If you assume that one of the keys to maximizing your return in real
estate is leverage, then correctly financing your mobile home park
is a key driver to maximum profitability. There are only two options
when financing your mobile home park.
The first is having the seller carry the
note on the park. That is not covered here but in our other articles
and materials, such as our CD's on “How To Buy A Mobile Home Park”.
The other option is to borrow the money to
buy the mobile home park through a bank or other lender. That is
what this guide is a primer on.
Probably 75% of all mobile home park
acquisitions require bank lending as opposed to seller carry, so you
will definitely be having to get a loan for a mobile home park at
some time in your career. Getting the right loan is essential to
making a success of your mobile home park purchase.
We have probably over 50 successful applications and loan closings
on commercial loans under our belts. With that much experience, you
would think that we know everything about the process. However, with
constant changes in the marketplace, such as the current lending
crisis, the market is always changing. As a result, what we have
outlined in this primer is the basic, essential knowledge, but you
will still have to fine-tune it to meet your circumstances and the
market conditions. Matching your loan requirements with the
marketplace is one of the key ingredients to success, and one of the
main reasons we recommend using a loan broker to get the best deal
and the easiest closing. A good loan broker is worth every
percent that you pay them. A bad loan broker will give you
nightmares and miss deadlines and make false promises.
When seeking financing, it is essential to never become discouraged.
Many folks, ourselves included, have been turned down repeatedly on
loans before getting approved. Banks are not geniuses – the current
sub-prime crisis is a testament to that – and they will turn down
good loans for no apparent reason frequently. When this happens to
you, just go on to the next lender and don’t let it get you down.
To quote the civil war general Nathan
Forrest “ your best chance of success is to put your bayonet on and
run screaming at the target”.
So it goes for getting that mobile home park
Remember that we are always here to help you at
Frank Rolfe & Dave Reynolds
DETERMINING HOW MUCH LOAN YOU CAN
Unlike the single family home mortgage business, there is little
mystery as to how much you can borrow on a mobile home park. The
amount the lender will advance you is based on several criteria:
An appraisal from a certified appraiser which states what the
property is worth, less the percentage of down payment you must
The financial statement of the mobile home
park, and its value derived from its income, as it is applied to
How good a job you do convincing the lender
that the park is worth more than the current income and appraisal
will imply, based on drastic increases in revenue or cost cutting
that you can carry out upon purchase of the property.
How comfortable the lender is with making a
loan on a mobile home park in the first place, and how conservative
he or she wants to set the parameters for making the loan.
There are no zero down or “no documentation” loans in mobile home
park land. You will have to have the capital for a down payment
(normally 25-35% of the purchase price), and decent credit.
Due to the meltdown of sub-prime lending,
banks are more cautious than ever before, although there have not
been many repossessions of mobile home park assets to spook them
yet. But remember, they are ill at ease making mobile home park
loans to begin with – so it doesn’t take much to spook them!
Generally, on a $1,000,000 mobile home park, these are how the
numbers work out on how much loan you can afford:
If the appraisal comes back at $1,000,000 or above, then the bank
will generally consider that to be the actual value, and you will
have no push back from the bank on the total amount you are paying
for the park. However, if the appraisal comes in at $900,000, and
you are unable to convince the bank otherwise, that will become the
new value of the park. You can expect a dollar for dollar reduction
in what the lender will give based on this scenario. For example, if
the bank offers a 80% loan to value, then they will only give you
$720,000 based on a $1,000,000 sales price but $900,000 appraisal.
And who makes up the difference between the $800,000 loan you
expected and the $720,000 they now offer? You do. You will have to
cough up the $80,000 if you still want to do the deal.
Banks, appraisers, and investors often use various capitalization
(or “cap”) rates. The cap rates are determined by the market
and by applying the cap rate to the income stream a value can
estimated. For example, if the mobile home park makes $100,000, and
the person coming up with the valuation bases his value of the
mobile home park at a 10% “cap rate”, then they would decide the
park to be worth $1,000,000. Unfortunately, all banks, appraisers,
and investors may use different cap rates and much of the process is
based on their judgments. So you must first know the cap rates
that the bank or appraiser is likely to use to know where your value
is likely to come in at. Most appraisers value mobile home parks at
a range of cap rates from about 8% to about 12%. The key is
that better located, managed, and attractive properties will sell at
lower cap rates. The MARKET determines the cap rate and the
appraiser when coming up with a cap rate to use will extract the cap
rates from similar market sales and apply an appropriate rate.
Banks have other ratios that they use in
deciding what size loan the mobile home park can support. One of the
key ones is the “debt coverage ratio" abbreviated as DCR. This
is a measurement of an income producing properties ability to cover
the monthly mortgage payments. To figure the DCR you take the
Net Operating Income and divide that by the annual debt service
(principal + interest). Most banks will require a coverage
ratio of 1.2 to 1.3, or 120% to 130% of the note payment. Obviously
if the DCR is less than 1.0 then the property is not able to support
the mortgage payment and not many banks will make this loan.
There are other ratios that the bank may
want to see you qualify under. These are pretty much set in stone,
and are rarely negotiable.
If you fail at achieving the numbers required to make the loan, you
can sometimes negotiate with the bank to loosen their requirements
to accommodate the wonderful things you are going to do to maximize
cash flow at the park. This is usually a very hard task. You are
normally better off going to the next bank in line, or reducing your
expectations and negotiating a lower price on the park.
This is a hard gauge to measure, but you will feel, during the loan
process, how much the bank really wants the loan. For example, many
loan officers are actually hoping that the appraisal and ratios
don’t support the loan, so that they can turn you down. Why? Because
the loan scared them to begin with.
For example, a perfectly nice loan officer
made the appearance of being interested in a mobile home park loan
we had, and then when the appraisal showed the value being only that
of agricultural farm land plus depreciated improvements (clearly a
bad appraisal) he refused to intervene. In reality, we probably went
out and had a party to celebrate the death of the mobile home park
loan idea. Why did he not just turn the loan down to begin with?
Sometimes, its because the bank has other relationships with the
borrower and doe not want to offend them. But most the time, it’s
because the loan officer has no idea what the bank’s appetite is for
mobile home park loans and, after getting the ball rolling, finds it
to be negative.
The sum of these parts it the amount of loan that you can afford on
a mobile home park.
HOW TO APPROACH THE APPRAISAL
You do not have a lot of control over the appraisal and what price
it states your park is worth. But you do have two shots at improving
the amount shown as the value. And if the opportunity comes up, you
need to be ready for it and take advantage of it.
You will not be able to choose the appraiser for the bank. The bank
does this to make sure that you do not hire an appraiser that will
give you an inflated, non-impartial opinion of value. Even though
you do not hire the appraiser, and probably have no prior contact
with them, you will have a chance to put some positive spin on the
property when you are contacted by the appraiser for basic
information on it. Normally, you will receive a call from the
appraiser at the start of the process. You will be asked some basic
questions such as the park location, number of lots, etc. The way
you answer these questions, and the “spin” you put on your response,
can put a favorable first impression on the property, which may
translate into a higher value. Here are some of the ways to present
- If you have a fair degree of vacancy,
tell the appraiser how many lots are vacant, and that the other
parks in the area have a much higher occupancy due to better
management. Convince the appraiser that you can, with better
management, fill the vacant lots shortly after taking over.
- If the park looks terrible, tell the
appraiser that the park needs a lot of low-cost TLC such as
skirting, re-painting, pothole repair, etc., and that you
already have the bids and you will get the repairs done
immediately after closing. Blame it on poor management.
- If the park has a great location, tell
the appraiser that the land value alone is worth as much as the
park, and you can see a scenario down the road where it will be
a hot development property.
- Implant the thought that the prior
owner “cooked” the books to hide the real income in order to pay
less income taxes.
- If the rents are lower than market,
explain to the appraiser your intentions of the immediate rent
raise once you take over. Explain to the appraiser that
even with a rent raise it will be difficult for the residents to
move due to the cost of moving their home.
- If the rents are higher than market,
explain to the appraiser that the other parks should and could
raise their rents to the same or higher level of rents.
- If the park has several park owned
homes and the income from these park owned homes is not going to
be included in the appraisal (it shouldn't be), make sure to
explain that you are going to sell these homes to the residents
and in doing so, the expenses are going to drastically decrease.
Even prepare a proforma without the extra park owned home
expenses (management, repairs, collections, insurance, taxes,
Even though the appraiser is supposed to be
above any corruption on your part, he is a human and, therefore, can
be tainted in your favor if you work it hard enough.
Your other chance to affect the outcome of the appraiser is after
the fact. Once the appraisal arrives at the bank, you will get a
call if there is a problem with it – especially if the value is
lower than what you are paying. In that event, you need to make an
appeal to the bank for a new appraisal, or to intervene with the
appraiser to raise his estimate of value. Be careful when you do
this. It is like appealing a decision on a lawsuit. You have to show
reasonable grounds for the opinion to be flawed. You will not get
anywhere if you appear to be a sore loser.
The most common complaints against the
- Appraiser’s lack of experience in
evaluating mobile home parks.
- Lack of reasonable comps for an
accurate value to be obtained.
- The park owned home component -
dropping revenue without dropping expenses.
- Appraiser not having a handle on the
value enhancement of what you are going to do to the property
If you make your case, not as someone who
needs a higher value, but as someone who just wants a fair value
that just happens to be higher, then the bank may take your side on
the matter. This will result in a call to the appraiser to see if
they would reconsider. It may also result in a new appraiser being
hired to render a second opinion.
If you make your case poorly, or if the bank just wants a good
excuse to turn down the loan, then you it is time to go on to the
RECOURSE VS. NON-RECOURSE
Recourse debt is a loan in which, in the event of default, the
borrower is personally responsible to repay the debt. For example,
if you default on your mobile home park loan, and the bank sells the
property at auction and there is $300,000 still left unpaid on the
loan, you have to come up with it yourself. In other words, if your
business fails, it can suck you down with it. Non-recourse debt has
no personal liability. If your mobile home park loan goes bad, all
the bank can do is foreclose on the park. If they later sell it and
lose 99% of the total loan, you don’t have to come up one cent.
Clearly, anyone would prefer non-recourse over recourse loans.
However, it is normally very difficult to obtain non-recourse loans
unless you are buying a very large park that has had “institutional”
quality debt in the past. As a result, you normally are stuck with
recourse lending until you become much larger. Some banks will not
allow you to borrow money in a non-recourse manner ever. These are
normally your small or medium sized banks. Some large banks,
especially conduit lenders, allow this type of construction.
Banks dislike non-recourse because not only does it reduce their
ability to recover money in the event of a default and loss, it also
puts the borrower in a much better bargaining position with the bank
when times get tough (“ you better back off, or I’ll just give you
the park back”) as well as reduces the borrowers willingness to
fight to keep the property afloat.
ESSENTIALS OF THE APPLICATION
The application for your loan is one of the most important drivers
to whether or not your loan is approved. A good application can
carry a mediocre park, and a bad application can sink a good park.
The application forges the first impression of the lender as to both
you as an individual and the mobile home park you are looking at
buying. As a result, it is an area in which you must do your best
work. A mediocre job could ruin your prospects for obtaining your
The parts of the application include:
- A general description of the park, such
as number of lots and location.
- The loan request (total amount of
- A map showing the location of the park.
- A map showing the layout of the park
and number of lots.
- Financial statements on the park for
the last two years.
- Tax returns on the park for the past
- Business tax returns for the past two
- Personal tax returns for the past two
- Personal financial statement - current
- Evidence of down payment
- A proforma of what you will be doing to
improve the numbers on the park.
- A rent roll
- A copy of the standard lot lease
- Photos of the park.
- Current survey and phase I, if
- Current appraisal (if it helps your
It is essential that these numbers all “tie
together”. In an ideal world, the tax returns would exactly match
the financial statements, which would exactly tie back to the rent
roll. Unfortunately, this seldom occurs, and it is imperative in
your request that you explain such lack of conformity in advance –
before the lender figures it out for himself. If you try to hide it
and the banker figures it out later, you will lose some credibility
and the banker will have a bad first impression of you and the deal.
The best loan applications are very simple and easy to read. You
application is not judged by the pound! If the application is too
cumbersome to read, the lender my turn it down just to get rid of
it. After all, bankers are just people, and people like things that
are easy to use.
Remember that banks dislike things that are not routine. Be aware
that you will not get a favorable response on a property that only
has three months worth of accounting, or a rent roll that is missing
half the tenants. Sometimes, however, that is all you have to work
with. So present it in its best light and appear confident. Remember
that getting a loan is often a volume business, and don’t be
discouraged by rejection. Just think “on to the next lender!”
HOW TO FIND A LENDER
Finding a lender is not as easy as it sounds. There are plenty of
banks out there, but very few of them will even consider a mobile
home park loan. When starting your lender search, it is imperative
to pre-qualify candidates to make sure that you don’t waste your
time. Most loan officers will tell anybody to send in their
application, just to appear busy to their boss. Ask them if they
have ever made a mobile home park loan before. If not, then the odds
are pretty bad. One of the best shots at getting a loan is often the
largest bank in the small town the park is located in (assuming your
park is not in a big city).
You can also get an advantage in finding a bank from looking in the
industry trade publications for lenders who advertise or are
mentioned in them. These are often large, national banks that
actively do commercial loans. However, they often have very large
minimum loan sizes – often $1,000,000 or more.
Another, and often best, option is to use a loan broker.
These brokers do almost all of the work for you. They assemble the
list of prospective banks, help you build your application, and
present it to the banks on your behalf. They then help you gather
the responses and help you negotiate rate and terms. And, for all
this work, they only get paid 1-2% of the loan amount – and only in
the event that it successfully closes. We are so sold on the concept
of loan brokers and use them almost exclusively.
If you are looking to get a quote from one
of the lenders we have used or recommend, then fill out the short
form below to be contacted by potential lenders and brokers.
Like riding a bicycle, the worst part about getting your first
mobile home park loan is not knowing what to do. Once you understand
and master the process, it becomes completely routine.
To maximize your loan, it is important that you know exactly which
banks in the U.S. offer the best terms at the moment, and which
banks are making loans in your area. Since it is impossible for most
laymen to invest the time necessary to know this information, it is
often in your best interests to use a loan broker.
Remember than everyone who ever bought a mobile home park, from
Frank and Dave to big companies like ELS, Hometown, and ARC, all
began just like you, with their first deal. And they all made
mistakes and had rejection. What often separates the winners from
the losers in the lending game is appetite for rejection and failure
to give up. In reality, it is fairly rare to have a mobile
home park that just can’t get a loan on it of some type.
And remember that you are always free to contact us at 800-950-1364
(Dave) or 573-535-0206 (Frank) if you have any questions. Nobody
likes talking mobile home park more than we do.
Frank Rolfe & Dave Reynolds
FREQUENTLY ASKED FINANCING QUESTIONS
Can I find financing for a park that has
Most lenders require a park to be “stabilized” (not much turnover)
at an occupancy of at least 70%. They really prefer, and many
demand, 85% occupancy or more. It is sometimes possible to find a
loan at 50% occupancy if you can prove out to the lender a rational
plan to increase the occupancy following closing. The most common
example of this is a park in a great location where all of the
neighboring parks are full, but it suffers from terrible cosmetic
problems (normally rules enforcement and paving) that you will
immediately cure following closing. But such loans are rare, and the
interest rates and terms are not favorable. Nobody wants to make
loans on poorly occupied parks.
How many park-owned homes can my park have and still be
approved for a loan?
Lenders dislike park-owned homes. Their mere mention turns off many
lenders. There is a strategy to deal with this that involves
separating the homes from the park by placing them in a separate
entity. Then you sell the homes and carry the paper, and no longer
refer to them as “park-owned” homes. With this strategy, you can
have many, many formerly park-owned homes in the park with no
financing problem. However, the lender will not be attracted to your
loan if you show more than about 5% of the trailers as being
In addition, a strategy you can use is to
have the seller finance the park owned homes for this separate
entity and then get your loan for the park only through the bank.
Can I use rental income from trailers in my revenue numbers?
Generally not. Lenders will only allow you to use the lot rent
portion of the rent in your revenue figures. They will not count any
revenue related to the home itself – remember, they don’t want you
to even have any rental or park-owned homes to begin with. For
example, if you have a rental trailer that rents for $500 per month,
and the park’s lot rent is $200 per month, then you can count only
the $200 in your park’s numbers. The other $300, while it might
exist, will not be counted.
Can I count the rental income from other structures?
In most cases, the bank will allow you to include rent from
single-family homes, commercial properties and other stick-built
structures on the park land, as long as they are not rented by the
park itself and have a quality tenant on a legitimate lease.
However, they will not allow you to count income any businesses
located in those structures that the park may own. For example, if
you have a used car lot on the property, that the park owns and runs
as a free-standing business, then only the rental amount of the
building itself is allowable. The bank is making a mobile home park
loan – not a business district.
Can I get a loan even if the homes in the park are really old
The key thing most lenders are looking for is “pride of ownership”.
What this means is that the homes be clean and painted and skirted,
and the yards be mowed and free of debris. In other words, lived-in
by people who are stable, and respectful, and going to pay their
rent. They will rank an old home with pride of ownership higher than
a new home with the skirt missing, and a pile of junk in the yard
and a car up on blocks. To many more seasoned lenders, the concept
is that an old home is paid for and new home has a mortgage. As a
result, a new home is much riskier – it might be repossessed and
removed from the park, and the tenant has a bigger strain from
paying lot rent and mortgage, so is more likely to be late on rent.
Can I get a non-recourse loan on my first deal?
Probably not, unless it is a very large loan and there is a rational
reason for it. Most non-recourse lenders have minimum loan amounts
of, say, $1,000,000. As for a rational reason, the most common is
when the borrower is a limited partnership made up of many members.
In those cases, it is impossible to get 50 people to personally
guarantee a loan, so the bank does not even try. Most large
corporations only borrow on a non-recourse basis due to these
logistics. Given the option, however, every lender would rather have
a full recourse loan.
Can I get a loan on a park in a small town?
Yes. But it has to be a very strong application. You probably can’t
get a loan on a turnaround park in a small town. But if you have
good credit, and the park is stabilized with clean numbers, then
your odds are favorable. One great resource is the local “home-town”
bank that understands the market and is not afraid of it despite its
small size. Every small town has at least one “home-town” bank.
How much down payment will I need?
Typically, the down payment is 20% to 30%, depending on the lender
and the quality of the loan. The era of 10% down is probably over
for the time being. However, you may find deals still at even 0%
down in cases where the seller will carry the financing himself.
Can I get a second mortgage on a property, in addition to the
This will depend on your bank and loan agreement. Most lenders
discourage second mortgages. Often, the loan documents will specify
that none are allowed. Sometimes, the documents do allow it and, in
those cases, if it’s legal, then there would be nothing to stop you.
However, when you go to refinance down the road, or renew your
existing loan, it could cause problems then. It is always best to be
above-board with your lender on such issues so that everyone is on
the same page. And you never, ever, want to create a condition that
puts you in default of your first mortgage.
Wells Fargo Third Edition of the Manufactured Home Community