Convince me NOT to invest in a MHP

28 Replies

I'm trying to find good reasons not to invest in MHPs. If 25% or less of the homes are park owned and there is cash flow, what are some valid reasons why I would not want to invest in a deal like that besides being in a market where I don't have a big enough pool of people to fill the remaining homes?

If they were not separately metered I would make sure to include those numbers in the deal as well.  If it breaks your requirements, then I'd steer away from it.  As I'm sure you've know, people tend to not care about how much gas/water/electricity they use if they're not paying for it.  

Other than that, the biggest reason not to invest would be exactly what you mentioned, not having the demand to meet the supply of the park.  

Do not buy a mobile home parks that has:

1) No operating permit as evidenced by a Certificate of Zoning.

2) No demand as verified by running test advertisements.

3) Failing private utilities unless you have an approved plan to fix them and can afford to do so.

4) Dirt roads unless you have a lender that will finance it, or the capital budgeted to pave them.

5) One individual (other than the park owner) that owns a huge number of the homes (most lenders will not make a loan if one person owns more than 5% of the homes).

6) Does not have a clean Phase I environmental assessment.

7) Does not have a clean survey.

8) Does not have a clean title.

9) Is overpriced in such a manner that you will not make money with it based on reasonable performance.

10) Does not have a healthy risk/reward relationship (buy low risk with high reward and avoid high risk with low reward).

Don't buy a park that you can't check off all of the things @FrankRolfe listed above.   I'll expand on a couple of them though.

1) If you are getting a loan to buy the park, don't buy a park that you can't verify clean title on every POH (not just clean title to the property).  Require the seller to show you copies of the titles of all POH showing title is in their name before signing final contract. 

2) If park is on all septic currently, don't buy a park that will be required to be put on the public sewer system in the near future, unless that cost is factored into purchase price.  Many municipalities will require property owners to connect to the sewer once it is available to the property.  This can be very expensive, especially if grinder pumps/lift stations are required.

With all that said...go by the right mobile home park!

Originally posted by @Frank Rolfe :

Do not buy a mobile home parks that has:

1) No operating permit as evidenced by a Certificate of Zoning.

2) No demand as verified by running test advertisements.

3) Failing private utilities unless you have an approved plan to fix them and can afford to do so.

4) Dirt roads unless you have a lender that will finance it, or the capital budgeted to pave them.

5) One individual (other than the park owner) that owns a huge number of the homes (most lenders will not make a loan if one person owns more than 5% of the homes).

6) Does not have a clean Phase I environmental assessment.

7) Does not have a clean survey.

8) Does not have a clean title.

9) Is overpriced in such a manner that you will not make money with it based on reasonable performance.

10) Does not have a healthy risk/reward relationship (buy low risk with high reward and avoid high risk with low reward).

Excellent bullet points.. I can vouch personally for the private utilities I personally would never buy a park with private Utilities the risk to me is to much.. I loaned on one that I had to take back and the owner let the water and sewer system degrade it was big money to fix. 

I have owned 3 parks with city utls and those are a breeze .. for me take smaller returns with no worries on where the water comes from and where the waste goes to :)

 

Bad quality of residents could be a valid reason not to invest. It seems every other day there is a news story in my city of a stabbing, drug overdose or murder in one of our mobile home parks. The only people who will want to buy or live in a park like that are people who act similar. 

Originally posted by @Nathan Barshinger :

@Jay Hinrichs I've heard never to buy a park with private utilities, this confirms it. Thank you!

Not sure what the ratio is however it bet its a large number that have private wells and private sewage systems that the owner is responsible to build maintain and replace upon failure.

 

Originally posted by @Joe Splitrock :

Bad quality of residents could be a valid reason not to invest. It seems every other day there is a news story in my city of a stabbing, drug overdose or murder in one of our mobile home parks. The only people who will want to buy or live in a park like that are people who act similar. 

Joe,  from my experience of owning 4 parks.. They are very much like MF  you have  A B C D  well rare is an A and A would be brand new built with brand new homes.. its darn hard to build a new park these days  ergo the value preposition in existing parks.

But a well run B park is a very solid asset with little to no trouble.. now a D park or like some I see in the rural Deep south I would classify as F parks.. these are another story.. but then again a MF in a D location of a bigger city is the same thing constant drugs shootings and so on and so forth.. And of course CAP rates adjust for those risks.. I have owned both a B class fantastic asset little to no work bought it did a little improving and raised rents a touch and sold it for 40% gain in 4 years.. Bought a D class had to evict all but 2 tweakers bunch up a bunch of the trailers into dumpster haul them off and reposition and sold it for a profit once turned around. but during the year dealing with all these folks you earn your money..

 

Originally posted by @Nathan Barshinger :

@Jay Hinrichs gotcha, how expensive (estimate) would it be to convert over to city water and sewer if the lines aren't far from the park?

Hard to say would have to talk to a good civil engineer on local costs. but if you have to extend main lines to the park thats going to cost some money and then probably about 10k a pad to run your services into them. maybe less in some markets. 

Unless Sewer and Water are right at your property line  sized enough to handle your park then your looking at some major expenses and probably not financially feasible unless rents of course allow it.. 

the risk with private water systems ( wells) and private sewer ( septic systems  or more elaborate systems) is the cost to repair replace and if the codes have changed since the park went in .. I know out here on the West coast this can be a major major expense been there done that and never again.

 

Originally posted by @Nathan Barshinger :

@Jay Hinrichs so basically it's A LOT less of a headache to just buy a park with city utilities haha

Again for ME PERSONALLY having had a park with systems go bad on me.. YES I would never personally buy a park with private utls

not when I can buy ones with public UTLS.   returns maybe a little lower but its not all about returns to me its about safety and not having systems fail like what I experienced.. 

 

 I owned a park with well and septic and the constant repairs and maintenance need that was my biggest issue, after that was the dirt roads, and not being able to find qualified people to put in the homes. It was not the right park for me and best day was when it sold. However I do think parks are good but you would have to defiantly follow Frank guidelines at  a min. 

Nathan,

A Phase I Environmental Survey is a study done by a licensed environmental engineer that reviews whether or not the property is potentially polluted. This can be from a number of factors including leaching from neighboring contaminated land, but most commonly mobile home parks can fail the test due to stupid things that owners did in the past such as burying trash (results in becoming a landfill) or installing gas tanks (either commercially or for their own use). A Phase I costs around $2,500. I would NEVER buy a property without a Phase I being conducted as the downside will surely bankrupt you if it turns into a significant contamination site.

Only about 1 in every 100 properties we have studied have had a contamination issue, but the risk is too great not to have the study conducted. Most sophisticated lenders require a Phase I before they will make a loan on any property. Over the past 25 years we have uncovered some massive disasters that we fortunately were then able to cancel the contract on during due diligence.

The best guy in the U.S. for doing a Phase I is Mike Renz with Renz Environmental in Ohio -- he goes nationwide. We have probably done 200+ Phase I examinations with him. But regardless of who you use, the key thing is to definitely do it.