How to take Advantage of the Greatest Buying Opportunity in Mobile Home Parks in Decades

Warren Buffet once said of Berkshire Hathaway “we only get greedy when others get fearful”. That statement has never been more accurate in describing the opportunities in the mobile home park business. We are approaching a time in the industry when the owners of parks for sale are fearful, and their fear is amplified by a struggling, nearly dead mobile home retail industry and a sudden reversal of fortune in lending. It appears to be the perfect storm for many owners.  And that cyclical train wreck is going to lead to some really great buys – if park buyers are properly prepared to take advantage of this once-in-a-lifetime buying opportunity.

The Causes

The mobile home industry had its “subprime meltdown” all the way back in 2000. Just like today, lenders had been way too aggressive in their lending standards – if they used any at all. Repossessions went through the roof, and with every mobile home dragged to auction came a new low in collateral value.

$35,000 homes were being sold for $5,000 at auction.

In turn, this re-valuation of collateral led to continually more homeowners walking off and leaving their hugely overvalued mobile home. As the lenders put an end to making loans on mobile homes, dealers found they could not find any credit-worthy buyers to buy their inventory. If you had bought one share of each of the publicly-traded manufacturers in 1999, you would seen the value of this portfolio fall by 90% in 2008. With dealers not selling any homes, the ability to fill mobile home lots has become difficult. In addition, many park owners are faced with the daily risk of losing more customer homes to foreclosure.

The other fundamental of the park business that has hit a brick wall is lending. A few years ago, many banks were aggressively approving loans for parks to be purchased. Unfortunately, several of these are no longer an active player as they once were. Indeed, many of the hard-core lenders from the last few years have virtually shut their doors to new loans.

Much of this was the result of the extreme losses in lending that are occurring right now, although interestingly, most of the mobile home park loans are doing fine. Repossessions of mobile home parks are not very common. But the lending industry has limited mobile home parks along with all forms of real estate borrowing. As a result, if someone wants to buy a park, they must have great credit and plenty of cash for a down payment or the loan will never materialize. In addition, many park lenders are being harder on occupancy, criteria, and location.

The Opportunities

With no dealers selling homes, and little lending for park purchases, many park sellers are becoming truly desperate. Day after day passes without any offers and, when they get one, the deal falls through predictably during the financing contingency. Many sellers do not know how to get their parks sold. And the panic feeds on itself and on other similar parks. A lot of value is based on perception – and many sellers perceive their parks to be nearly valueless. Most notable are the parks that have less occupancy than is required for a bank loan (say 60%), yet show reasonable positive cash flow. Despite a lot of good, solid raw material, the seller may perceive that the park will never find a buyer despite the low asking price. And so the price just keeps dropping.

The key buying opportunities in parks today are:

• Parks that have just enough vacancy to be unable to get financing, yet can reach this occupancy level (normally about 80%) with the addition of only a few homes.

• Parks that have sufficient occupancy, but have lousy financials due to mismanagement, and costs that can be reduced.

• Parks that can attain an enormous rent boost upon closing without any changes in occupancy to attain attractive numbers.

• Parks that come with additional real estate assets which can be subdivided and sold off, to reduce the basis in the park.

These opportunities allow a buyer to increase the park income almost immediately, and with little risk. And they circumvent the weakness in the market (dealer sales/occupancy/financing issues) and allow the buyer to obtain a winning deal from the start.

Buyer Preparation

To be able to take advantage of these opportunities, the buyer has to sharpen the weapons in his arsenal. The first of these weapons is his knowledge of the industry. The mobile home park business is extremely complicated. There are over 30 different items that much be checked and confirmed during due diligence, and some of these can cause you to lose your entire investment. In addition, having the knowledge to build a sample budget in line with industry standard cost ratios is essential to success. And once a good deal has been bought, the buyer must know the strategies to successfully manage the property and maximize its profitability. To prepare these skills, there are complete courses on mobile home park diligence and management available, which are essential for the novice and even experienced investor who is crossing over from another asset type.

The buyer must also have the capital necessary to make the down payment on a deal, and afford the additional capital expenditures necessary to put the park in good working order. The time to line up this capital is before you begin your search for parks, not after you have found one. Normally, parks are sold with a 30 day due diligence and a 30 day financing period – so there is really no time to raise capital after the property has been tied up. Capital can be obtained from your own liquidity, or family members or financial partners. Knowing the maximum amount of capital available to you will help shape the size of deals you will pursue.

Having a lender who knows and trusts you is another essential ingredient. Often, particularly on deals which have a blemish which you will resolve upon purchase, having the trust of your banker is essential to getting the loan. Another way to achieve a head start in banking is to consult with a loan broker who has access to all of the current lenders on mobile home parks. It is always a good idea to have current financial statements on hand, and a resume on real estate experience.

Conclusion

Not since the Savings & Loan crisis of the 1980’s have so many great deals on mobile home parks been available. Since these cycles only come every couple of decades, this is one opportunity that may not come again in your lifetime. So it is important to “carpe diem” – “seize the day”.
 
If you take the necessary steps to succeed, you may find yourself owning a profitable mobile home park in the near future.

By Frank Rolfe and Dave Reynolds