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
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:
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.
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
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,
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,
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.
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
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
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