0072 (fax)
stevemortgage@aol.com
www.starcapitalcorporation.com

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