Covid-19, Economic Downturn & Mobile Home Parks

Real Estate Investor · Detroit, MI · Member since 2014 · 42 posts · 3 votes

Hi everyone,

How do you think the mobile home park space will perform in the next 1-24 months? Do you believe the Covid induced economic downturn will takes its toll on the industry? Do you think we will see less competition and more buying opportunities (or the contrary)?

Thanks!

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Frank Rolfe

Real Estate Investor · Ste. Genevieve, MO · Member since 2009 · 363 posts · 944 votes

This is a geographic and individual park issue. Most parks are doing extremely well at collections -- roughly the same as pre-Covid. However, then there are others that are doing 50% worse. It all boils down to how many residents you have on social security and essential services employment vs. non-essential services. Additionally, that has a lot to do with the types of employment in that market (for example Las Vegas vs. Kansas City) and their dependence on social gathering.

I can tell you from the experience of the 2007 Great Recession that the following will most likely occur:

1) demand for affordable housing will increase

2) some number of moms and pops will get distressed and decide to sell

3) lender interest in our sector will increase because we once again proved that we are the ultimate contrarian hedge

Buying parks will be weird for the rest of this year, as lenders and other businesses struggle to re-open. But the fundamentals of the mobile home park as a business model have not changed. You will need to build in plenty of extra time for diligence and financing (probably 120 days to get a loan right now). Then things will start to back to normal in Q1 2021.

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Frank Rolfe
Real Estate Investor · Ste. Genevieve, MO · Member since 2009 · 363 posts · 944 votes
6y
This is a geographic and individual park issue. Most parks are doing extremely well at collections -- roughly the same as pre-Covid. However, then there are others that are doing 50% worse. It all boils down to how many residents you have on social security and essential services employment vs. non-essential services. Additionally, that has a lot to do with the types of employment in that market (for example Las Vegas vs. Kansas City) and their dependence on social gathering.
I can tell you from the experience of the 2007 Great Recession that the following will most likely occur:
1) demand for affordable housing will increase
2) some number of moms and pops will get distressed and decide to sell
3) lender interest in our sector will increase because we once again proved that we are the ultimate contrarian hedge
Buying parks will be weird for the rest of this year, as lenders and other businesses struggle to re-open. But the fundamentals of the mobile home park as a business model have not changed. You will need to build in plenty of extra time for diligence and financing (probably 120 days to get a loan right now). Then things will start to back to normal in Q1 2021.
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Charles Kao
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
6y
@Dane Fossee I agree with much of what Frank said but one thing to point out is it has been assumed mobile home parks would be next darling for lenders and would have higher preference. While this may be the case, I have not seen it and default rates on mobile home parks still remain higher among nonexperienced investors than other asset classes. I have talked with multiple lenders in regards to this and because of the many moving parts of banks wanting to only lend on the land and not on acquisition of actual POH mobile homes itself this often provides and obstacle for financing which is why so many are sold on land contract.
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Frank Rolfe
Real Estate Investor · Ste. Genevieve, MO · Member since 2009 · 363 posts · 944 votes
6y
There are four types of financing for mobile home parks: 1) seller carry 2) bank 3) CMBS and 4) Fannie Mae/Freddie Mac (Agency). And most investors start buying parks and financing them in that sequence. First-time buyers who have no real estate experience and not strong personal financials should focus on seller financing exclusively. Then you work your way up to bank financing (which is the least attractive option as all others are non-recourse). Conduit has now left the building because of Covid-19 and market instability and will probably not return for a year. But Agency debt is still going strong and represents over 50% of all park debt issued, but this is only possible on loans over $2 million and with certain property requirements and a buyer who knows what they're doing.
I started with seller carry (all of my first 5 deals were this) and so did my partner Dave Reynolds. Seller financing, in fact, was what attracted me to "trailer parks" to begin with (it sure wasn't the prestige). Once you have established a track record as a park owner, obtaining bank financing is not that hard, but you have to earn that right. You cannot walk into a bank and say "I want to buy a trailer park and I have no experience and the park has lousy records" and expect to be greeted with enthusiasm. As a banker once told me "before you can have return on capital you have to have return of capital". Banks hate risk and there's nothing riskier, in their opinion, than somebody who knows nothing about how to run a park.
That being said, there are a number of loan brokers that match mobile home park buyers with lenders, such as Security Mortgage Group. This makes getting mobile home park debt MUCH easier. It is rare today for most buyers to find a loan without the use of these brokers. They charge only 1% and pay for themselves many times over. Another one, Cloverleaf, will obtain loans with no minimum size, while Security only works on loans of $750,000 or greater.
I rarely hear about a deal dying because the buyer could not find a loan. But does it take strategy and work to get one? Absolutely.
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Dane Fossee
OP
Real Estate Investor · Detroit, MI · Member since 2014 · 42 posts · 3 votes
6y
@Charles Kao are you an active buyer in Michigan? Can you share your data on the default rates? I'd love to dig into it. Thanks for your comments!
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Dane Fossee
OP
Real Estate Investor · Detroit, MI · Member since 2014 · 42 posts · 3 votes
6y
@Frank Rolfe do you see increased competition in this space? Or will the uncertainty and lack of CMBS have some exiting the MHP market (specifically the investors targeting properties above a few million and below the very large institutional parks)?
Do you see the increased interest in MHPs the last few years as favorable for the industry?
Thanks!
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Frank Rolfe
Real Estate Investor · Ste. Genevieve, MO · Member since 2009 · 363 posts · 944 votes
6y
Clearly the apparent death of retail, lodging and office sectors as a result of Covid-19 will steer investors into areas of real estate that are not weakened by these type of events, and mobile home parks will rank highly. However, the stigma that buying "trailer parks" presents will scare more than a few off, just as it has for the past half-century.
If the Covid-19 crisis resembles the 2007 Great Recession, what you will see coming is more demand for affordable housing coupled with more moms and pops wanting to sell because they're freaked out or want to spend the rest of their life doing something besides running the mobile home park they built. Both are good for the industry as some of the best buys in mobile home park history occurred after the Great Recession. The timing, however, is what's at issue, namely when fresh park product will hit the market.
CMBS debt taking a hiatus is not that damaging since Fannie Mae/Freddie Mac have already taken away most of its importance. If all the banks get blown up by defaults on business loans and can't lend, I can envision a return to a world of seller financing only, which has happened before. Nothing wrong with that. But Fannie Mae and Freddie Mac will be leaving, and again that's over 50% of all park loans. Some would say that banking instability would be good as it forces sellers to accept carrying the paper, which is the best form of borrowing anyway (easy, cheap, non-recourse, low amount down, etc.).
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Frank Rolfe
Real Estate Investor · Ste. Genevieve, MO · Member since 2009 · 363 posts · 944 votes
6y
Sorry, just saw a typo in my response. Fannie Mae will NOT be leaving in the final paragraph. I need to proof my writing better apparently.
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
6y
@Frank Rolfe all great points. On the West coast parks are highly sought after by some pretty big players.

But they have a criteria they follow

I have owned 3 parks over the years in WA and Or. all were bought from original owner who started with dirt and created the park.. as you allude to this is where the deals are.. and the goal is to find the burnt out park owner :)

.. we never had any debt on our parks as we are not long term buy and hold we are reposition stabilize and sell.

But we did learn through trial and error exactly what your saying lenders dont lend on the POH :) and owning those things is a MAJOR pain in the tush.

Also the quality of the park makes a huge difference chasing low end parks with old single wides compared to a park with all doubles and pit set.. huge difference in the amount of work it takes to run them and who will buy them.

i like parks we did well 2 of 3 we owned.. I will be looking for opportunities as well for burnt out owners.

of the 3 I bought it went like this.

1. In Vancouver WA the owner built a fantastic park.. But they need cash right away for a business and took our cash offer and quick close. they did have 8 of the 50 units were park owned.

2. Smaller park 20 units hubby died wife was elderly and the water was just about to be turned off park full of tweakers. We bought this one for about 20 cents on the dollar.. again all cash close in 10 days. DESPERATE seller i did not really want to deal with it, but they took our offer so just had to do it.

3. Park in recreational area.. got in got out made NO money.. too many non pays.

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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
6y
If last recession is any indicator of this one, mobile home parks should do better than most. I admit that this recession seems different from the 2008+ one, however. But this chart encourages me.
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Austin Works
Investor · West Monroe, LA · Member since 2015 · 196 posts · 70 votes
6y
Are there any good books on MHP analysis? I am familiar with the online training programs available.
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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
6y
Jamie Smith has a summary book called "Trailer Cash" but that is all I am aware of. I read it and it is a good overview of the business.
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David Frasz
Lender · Washington, DC · Member since 2016 · 27 posts · 12 votes
6y
This thread is great. @Frank Rolfe it sounds like you have quite a bit of experience with MHCs so thanks for sharing for everyone. As a Fannie/Freddie lender, I wanted to report on one of the most common frustrations I see for investors I work with: Though sometimes we can dip below, we can generally only finance properties with 50+ pads. This makes many otherwise strong prospects (particularly in expensive California markets) ineligible for agency financing and occasionally sends investors scrambling for other financing. That said, the agencies love MHCs for their "affordable" housing profile which is the primary mission of the agencies. As a result, agency financing is, as you point out, the top tier method of financing for investors in the space. Cheers to all!
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Jim Biggs
Investor/Syndicator · North Aurora, IL · Member since 2013 · 167 posts · 70 votes
6y
Originally posted by @David Frasz:
This thread is great. @Frank Rolfe it sounds like you have quite a bit of experience with MHCs so thanks for sharing for everyone. As a Fannie/Freddie lender, I wanted to report on one of the most common frustrations I see for investors I work with: Though sometimes we can dip below, we can generally only finance properties with 50+ pads. This makes many otherwise strong prospects (particularly in expensive California markets) ineligible for agency financing and occasionally sends investors scrambling for other financing. That said, the agencies love MHCs for their "affordable" housing profile which is the primary mission of the agencies. As a result, agency financing is, as you point out, the top tier method of financing for investors in the space. Cheers to all!

@David Frasz Sounds like a great opportunity to play matchmaker on these smaller deals. Great way to source more deals and like Oz behind the curtain, you can match deals to partners and create a win/win/win. Not to mention, grow your business. Might be a great niche.

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David Frasz
Lender · Washington, DC · Member since 2016 · 27 posts · 12 votes
6y
Hey! @Jim Biggs Great idea! I'll have to start developing a list of reliable lenders that I can confidently refer to. Hope you're doing well. Give me a ring to catch up!
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Jack Martin
Specialist · Scottsdale, AZ · Member since 2014 · 626 posts · 700 votes
6y
The most important item shared on this thread is "Demand for affordable housing will increase". In our experience here in AZ, we sold out of all our available home inventory in the first 3 weeks of COVID-19. I believe that demand will continue and it will be significant. Since mobile home parks tend to be the most affordable housing, it would be smart to get in front of that demand.
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Jack Martin
Specialist · Scottsdale, AZ · Member since 2014 · 626 posts · 700 votes
6y
Also, consider that other asset classes that are not as recession resistant may experience default, foreclosure, and portfolio toxicity, which could result in wholesale acquisition opportunities that have not been available for a decade. That could potentially attract attention from the same capital that is competing in the MHP space. Just a thought.
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Daniel Ryu
Investor · Suwanee, GA · Member since 2014 · 579 posts · 347 votes
6y
@David Frasz Frank Rolfe is the 5th largest mobile home park owner in the industry (along with his partner Dave Reynolds). They manage 26,000 units.
Some observations about MHP resiliency during the COVID 19 Crisis:
RENT COLLECTIONS
* UMH (3rd Largest Public REIT focused on MHPs), Sun Communities (largest REIT and owner / operator), & Frank Rolfe (5th largest private equity owner) have all reported near normal collections level.
- UMH: Through first week of April (86.6%)
- Sun: April Collections 98% as of April 22
- Frank Rolfe: Year over Year - same collections rates for April (after the first week)
TRANSACTIONAL VOLUME
* Marcus and Millichap: March Closings ($800m) / April Listings ($160m) - 5x drop. Brokers have been holding onto listings.
* Northmarq: Only MHP Listings (according to their report): Closed deals in March - $127m. Closed deals in April - $51m
As you can see, quite a drop off as broker's hold back listings and wait for prices to readjust.
FUTURE PRICING EXPECTATIONS
* Northmarq survey of MH owners: 47% stated between a 10-25% decrease in pricing. The next largest group 32% said no change in pricing
* Costar estimated a 20% drop in apartments through next year, according to John Affleck, VP of market analytics
These are all topics I've covered in a weekly show - Mobile Home Park Desktop - that I've been producing for the mobile home park market - you can see the channel info in my bio if you're interested.
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