Park owned homes vs Resident owned homes

17 Replies

I have been doing a lot of research into mobile homes and mobile home park investing lately. As I research I always see parks with a percentage of park owned homes. Is there a general thinking on which is better? I realize there is less maintenance on just the lots than there would be on a lot with a home owned by the park. What are the benefits and risks? Is there a general rule of what a good percentage is on POH vs just getting lot rent, or is 0% park owned a better strategy? 

Tenant Owned Homes are always better.  Here's why:

  1. Banks will not finance the Park Owned Home (POH) "home rent" component of mobile home park income, so you will be out of pocket that premium if you decide to pay it;
  2. Expense ratio is 10-20% higher due to constant maintenance as you alluded.  Do you really want to track work orders and find someone full time that will fix these with barbed wire and bubble gum?  It's slumlording regardless of how you spin it.
  3. Increase management overhead screening tenants, evicting people, etc.
  4. Lower general pride of ownership.  When you mix POH with tenant homes the overall type of resident will be less likely to proactively maintain the exterior of their property.  You will get the lowest common denominator.

A good % of POH to tenant homes is 0%.  It is difficult to find large Parks like this, so you have to wiggle and determine an acceptable amount.  When you acquire a park with many POH's the main goal is to offload those to qualified tenants who will increase the value and pride in the community.  There are companies out there that will carry the paper if you won't want to.

When you're evaluating Parks do not give the POH's anything but lot rent value if they're occupied.  It's a common sucker tactic of brokers and sellers to ask a premium for that home rent component - don't fall for it.  When a Park has several nice homes I will allocate 5-10K for the very very nice ones as that's what they will likely sell for to the tenants - it's a one time cost and not part of the recurring business value. 

Choose to run a Mobile Home Court and not a Trailer Park - put yourself in a position to have time for additional Parks after that.  Good luck!

@Michael Fortier Michael, @Jeffrey H. is spot on.  The best ratio is 0%.  As long as you know how to analyze the deal properly, don't let park owned homes chase you away.  Finding parks with no park owned units can be difficult.  As long as you have an immediate exit strategy on the mobile homes, you can be successful.  Be sure to analyze the market carefully.  There are areas where rentals will not last 24 hours on Craigslist but you can't sell the same home for $1.  Be sure to value the homes correctly.  Do not pay any more than 25-50 cents on the dollar based on what your research says you can sell them for.  Never ever pay more for a home than what the lot rent generated in value.  To be safe, use the 100 times equation.  If the lot rent is $100, never pay more than $10,000. That way if you give the home away you still make money.  Research the values in the area.  Homes can be worth much less than you think.  Depending on the age of the homes in the park, it is not unusual to place a $0 value on the home portion of the rent and the home itself.

Adding to what great advice that has already been given.  When parks get put on the market it's rarely because they are perfect and make loads of cash.  One of the best reasons is that the current owner is old or fairly common has died and the widow has let the park go to heck.   These are almost always 100% POH parks.

If most of what's forsale are POH parks,,, guess what, learn how to make sane offers.  Once bought then how to clean up such a park and convert POH to TOW (tenant owned) is the business model.

The hard part (ignoring the huge problem of cleaning up such a park) is getting the seller to accept an offer calculated as:

Number of paying pads x 12 x $equiv lot rent from surrounding parks x 0.5 (50% expense ratio) / 0.1 (or higher) for 10% cap rate

Add in nominal value of the homes, $3k for old homes on up a bit.  

Most sellers will have an idiot broker who's caprated the whole home rent amount and it will take literally a year or more for the seller to realize your offer range is what they'll have to accept to sell.

Then as Jeff says, the bank's appraiser will validate your very low price through the financing process.

I agree a lot with what @Paul Stout said, but one point I think we differ is the approach to value the POH's when shaping the deal.  

I could never value an empty 1978 trailer at 10K.  It generates zero income today and you should not use potential income to value it.  It's worth maybe $500 dollars to a tenant you have thoroughly vetting for 12 months.  The nice 2009 3/2 singlewide is worth $10,000 because it's worth selling it the same way.

Usually these POH's need thousands in rehab and very rarely will you actually pay 10K, it's typically more like 2-5K, and then another 5-10K to rehab and make it ready for sale.  If the home was so easy to fill the Seller would have done it and the value reflected as part of the business, and you should not pay extra because of it.

I have been looking into MHP investing for some time and one thing I have noticed is sellers counting mortgages that they hold on MHs they have sold as rent in their pro forma. This artificially inflates the pro forma because rent implies a stream of income forever and a note is not the same thing. That stream will end and a portion of the steam is being used to take an asset that the seller is likely charging you for. Just something to watch out for.

I heard somewhere that you should attempt to value the park and the park owned homes separately with two separate purchase agreements and even in two separate entities. Again, something to look into. I cannot speak to the validity of that strategy other than it may be something to consider.

If you are going to be in the business of buying parks to reposition (turn-around), you'll be hard pressed to find a park that has little to no park owned homes that you can buy at a discount.  Getting park owned homes is just simply a fact of life.  In any event, you'll need to value these for what you can sell them for cash - what it will take to get them ready to sell.  In my experience that number usually falls between $2,000-$8,000.  I would strongly recommend against selling a home for $1 simply because the new owner of that home won't have any skin in the game and that's not a good thing.  Pushing for fair market value in both your sales and rents usually results in better quality tenants.  Someone who pays $5,000 for a home is also much more likely to stay for the long haul over the person who pays $1 for a home.

For notes, just discount the balance on the note 50%-60%.  If the value you get after discounting is more than the value of the home, then use the wholesale value of the home.

As for purchasing a park with homes, you will purchase the land/improvements with a purchase & sale agreement typically and the homes will be done through a bill of sale.  It is industry standard among sophisticated owners to hold the land separate from the homes.

Sorry for the confusion @Jeffrey H.   I was not stating that the home was worth what it will generate.  That is not accurate for the most part.  If that is the way that came off then I must clarify.  The equation to value is only used to limit the amount of money that you should invest in a home and be able to make a solid return.  I would never suggest that anyone pay more than the fair market value for a mobile home.  What I intended to convey was the fact that you should limit your investment in a mobile home to fill a vacant pad to 100 times the pad income.  Even if you find a mobile home that is "worth" $20,000 and you can buy it for $15,000 and your per pad income is $100, you are almost certainly going to lose money over the deal in the long run.Or at least that potential exists to do so.  Instead, if you purchase a mobile home that is "worth" $10,000 for $10,000 and you end up selling it after the first buyer runs off, the second buyer runs off, the third buyer runs off and the fourth buyer pays you $1 for a trampled home, you will still have added $12,000 in value to your park based on a 10 cap.  To determine the value of a mobile home you must understand the market, the type/size/layout and the condition.  Each home should be evaluated individually.  The lot rent has no basis on the value of the home.  It is only considered when decided how much home to purchase.  If your net per pad rent is $350 then you have a lot more options.  This is something to keep in mind when looking at parks with vacancy and low rents.  If you buy a park that has $100 lot rents you will have no other choice (no other smart choice) than to purchase older cheaper homes.

@Paul Stout  It's an interesting approach and think this might be okay for certain markets, but I am hesitant about using it across the board.

In San Antonio, TX for example there are good Parks with $450 / month lot rent.  I can get a new home from Clayton for under 30K all in delivered setup the works, and as a result I would never pay 45K for any home in there.  Maybe it still works in markets like some of these 55+ retiree Parks in California or Florida though.  with so much variation it's difficult to use 100 as a national benchmark for maximum home prices.

End of the day like you said these should be evaluated and purchased based on what you can sell them for...a very key point is that most tenants in most Parks once you get above 10K it's very difficult to find a cash buyer and then you have to look at things like rent / credit programs where you're accumulating the cash over time for purchase.  I would rather sell homes outright for cash immediately than carry that debt for 5-10 years.  I still have not seen a mobile home I would pay more than 10K to a Seller - end of the day very few POH's are really nice and worth more than 10K anyway.

I agree 100% @Jeffrey H.  That is a rule of thumb and as with all rules of thumb they are just a starting point.  You have t know your market.  Also, there is obviously an upper limit.  I can't say what that is but you probably nailed it in your example.  The rule does not determine value nor tell you what to spend.  It merely should alarm you if you are exceeding it.  That is all.  

Originally posted by @Michael Fortier :

I have been doing a lot of research into mobile homes and mobile home park investing lately. As I research I always see parks with a percentage of park owned homes. Is there a general thinking on which is better? I realize there is less maintenance on just the lots than there would be on a lot with a home owned by the park. What are the benefits and risks? Is there a general rule of what a good percentage is on POH vs just getting lot rent, or is 0% park owned a better strategy? 

 All the advice you have been given is excellent. Here are some thoughts:

  • While I may buy a park that has rentals, I won't buy it unless I believe my team is capable of converting everything to resident owned homes within a year. The secret of land lease communities is that owner occupied means far lower expenses and far greater profits.
  • As others have noted, encountering park owned homes is far too common these days. Under the right circumstances it can be a real opportunity for a grand slam and worth consideration, but, it takes knowledge, capital, and a taste for some risk to make that grand slam happen.
  • Don't be afraid to pay for good advice in areas you are lacking in knowledge or expertise. Frank Rolfe and Dave Reynolds have some excellent educational programs that cover acquisition, Don Wesphal is excellent on expansion issues, and my consultancy (Rishel Consulting Group) offers help in legally seller financing homes as well as strategic planning and capital acquisition. George Allen can help direct you to new home manufacturers that specialize is what is called "Community Series Homes" and has other knowledge and expertise for community owners. Take a look at Jefferson's stuff as well.
  • Do not buy a park that requires interest and skills you don't have, and can't, or won't, learn. I never look at anything that is not on city utilities, but friends of mine find a gold mine in those types of properties. If you lack expertise and inclinations in marketing, advertising and sales, stay away from parks with occupancy problems.

Good Luck!

Thanks for all the great advice from everyone.

@Jefferson Lilly I have already listened to that podcast. I will check out the LinkedIn group and the podcast you co-host as well.

 Thanks

@Ken Rishel I recently signed up on Mobilehomeuniversity.com and have been researching whats available there. I have been contemplating getting the home study course. 

Thanks

@Michael Fortier  Park Street Partners website contains a lot of great info at parkstreetpartners.net.  I have also bought the mobile home university study course from Frank Rolfe and Dave Reynolds.  It is pricey but well worth the money.  Along with @Jefferson Lilly  and Brad Johnsons podcast, which is excellent, check out @Kevin Bupp  podcasts.  There are many focusing on MHP investments.  

Regarding @Account Closed comment regarding $1 mobile homes, he is 100% correct on the "skin in the game" issue.  However, there may be circumstances where that is the only option (albeit the last option).  So you must prepare for the worst case.  The MHP university audio course covers this in great detail with real world examples.  

I believe MHP investing is right for me and is an exceptional investment vehicle.  There are not as many experts available as there are with other classes but everyone in this class are eager to help and share their expertise.  I have reached out to most of them and they are all good people.  MHP investors provide a community service by providing low income families with the opportunity for affordable home ownership that they could otherwise never dream to attain.  It is truly in a class of its own in many aspects.

Paul, I completely agree with you about being conservative to the point that the homes are effectively $0 in the evaluation.  Totally get it and more times than not, that's typically how I underwrite most turn-arounds.  I just feel that the point needs mentioned because too many people take what is taught at MHU literally.  I've already seen three parks on the market this year where the owners actually did the homes for $1 program and the results ranged from bad to downright ugly.  One of the parks now has 12 vacant/not paying tenant owned homes all in various stages of either eviction or abandoned property.  Your typical period without rent in a deal like this is around 6-8 months depending on the state and condition of what you get back.  Multiply that by 12 and this owner is in some dire straights.  The most recent one I looked at is essentially a flip.  Guy bought a smaller park for almost nothing.  Instead of spending the money, renovating the homes, selling the homes to qualified people, and turning the park around properly; he just gave all the homes away and is billing this park as an all lot renter, turn-key investment.  If he happens to sell this thing, the next owner is likely going to go through a very painful learning experience.

Not to go off track here, but it brings up a point.  If you are buying a park where the park owner has sold homes in the last two years (easily identified on the rent rolls), ask for copies of each bill of sale as part of your diligence request.

@Paul Stout Thanks for more great info. I will check out those podcasts as well.

Great point @Charlie DeHart I too have seen that scenario played out to the tune of taking a 22 space park. This man decided the same. Instead of renovating he would just sell for $1 and let the tenants fix them. Well they never did. Once they got too bad even for them the tenants left. They also stole anything of value.  His park now has three tenants due to that and other management missteps.  I am negotiating a purchase of the park.  It is hard for him to grasp that his park is now worth less than 10% of what he paid for it.  

If you can acquire some POH cheaply, or included in the deal, and then OWNER FINANCE them out, then you stand to make a good % return as those people cannot get a traditional loan, as long as you write in the contract they MUST maintain/pain, keep clean or they will lose their equity.  There is always money in owner financing them out, granted it is more work and if you're a BIG park buyer iwth 5_+ parks then dont even think about it, but to self manage then there is upside.  As long as you write your contract IRON CLAD ! 

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