MHP offer how to structure a master lease with option

12 Replies

Small park 22 spaces (16 owner occupied-3 park owned-3 vacant lots) with a 30 space mini storage also. $415k asking price.  My offer will be $385K.  Owner very motivated as headed towards foreclosure.  Says he won't let that happen but don't know what his plans for that are.  Property seems generally stable but owner lost his manager last year and he has health problems.

Owner wants to carry paper but needs $100K down to cash out a $72K non assumable loan and $23K in back taxes (4 years).  He Will carry at balance @ 4.5%, amort. 25 years, 15 yr balloon.

I have $76K cash for a down.  I would like to offer to bring the current taxes up to date, pay down the loan 53K, leaving a balance of 19K on his loan.  Then I would lease the property for $3000/mo designating $2000 payments to the loan and $1000 to the seller until loan is paid off (approx. 9 mo) at which time, I would exercise my purchase option on the balance.  The $1000/mo to the seller would not go toward the purchase price.

The balance would be the 385-53-23-19=290K.

I am a little hesitant to put so much cash up front with only a lease option agreement to assure the sale after the 9 months.  Any help here?

Mark

@Mark Kvam

 Sounds like an interesting deal and you definitely have a seller who is motivated.  There are a number of great MHP people on this site who I am sure will chime in.  But, if you have a question regarding creative financing like lease options the best in the business is @Brian Gibbons he definitely knows lease options and might be able to offer some other suggestions that will work. 

@John Hixon

Thanks for the kind words

@Mark Kvam

The following people I think should be consulted regarding your mobile home park purchase

@John Fedro

@Curt Smith

@Ken Rishel

Master lease options in general is where we "guaranteeing the net operating income NOI" on a master lease, have an option to purchase based on NOI, and then turning around the investment

All leases are turned over to you as a master tenant and you in turn sublease  out

Think of a poorly managed apartment building, with a low NOI

You increase rents over time and decrease expenses and efficiency of management

With a master lease option, you can sell your option or exercise your option

Mobile home park negotiations, I would think that that's a late sale and purchase agreement with a large down payment would be the most prudent way to approach it, you may need private money to execute the  sale and purchase agreement

@Bill Gulley

Might have a few ideas too

You're going to settlement in 9 months? Skip the option route, use a purchase agreement and set closing off ten months, you can have delayed settlements for less than a year and you'll be better secured with earnest money going to pay taxes, might consider buying the taxes if you can. Use a master lease for possession prior to closing. Draft the note and deed of trust along with UCC filings with the sales contract so that everything is set to close before you pay off loan balances and taxes. The purchase agreement is where you need to put the application of funds from rents paid toward the mortgage, pay those directly. 

This is commercial, lease payments or earnest money can reduce the sale price, it is not subject to Dodd Frank and the end loan is seller financed, no issue with allocating rents toward the purchase price in THIS transaction.

I wouldn't mess with an option for less than a year, I'd go straight to the purchase contract with possession prior to closing under a master lease . Good luck :)

@Mark Kvam you didn't give us your gross, net or expenses for the park so we have to make some assumptions, one of which is that you will be able to make those payments to the owner each month and still have money left over for your expenses. By my calculations your lot rent has to be at least $160.00/mo just to cover your $3,000 payment but that doesn't leave you anything for expenses.

In addition to his late property taxes it sounds like he's behind on the mortgage as well since he's heading into foreclosure. I'd want to know how far behind he is and what it will take to bring him current. Once I knew that I would structure my offer to bring in money to pay the taxes, as you've already said, and bring the loan current. That amount would be my option fee. You can decide if you want it to refundable or non-refundable or a combination of both. It's probably going to be a large amount but if those two things aren't paid he's going to lose the park and you won't have an option anymore, right?

I'd structure the monthly payments so that you are making the mortgage payments yourself and giving the seller a little extra that goes towards the purchase price. Try to keep as much money from the NOI as possible and bank roll that until you get a feel for how well the park runs and what the expenses are once you start operating it. Maybe that's what you've already formulated with your $3,000/mo offer. Don't limit yourself on your option period. Most of the time they are two to three years. You can exercise the option anytime before the period expires.

Finally, if you've never owned a mobile home park before there are several things you should know. If I were you I would attend the Mobile Home University bootcamp before I bought the park (yes I have attended and no I don't work for them) so that you know exactly what you are getting in to before you buy it. Best of luck.

@Brian Gibbons Bruce M. Thanks for the referrals and encouragement.

I will keep you posted if we proceed with the sale.

Thanks, mark

Something seems off but we do not know the terms of this 72k note…….. your potential proposed structure of paying the 53k down , what would that do for him anyway since unless the loan is going to be recalculated to lower the payment, the payment exists ( and I’m assuming its small) which does not explain what the stress is from it.

You say the owner is motivated. To me it sounds like he should be motivated but not really motivated.

The guys is obviously not paying his taxes…. where is the money going?

For the park side…..

19 occupied lots at 210 a month.

Park is paying water. The rule of them would be to use 40% expenses but on a smaller park, I would use 50%.

So $23,940 NOI at a ten cap would give the park a value of 239K.

You have the self storage there and if you want to give a bit of value for the homes you can do that too if they are ok shape.

Realistically though, i would not give too much value as on resale you will be hard pressed to get maximum value on all that

I think if you paid 385 for this think that would be a big mistake. Sometimes its easy to be deluded on a deal when someone offers terms or owner financing…. Don’t let that cloud your judgement that its ultimately not a deal.

Your exists are going to be limited with this park to and the only real hedge you can make is by getting this as a deal on the front end.

I won’t comment anything about the structure or deal but I wouldn't personally continue on with this one. And second what others said, you need to go to the MHU class as one bad deal will cost a lot of money…..

Maybe this guy need some more time because it should be a motivated seller but at those numbers he sounds like a retail seller and we still have a lot of unanswered questions about why the park is the way it is. 

@Jack Baczek Thanks for the input.  I may be putting to much value on the storage spaces.  Also I need to consider you idea that he may need to be In the hot seat a little longer and would consider a more reasonable offer.  This is my first park and I want to be careful.

Thanks again, Mark

@Mark Kvam

Expenses seem a bit high to me, especially given it's tenant owned. Can you break it down more? (Bruce M.:agree or disagree?)

@Ariel O. Bruce M.

 I thought the same also but was unsure what percent to account for repairs, vacancy, and cap ex.

22 space park with 19 pads occupied, 3 of 19 are park owned but I am assuming only pad rent for this analysis, 30 storage units (10 large, 20 smaller) currently 2 units vacant.

Expenses per month:

Stated by seller:

water $570

sewer $570

garbage $160

taxes $433

electric $10

Assumed by me:

Repairs: $284 ( 5 %)

Vacancy: $114 (2%)

Cap. Ex.: $170 (3%)

Manager fee: $250

Income:

19 units x 210 =$3990

8 large units x 60= $480 (10 units total-assumed 20% vacancy so used 8 units)

16 small units x 40= $640 (20 units total-assumed 2% vacancy so used 16 units)

water charged back to tenants= $570

Yes @Ariel O. I think expenses are high.

Water and sewer can be easily verified, but the monthly figure comes up to $30.00 per lot for water and another $30.00 for sewer for each lot. @Mark Kvam you don't list insurance or advertising. Your vacancy seems low (I'd use at least 10% -15%), management not too far off, electric at only $10?, not likely but possible, but overall I'm coming up with 69%. Below is just for the mobile home income. I don't know enough about self storage units to even comment.

Bruce M. Incredible! If that is a true reflection of what this park is like it is no wonder that he hasn't paid his taxes and is facing foreclosure! Thanks for the insight and analysis.  I am still trying to find the right property where the expenses don't eat you alive.  I need to look at smaller parks to make the down.

Originally posted by @Mark Kvam :

@Bruce May Incredible! If that is a true reflection of what this park is like it is no wonder that he hasn't paid his taxes and is facing foreclosure! Thanks for the insight and analysis.  I am still trying to find the right property where the expenses don't eat you alive.  I need to look at smaller parks to make the down.

 Best of luck. The right park will come up for you.

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