I noticed that in MHU's P&S no rent or utilities guaranttees

4 Replies

Hi MHP folks. I bought MH Universities 30 day DD kit that comes with a P&S contract. In comparing this contract with ones used by sophisticated multifamily buyers which is my background this is the list of issues I see that are missing from this MHP P&S contract:

- Seller escrow account guaranteeing rents for 12 months. In MF the risk is that the seller loaded up dead beets to get above 80% and they all will disappear or stop paying after closing.

- Seller escrow account guaranteeing park utilities (water pipes, septic systems) for 1 year. Too many stories of post closing park blow ups with known before hand utility problems.

Other issues you as a buyer would like to have some seller assurances that all is as it's being represented.

I'm not saying the Seller should back stop all normal stuff happening. If the park is in good operating order then a seller should not have a problem saying that after some $$ amount of systems failure it's coming out of the purchase price after the fact. In an owner financed situation the cash flow is there to divert to cover the contracted problems.

Feed back?

I don't do MHP's, but these terms sound like fantasy land conditions that won't regularly happen in the real world. I'd think a MHP owner would be just like any other multi unit seller.......here it is, do your DD, if you buy it, it yours. No 12 month/12,000 mile guarantee. I guess they need to give you some new "innovative ideas" to justify their program price.

No these clauses come from real life bigger multi family contracts, not from a purchased MHP training system. They are gaps in my view in MHP. MHPs have alot more fraud and misrepresentation by the sellers and I don't see it being unreasonable that a buyer have some back stop the seller isn't misrepresenting his business. DD can't uncover crafty fraud or 1/3 of the park are distant relatives planing on moving after closing... (etc).

At the least even the mention of rent role guarantee might be a good way to sort out the character of the seller and the business.

You will lose people after taking over a park. Just sending out a letter explaining new ownership will confuse some of them to the point of moving. That's fine...you didn't want them anyways. If the park is in a good location, then it won't take long to fill that house again.

As far as the utilities...don't skimp during DD. Its well worth the money!

If you can get a seller to agree to escrow rents or warranty infrastructure for a certain period of time, by all means do so. Everything is negotiable, but this is a HUGE ask. If I was selling you a park and saw those clauses in your contract, they would immediately be redlined. The vast majority of sellers will not agree to these terms unless A) you were the only party interested in buying their park - not a good sign if the park was highly marketed or B) you were willing to pay a substantial premium to market.

The two risk items you've addressed (stacking the rent roll and near term infrastructure failure) can indeed be mitigated through due diligence.

On the income side:

Ask for bank statements, review check deposits, tax returns and review the leases to determine if the owner has leased up the park with all new, perhaps suspect tenants prior to closing. If the seller has horrible documentation, you can walk or decide if the market is strong enough to backfill tenants if a large number leave post closing. If the tenants own most of the homes, this is not a significant risk as they can't simply pull the home in the middle of the night. If they leave you can always resell or rent their home. If you've chosen a large enough market, demand for your affordable housing is not going to be an issue. Lastly, I would encourage you to stop comparing MHPs to large apartment buildings, you'll never buy one if you continue to do so.

On the infrastructure side:

Ask the utility companies for historical water bills to see if there have been large spikes (sign of frequent leaks). Get a few sewer guys (including the firm that current handles the park's sewer issues) to take a look at the pipes. If needed, you can run a camera to see if there are any major collapses.

Additionally, if you're nervous about infrastructure, don't purchase a park with private utilities (especially sewer - we are currently not buying parks with private sewer systems unless we can convert them to public). A one year owner warranty on a septic system isn't going to do you much good if you need to replace the leach fields in year 2. Short of a brand new packaging plant, private sewer systems are pretty scary if you don't know what you're doing. You'll likely need a large price concession or substantial capital reserves if you really want to pursue a park with septic or worse a lagoon system. If the thought of this makes you nervous, and by the concerns you've raised, I assume it does...I would advise you to only pursue parks with public utilities.

Best of luck

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