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How to Harness the Best Opportunity to Buy Mobile Home Parks in the Last Decade
By Frank Rolfe
If your definition of a good buy is to
buy low, and buy when “there is blood in the streets”, then this is the time to
buy mobile home parks. Prices have never been lower, and sellers more desperate,
since the mid-1990s. And there does not appear to be any improvement on the
horizon. This buyers market will last at least through next year. But as soon as
the credit market recovers, then that’s the end of the window of opportunity.
How did the market change so fast?
Mobile home parks have remained one of
the most stable and predictable of real estate asset classes. The loan failure
rate is nearly zero. In fact, I have only ever seen firsthand one park in
foreclosure. Why? Because mobile home park tenants are trapped with about a
$3,000 cost to move their homes. Consequently, they can’t afford to move out of
your mobile home park, even if they wanted to. Also, affordable housing is as
much in demand today (or maybe more) than it was twenty years ago. And there are
virtually no new mobile home parks built in the U.S. each year, so the supply
side never increases. In fact, in some areas, such as Florida, the number of
parks sold and converted to a higher use is alarmingly high. So, in effect, the
number of parks in the U.S. is shrinking, not growing.
So why the desperate sellers? In any
asset type, there are always folks who want to sell due to retirement, health,
marriage or estate problems. There are about seventy-five new parks that go on
the market publicly (more privately) each month – but less than 1/3 of those are
being sold to eat up that supply. And why is that? Because the lending market
for mobile home park mortgages has virtually vanished overnight. Even though the
default rate on such mortgages is virtually non-existent, the whole industry has
been lumped in with the rest of the commercial real estate mortgage market.
There is no market to securitize commercial loans on Wall Street. And the prime
lenders on mobile home parks have ceased to make new loans. As a result,
although the number of buyers has not gone away for parks, the ability of these
buyers to get loans has shrunk enormously. After a seller has had their property
tied up two or three times by buyers only to see the deal collapse, they get
very concerned and lose their patience and confidence. And the result is price
collapse.
How bad is it? We’re seeing four-star,
REIT quality parks being offered at 10% to 12% caps. This is not junk, this is
prime real estate. The lesser parks are being offered at caps up to 15%. Of
course, you have to sort through all the bad deals to find these, but the tools
are out there to help you make this sort. If you go to a site such as
www.mobilehomeparkstore.com, you will find around 1,000 parks for sale, and
about 10% of these have become very attractive recently. Some scary attractive.
So how can I get a loan when others
can’t? Several ways. Many of these borrowers who are being turned down lack
three things: 1) sufficient capital to put 20% to 30% down and still have
capital in the bank , 2) a track-record of real estate or other management skill
and 3) good credit. If you have these three items, you are ahead of many buyers.
There are still loans being done, but not nearly as easily as they were before.
There has been a “flight to quality” by lenders to favor those borrowers who
appear better risks. If this is you, then you are in the power position.
O.K., you’re interested. But how can you
find deals? Again, go to
www.mobilehomeparkstore.com or loopnet and start sorting through the
listings. Sort by what is most important to you – normally geography or deal
size. Get on the phone and start calling the brokers and sellers. You will
immediately sense the quiet desperation and the opportunity. If you need
information on the pitfalls of park selection and ownership, look at the books
and other educational materials available on the subject on the internet. It’s a
very simple business to grasp, but you have to know the true basics.
Is this all too good to be true? If you
do not handle it right, this opportunity is just another disaster in the making.
You still have to understand what you’re doing, and put in the effort to find
and negotiate good deals. But considering that mobile home park cap rates were
about 6% to 8% a year ago, things are 100% more attractive today than just 12
months ago. And that is a unique opportunity that won’t last forever.
What’s the future of the industry?
Pretty robust, thanks to two megatrends: 1) a continuing, growing demand for
affordable housing, in part due to underfunded retirees struggling to get by on
$1,000 per month and 2) a growing Hispanic population that has a big appetite
for mobile home park living. In addition, even if demand was flat, the simple
fact that more parks are re-developed every year, and no new ones are built,
would make prices go up due to simple supply and demand.
A lot of real estate asset classes are
caught in a storm of lack of demand and changes in consumer taste. Not mobile
home parks. Their recession is credit-centered and will come to an end once the
lending mess is resolved. So you better hurry. But not too fast. Learn what
you’re doing and get the best deals. This opportunity can wait for you a little
while.
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