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Who Pays Unpaid Lot Rent When You Buy A Used Mobile Home In A Park?

by John Fedro on December 15, 2013 · 7 comments

  
Mobile Home

What a great business it is to own a mobile home park.

You own land that others have agreed to rent from you for years or decades at a time. In addition you can hold multiple mobile home units on your land and charge each owner monthly for this parking space. There are of course amenities, utilities, rules, and statutes the park must obey and may have in place however this business model makes sense (and dollars… bad joke) to most of us reading this article.  

In this article I would like to quickly highlight an important issue when it comes to investing in mobile homes inside preexisting parks, “Who pays unpaid lot rent when you purchase a used mobile home in a park?”

This is a popularly confusing question that we will describe using a recent case study.

A Mobile Home Example

I recently purchased a used mobile home in a preexisting mobile home community.

In the coming weeks I will have a full case study regarding this property for everyone’s education. The mobile home seller was originally asking $11,000. When I approached the seller he was asking $7,000. After negotiating some time and offering 3 purchase offers we agreed on a fair price of $2,100 plus my company agreeing to pay their past due lot fees and late fees. The terms for the sale were all cash.

The seller accepted my offer because he and his family were motivated to leave. One reason for the quick move was due to the seller wishing to move to an area closer to work. The other more pressing reason was due to the seller being 2 months behind in lot rent and not planning to make the payments before the park intended to evict him and his family. Luckily we were able to save an eviction from his record by purchasing his mobile home.

Now comes the question. Who pays for the past-due mobile home park lot rent when you purchase a used mobile home inside a park? There are 3 possible answers to this question. I will list them in order from most likely to happen to least likely to happen. These answers are solely based on my experience and the experience of the investors I help daily.

1. You (the buyer) will pay the past-due lot rent and late fees: Correct. Almost 100% of the time you will be asked to bring the seller’s past due lot rent and late fees current as the buyer and new owner. You will be informed of this cost by the park manager prior to being approved and closing. While the park manager may not specifically state that “you” are responsible for this cost, it is understood the lot space will not be transferable until this amount is paid.

Since it is likely that the sellers do not have the available money to bring the account current, all monies owed to the park by the seller should be deducted from any profit to the seller and paid by you to the park. Making this payment will likely help bond the park manager and you together. Realize that you are solving one of the park manager’s current headaches.

2. The park will legally go after the seller for these costs: I have only seen this happen on a few occasions. If a park considers themselves “fair” they may allow the mobile home to be sold and you not pay the back lot rent. In this situation the park may be pursuing the previous tenant’s debt through legal means. If this is the case then you should double check with the park manager if he/she would like you to pay these costs through withholding them from the seller at closing. While this is not necessary it is helpful toward building a helpful and honest relationship with the park manager.

3. The park will completely forgive all past due lot rents and late fees: Even less likely still is the possibility that a mobile home park will simply wipe the slate clean and forgive all past due lot rents and late fees because it knows the seller is selling and a new buyer will be making payments moving forward.

This makes little sense for a park to do unless it wishes to entice a buyer to purchase the seller’s home. An example of this could be from a mobile home that is being sold by a private seller that is past due on lot rent. The mobile home park does not want the home back through eviction or abandonment and has already inspected the home to see it needs over $10,000 in rehab costs just to be considered livable. In an example like this the park may forgive all back fees and start fresh for a buyer that wishes to make the needed repairs and bring the home up to current park standards. The park forgives this amount as it is in the park’s best financial interest to avoid making the repairs themselves and instead simply continue profiting lot/pad revenue from the new buyer.

Outside of this unique scenario a mobile home park has little incentive to discount or forgive the back lot rent and late fees. Consider a private seller selling their used mobile home in a park. The seller has lived in the home and has not paid lot rent fees in 3 months. If the seller profits thousands of dollars on the sale of the mobile home the park will want it’s past due balance to be paid in full. While it takes a legal process to criminally go after a seller for back lot rent, it is much easier to demand the back lot rent be paid by the future owner, aka the buyer, prior to the buyer moving into the park. Buyers typically must become approved at the park office prior to purchasing a home inside the park. At this point the park manager will inform the potential buyer of the past due amount.

What to do after you learn that the lot rent must be paid prior to you owning the home: As the buyer it is your added job to alert the seller to the past due amount and agree to deduct the past due lot rent and late feels from the purchase price of the home. Pay this amount yourself after closing. Do not allow or trust a seller to pay this amount on their own outside of closing.

In conclusion make sure to always have clarity in your mobile home investing deals. With this clarity comes the step by step process and understanding you will take to ensure you have purchased a profitable mobile home investment. Always talk with the park management and become approved at each park prior to purchasing any home in the park. Some sellers will push you to not speak with the management or claim they must move-out over the weekend while a park manager is not available. Again, always make sure to speak with the park manager prior to purchasing any used mobile home in a park from a seller.

Love what you do daily,

John Fedro

Photo: Patrick Ahles

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{ 7 comments… read them below or add one }

Geoff December 15, 2013 at 7:41 pm

Great information,

Reply

John Fedro December 17, 2013 at 11:38 am

Hi Geoff,

Glad you received some value from the article.

All the best,
John Fedro

Reply

Gerald Harris December 17, 2013 at 11:10 am

I was always under the impression that the owner on title paid the past lot rent. If not paid the park would foreclose on that mobile home. Now I can see how unpaid lot rent can work to your advantage as an investor when negociating price of property. No owner wants an eviction or foreclosure on their credit profile, so the motivation to use past rent to gain a better buying price is great.

Reply

John Fedro December 17, 2013 at 11:41 am

Hi Gerald,

You nailed it on the head. The owner is responsible for this cost however in the real world you will likely pay this cost as the investor and new buyer. If a non-investor buyer finds the seller and works out a deal then it is debatable who will actually pay the back lot rent. Either way the park wants to get paid before signing paperwork with the new owner.

Glad you received value here.

Talk soon,
John Fedro

Reply

Gerald Harris December 17, 2013 at 11:55 am

Hey John
This is excellent information to those of us trying to figure out this niche. Mobile Home investing is a hidden goldmine that I discovered years go. I have yet to invest in 1, the cash on cash return if more attractive than many other investments out there.

Keep Blogging!!

Reply

Ryan December 17, 2013 at 10:08 pm

Hi John
I’ve enjoyed reading your posts, and thank you for contributing your knowledge to those of us interested in mobile home investing.
I was wondering, for properties you wish to buy and hold, do you strictly offer lease-options, or are there instances in which you simply rent to tenants? Also, what would you say your average turnover is for lease-options in your portfolio (i.e. default/abandoned ) or average time before this happens?

Reply

John Fedro December 18, 2013 at 1:44 pm

Hi Ryan,

Thanks for your kind words. I am happy to provide you value in this industry.

I do not sell via lease options with regards to mobile homes inside parks. I do sell and collect monthly payments, with that said my default rate is now (and has been for the past 4 years) under 5%.

However in the beginning of my career I did not have any idea how to properly screen tenants or tenant-buyers and therefore would fill my homes with almost anyone with a pulse and money. Needless to say my default rate was over 90% and I was constantly reselling homes over and over again, not good.

Now I am happy to say that the folks I sell to now are hardworking, honest, and pay on time until they payoff the homes.

Hope this helps.

Talk soon,
John Fedro

Reply

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