All Forum Posts by: Frank Rolfe

CAVCO has brought out a financing program specifically for park owners called "REVIVE". 

The industry standard is $10 per month per lot, plus free housing. It's the same basic game plan the self-storage industry uses. That's strictly a guideline. The amount you pay is also tied to other factors such as if the manager is expected to sell/rent homes, if the park is in a tough turn-around mode, etc.

Call Security Mortgage Group. They are loan brokers and can get a loan on virtually any mobile home park as long as the deal is $750,000 or more. Under that you're stuck with either seller financing or small-town local banks.

Think like a lender since mobile home park investing is based on leverage. Lenders want decent infrastructure (city water/sewer, paved roads and a parking plan), usable density (no more than around 15 units per acre), a mix of home ages but without a huge concentration of homes from the 1960s and 1970s, a desirable location in a metro of around 100,000, and a cap rate that's at least 2 points or more higher than the interest rate. As long as you follow the sweet spot of lending you can't get into too much trouble. 

I would focus on parks that are within 5 hours radius of your home -- that way you can drive out and back in one day. That's an important attribute when you're starting out.

As far as finding deals, we have sourced over half of the 300+ mobile home parks we have purchased over the past 25 years from brokers, with the other half from a combination of online, cold calling and direct mail. The more deals you look at the better your luck will be.

Covid-19 has now proven that mobile home parks are the best real estate sector for the new America. Affordable housing is in exactly the right position going forward.

In general, mobile home parks follow the same "risk vs. reward" metrics as all real estate. In Sam Zell's book "Am I Being Too Subtle?" he says that you should always buy deals with high reward and low risk and never buy deals with low reward and high risk. So if you assume that all deals with high reward (high cap rate) must have high risk, then that's why you would think that any deal with a high cap rate must have above-normal danger to it. However, it has been our experience that many moms and pops price their property inappropriately so this formula is not always accurate. For example, if the seller has a deal with good infrastructure, density and location but has it priced too low due to poor knowledge of the market, then you have a high reward/low risk situation. We see this most often when the mom and pop have rents that are hugely below market (like a park we bought in Austin with $240 per month lot rents when the market was $550) and all you have to do to hit an insanely high cap rate is simply to raise the rents significantly.

The bottom line is that you should not assume that all high cap rates = high risk. That's only in a perfect market where pricing is accurate -- and most mobile home park pricing is anything but perfect.

The biggest lessons learned were the necessity of good due diligence and the importance of renting land and not homes. My first park was an infrastructure mess (master-metered gas and electric) and also had a huge number of rental homes that needed repair almost weekly. The other big revelation was the concept of seller financing, which my first deal also had in a big way. I was originally more attracted to mobile home parks because of the seller carry than any other item. I bought that first park for $400,000 with $10,000 down and the seller carrying $390,000 for 30 years, all non-recourse. I had never seen the concept of 2.5%  down before (until I later figured out you could also do 0% down if you hunted hard enough (and then did that five times). I was unprepared for almost everything, as there were no books, courses, forums -- or anything -- back then and you learned as you went (and that was a really bad idea). I also had a huge culture shock in two directions 1) the revelation that mobile home parks were nothing like I had learned about on TV (which showed them in a negative light) and 2) the knowledge that the demand for affordable housing was huge, as I would get sometimes ten calls a day with customers looking for a cheaper place to live. 

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.

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.).

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.

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.