All Forum Posts by: Frank Rolfe

The normal deal construction is 70% to 80% LTV without the seller taking a second for the balance -- that is extremely unusual. The zero down deals we've done are seller carry (we've done 12 of them). If you want to do high-leverage, the normal framework is to buy a park with seller financing that has the ability to aggressively push rents, cut costs and fill lots. After about three years of doing these things, you then refinance the property into CMBS or Agency debt and -- if you work it right -- you end up with all your cash back out. You then own a property with zero capital in it. That's probably the best business model in the industry. But it does require about 20% down (or whatever you negotiate with the seller) to get it started. But, again, we have done deals with zero down as well as small amounts down (my first deal was only 2.5% down) so the bottom line is that there is a lot of opportunity. It also requires the deal to me at least $1.5 million in value at the end because only CMBS and Agency debt allow for cash out.

Evictions policies are pretty straight forward in most states (ask state MHA) but the industry norm is rent is due on the 1st, later after the 5th, send demand notice on 6th (varies based on state -- some require 3 day, others 10 day, and some multiple demands), then file eviction, go to court, win, wait for appeal period, file writ, kick them out. You can get most any tenants who does not pay out by the following month in most states -- and in some cases in the very month they didn't pay.

They will almost always take the home if the difference between home rent and lot rents is at least $100 per month. In a sample of 100 rental homes, 50 will take it immediately when you offer it if the difference is $100 per month, then another 25% will take it when they have to make the choice between staying or leaving. But there's always around 25% that won't take the unit if you paid them $1 million to do so -- they just don't believe in owning anything. These are typically the system users and when you do the analysis you will find this subgroup are the same ones that call with a repair problem daily, don't pay on time, don't follow the park rules, claim their water meter is broken, etc. So it's no great loss when they move into a rental in a park down the street. You then rehab the homes on this subset, sell them and you're done.

Giving homes away for free to EXISTING tenants does not create a problem. They will already have skin in the game because the home probably already needs repair that they will have to pay for. If you give it away you may not be required to provide title or home habitability warranty (ask your state MHA). If you sell it for cash you will only get maybe $500 to $1,000 and that's not going to alter the resident's future behavior one iota. However, it might annoy them enough to move out, and that will cost you an average of $5,000 in renovations to put the home back on the market. If you tell the residents "we don't rent homes -- only land" and hold firm to that on a given date (the amount of time necessary in your state so back to the MHA) they will typically take them. It may be cheaper for you -- based on state law -- to "gift" them rather than to sell them (MHA time again).

The SAFE Act has severe penalties and there's no real way around it, but talk to your state MHA and see if there is a provision that might allow you to do a rent-to-own per year or two (some states allow that I believe).

As far as the lending, if you're only looking at deals that are $1.5 million or greater than you want to exclusively use loan brokers. They will get you far better rates and terms and are essential for CMBS or Agency debt. Our favorites are MJ Vukovich at Bellweather and Security Mortgage Group (ask for Pierce Redmond). They can walk you through the requirements both for the property as well as the borrower.

You should have no problem finding a bank that will do 50% LTV. If the deal is under $750,000 in loan size, then focus on local banks (the old time on the main square kind). If it's $750,000 and over in loan size, use a loan broker like Security Mortgage Group.

You cannot do "rent to own" under the SAFE Act. So you'll either have to 1) sell them for cash or 2) give them away to whoever's current renting the home (ask your state MHA). You could also rent them in a "rent/credit" format but that's a bad idea unless they're in good condition (the repairs on a mobile home will destroy any potential profitability).

31 lots x $265 lot rent x 12 x .6 = NOI of $59,148 and NOT $99,000. A price of $710,000 is a cap rate of around 8% on REAL property income.

You cannot use ANY of the park-owned home income in your calculations as that's PERSONAL property.

This deal will only work if 1) you can raise the rents significantly 2) the well and septic is in superb condition 3) you can sell or give the homes away in their current condition 4) the location warrants all of this.

Your projection of $47,000 in cash flow is off by about $40,000. So if that's what is making you want to do the deal, then that's not an accurate fact. But here's how the deal could work out based on REAL property analysis:

1) Property essentially breaks even at purchase, after debt.

2) You raise the rents $100 per month over time to $365 per month which yields you a positive cash flow of around $3,000 per month.

But remember that this deal will kill you if the well, septic or park-owned homes go bad and start gobbling up capital. Then you will end up with no profit at all.

If you worked it perfectly -- and found a buyer in the end who likes that location and will pay an 8% cap rate -- then your profit would be $3,000 x 12 = $36,000 divided by .08 = $450,000

As a park owner, you have an inherent duty to make it the best it can be -- and you get paid for it. A good looking property will get you the following benefits: 

1) A lower cap rate (and higher price) on your appraisal for either selling or refinancing the park.

2) Less issues from city hall, who will respect you for doing a good job.

3) Less issues from neighboring property owners who will not be mad at you.

4) Higher rents from those will feel you are providing a higher value for their dollar.

5) Greater resident retention so higher occupancy.

6) Greater attraction from new customers, which also leads to higher occupancy.

All that being said, you don't want to get carried away. A park owner can always find something more to do, and that can lead to excessive capital cost. So do the important things and remember that you don't want to go overboard.

The correct answer is "sensible moderation" and a budgeted focus based on improving the big things and holding back on the minor items. 

Glad to help. Keep applying those guidelines until you find the perfect park. 

You will likely have to get a variance from the city to add those RV lots. I would talk to the city zoning department to see if there's any chance they'd do that, and what the cost, steps and timing to make that application would be. Cities are extremely hostile to mobile home parks but a little less so with RV lots (but not always).

Figure on around $15,000 per space to build it.

You DEFINITELY want to try to buy this park as that will give you a 52 space park when you combine them -- that's far more valuable than a 30 and a 22 separately. Plus you can also save money by combining one manager for both and other efficiencies (advertising, etc.). The bottom line is that YOU are the best buyer for this park.

Based on that additional information, definitely get it under contract at whatever price you can and do your diligence.

Assuming the net income is $52,395, then the most you could pay would be an 8% cap rate = 654,937. 

Why an 8% cap rate? 1) that's about as low a cap rate as any appraiser will go (I assume you need a bank loan) 2) that's about as high a price as you can go and still meet your debt coverage ratio 3) that will give you around a 3-point spread if you canj borrow at 5%.

Would I buy that deal at 8% cap rate? No, unless I can push the rents up significantly over time. The problem with buying smaller parks is that the exit strategy is tougher -- there are fewer buyers for deals under $1 million due to the better financing starting at that price point (CMBS vs. bank debt). But if you can buy it at 8% cap rate today, push the rents up $50 per month starting in 60 days from purchase, and then keep advancing the rents annually, then it might work out fine.

As always, the other variable -- which I don't know -- is if it needs any cap-x and how great the location is.