Financing in Today's Market

Jefferson · March 12, 2009, 11:42pm

Friends -

After 7 months of wrangling with the banks and appraiser, I’m finally refinanced. 6.75%, 15 year amortization, 1 year balloon. Trying to get financing on a smaller ($1mm value) MHP with dirt roads proved nearly impossible.

Traditionally the value of real estate has been in getting 30-year fixed financing and letting inflation do the work of paying off your mortgage with deflated dollars.

I’m feeling I may never get long-term financing. I fear I may perpetually be rolling over a mortgage due in 12 months. I suspect we’ll have massive inflation in another 18 months or so, and I’m worried my banker may say “the interest rate is now 11%.”

Does anyone have any idea on how to get ‘long term’ financing on MHPs any more? Has anyone gotten even a 10 year fixed rate locked in on a smaller park like mine?

Many thanks,

-jl-

Jim_Johnson · March 21, 2009, 12:32pm

To start with, every market has a differing set of players, but here is a place that has been very easy to deal with in my neck of the woods… the commercial lending arm of the credit unions. There is one company in the Denver ish market that has this deal with the credit unions. They put together packages and the credit unions will offer to fund the purchases. Depending on the size of the deal, they will split the risk between several credit unions.

There are several loan brokers that seem to specialize in loans for MHP’s. I used Steve Murden for a park I just closed in Indiana. It was not the fastest transaction I have done in my life, but he got it done. The underwriter was so slow I could have walked from Denver to Florida faster than she would respond… but that is part of the market today.

http://www.starcapitalcorporation.com/

The link is where you can find Steve… Good luck!

Greg_Meade · March 22, 2009, 8:10pm

I spent 11 months on a refi and spent over 4K for apparaisal(s), survey(s), collecting bank statements, etc and after all this they stated, " We need current appraisals on ALL of the properties you have a “beneficial interest” in. cost? 22K or so. so the loan never materialized and I hated the way the Bank underwriters treated me…like I was doing something wrong or something. Every 3 months I needed to recertify appraisal and survey…the whole thing was crazy and I had a mortgage with these folks.

Do you need to this every year?? With seven month’s time needed from application to recording, you almost need to apply soon, don’t you? Approx cost to you? Did you pay points to get that rate? Can you pay a point or so to extend term?

Jefferson, you got a great rate, but I know you don’t like the hassle. In Texas I was ableto sell two SFR’s to put down on my loan and this gave me a better value to loan amount ratio(LTV) and stretched out payments 5 years and got me a 1/2 point better rate (8%) fifteen years.

I truly feel your pain Jefferson and I hope you respond to this follow up…I think a lot of folks are finding this same dynamic going on in their states. This has made me rethink my business model (several times). The good news is that Banks can’t stay in business long without loaning money…and this brings up the ugly point that by bailing the Banks out, they might NOT need to loan money, but that will be the topic of another thread!!

Thanks for the info,

Greg

Karl_Warner · March 23, 2009, 4:40am

Hi Jefferson,

From Wikipedia: Arbitrage - In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

One reason we are attracted to MH parks is that to the trained eye they offer predictable cash flows.

A QUALITY park could be defined as:

A lot lease community (limited park owned homes), with a solid infrastructure (decent streets, city utilities, inexpensive to maintain amenities, etc), in a solid market (home owners want to and can afford the rent space), virtually leased up to capacity with free and clear homes (older “paid for” homes are superior to new homes with big loans on them), whereby the homes are owned by homeowners who have stable and predictable income sources (multiple industries creating a stable job market. Or, in the case of a 55+ park; pensions, retirement portfolios, social security income, etc.). Most of us would agree that the more of these ingredients the higher the QUALITY of the mobile home parks cash flow.

So, it is not much news to say that a quality cash flow park tends to qualify for a quality loans. If your park is missing any of the above it will be reflected in the amount, rate, and terms offered in the form of debt (if you can get any decent financing at all). We need predictable DEBT as much as predictable RENT.

Look at your own parks. What’s the biggest line item on your P&L statement? And, when you bought your park, what line was the last one to get attention in the buying process?

For too many people the answer is DEBT SERVICE.

Many of my friends and clients get all caught up with infrastructure and demographics when rule the #1 rule in arbitrage is to find and procure quality DEBT.

Let assume a small land lease park that grosses 100K per year and $70K - or 70% - makes its way to the owners pocket before debt service (EBITDA). We all like to talk about 10 caps which would make this example a 700K park. Assuming 75% financing we are looking for a $525K loan. Taking Jefferson’s rate and terms we have will have an annual debt service of: $56K per year.

$56K represents 56% of the GROSS and 80% of EBITDA!!!

$$$$Please read this statement over and over again - Your line item for DEBT is likely twice as important to making a good deal then all the other expenses combined.$$$$

So my point- when buying and operating a park you have to answer this question. How and with what terms will I finance this cash flow for a predictable amount of time? See what I’m getting at - TERM is more important then the amount, amortization, and rate because as Jefferson points out - he has to re-qualify to buy his own park every year in order to stay in business. That is a job, not an investment. (Jefferson, you know I’m not picking on you personally - this is what it is!)

So what to do?

I like the credit union potential solution that Jim brings up (for Jefferson’s predicament). My clients on the $14M portfolio chased debt financing for over a year in order to close only a portion of their deal (although the rest should come together shortly). Credit unions and portfolio credit union brokers where one of the sources they courted. Credit unions are like small banks, they are geography sensitive, their appetites will vary from park to park, market to market.

When rental quality is compromised, Seller financing at the time of the sale is really where the answer lies - especially for these 1-2 star parks, rural areas, dirt roads, private utilities, parked owned homes, month to month leasing arrangements, high vacancies, mobile home rentals (the list of problems to manage and overcome can go on and on). With lower quality RENT comes the job of educating sellers as to why they will need to hold paper (including mortgages, notes, trust deeds, land contracts, NNN leases/options, etc.). Some times this requires a two, or three, or four step approach - contract all cash subject to DD and acceptable financing. Show the seller why the banks won’t dance at a reasonable amount of risk/return for you or any other prudent buyer. Show the seller why they might have to finance in order to sell, especially after getting their hopes up high and then letting a banker crush their spirit and deal. Don’t waste your time on this dance unless the seller is virtually free and clear our has a sizable equity to become banker for you - if they already owe 1M on that 700K park you are simply wasting everyones time.

One thought for Jefferson - you may want to procure a private lender now and pay a higher rate in order to get lower costs and better overall terms. Remember to follow SEC rules/regs and if you need help please feel free to call me - I like raising money. Of course this route depends on how much you like or dislike having the job of procuring yearly debt service and how comfortable you feel with your current financier (and your intestinal fortitude towards these changing times).

Final thoughts for those buying. I hear people stuck on 10 caps or better, looking at parks with park owned homes and high vacancy rates on lots, all of us looking for that ultimate infill home-run. This situation personally scares the “H E double toothpicks” out of me. I feel the real game is in simply finding a quality RENT receivable, contingent on quality DEBT (and if possible with below market rents and the potential for prudent expense reductions like sub-metering water/sewer to stimulate instant cash flow and appreciation). I’d rather have that QUALITY 8 capper with free and clear homes, rents that are $30-100 under market because of poor contracting methods (cpi leases for one), and a 50% expenses (because the family was milking the company), with some tasty non-recourse seller financing (say 5-6%), interest only, and a 10 year call. This deal will beat the 12 capper with a bunch of park owned homes and high vacancies, a seller requiring bank financing that comes with a short term “call schedule”, and a broker touting all that “upside potential”.

I’ll take the 8 capper - lot’s of quality and lots of collateral…

Karl

PS - the 8 capper above is a 300+ unit park we purchased 2005. We’ve had one eviction in 4 years and that home sold after a 7K rehab for 40,000 cash. The tenant owed 6 months rent (1,800). With $1M down the seller gave us superior terms to anything a bank would offer. The up front fees where $0 - I paid my attorney to draft the note/mortgage and we had our Trustee sign with no recourse except the pledge of the RE as collateral. I don’t say this to brag - just sometimes you get what you pay for - QUALITY (cash flow and debt) really does matter.

Shawn_Sisco · March 23, 2009, 9:41am

Karl, I appreciate what you bring to the forum. In reading your post I find nothing that I disagree with save one point - that of debt service on the P&L. My P&L only reflects interest expense. In the hypothetical MHP financing of $525k @6.75% 15 years ammortization $35437.50 would be the expense on the P&L, the other $20k (principle reduction)would show as profit. Your point seems to be more of 15 year amortizations effect on cashflow.

While I agree with your conclusions of the necessity of good finance terms, I have a hard time coming to grips with the prospect of 30year or longer amortization for MHP. The reason being that the state of the MH biz is nearly dead with no reason to expect a revival. I just can’t imagine the quality rents holding up as the housing stock ages as never before due to lack of new MH placements.

I am interested in your thoughts on exit plans given the realities of the business.

Greg_Meade · March 23, 2009, 10:31pm

agree with 100% of the content.

I use a lot of your arguments when trying to convince Buyers that a triple net lease or master lease is the way to go. I target parks that have been for sale for a year or more. Why? because by this time a prospective Seller has had multiple offers by qualified Buyers and had banks turn down the deal. Most common reason? Appraisals. A Park full of Park owned homes doesn’t pencil in using cash flow as the cap ingredient from a bank’s perspective. commonly the bank will attach no value to mobile homes period. They will use the lot rent as income and unit rentals, or unit Notes are entirely overlooked.

My thoughts are that is still green money and frankly i like it the same as any other kind. I really the cost of this money is higher than lot rent money, but there IS value in these items if managed properly.

By the time i pitch my L/O ideas the Seller is burnt out. something not mentioned often is the amount of time and effort that is required to keep a Park “show ready”. mowing, painting, litter pickup, keeping yards picked up…sheesh a full time job.

As promised i sent out over 70 packets at my expense to people interested in my L/O. i did this for 1 year and i don’t do it any more. 2 people used this lease in it’s entirety to procure 2 very nice Parks. They each net/net over 4K per month and neither required over 14K in OC and legal (one needed 3K to close). One is for 5-7 years like mine…one is 10 years with a 5 year negotiated extension.

In the next few years IMHO most Parks sold will utilize some form of Seller financing. I prefer a L/O for a host of reasons but there will be some KILLER deals available for people with cash or credit.

I like your idea Karl of using private money instead of bank money for Jefferson’s dilema. He has not responded yet as to cost of these refis, but just the "aggravation Factor " is enough for me to consider that. A three point increase in rate is quickly swallowed up by refi costs annually.

It almost seems like the Bank wants zero risk in this loan.

Greg

Karl_Warner · March 24, 2009, 12:59am

Shawn,

Great point! Only, Interest expense finds its way to the P/L and the debt reduction from the amortization shows up on the Balance Sheet. Where I wanted to go is that the overall annual debt service payments - the Principal and Interest - is likely the most important reducer of a properties Cash Flow (sometimes by double all the other expenses combined). I see in my practice too many buyers chasing deals and worrying about important details that don’t matter if the project will not qualify for stable long term financing. We buy 10 years of cash flow at a 10 cap. Be nice to have 10 years or longer on a loan call. To many people give this detail less then deserved attention. One of my first questions for a buyer is - how do you plan on financing the debt.

Onto your second point - that the MH business is likely to decline due to lack of new replacements - I’m not sure that I am as bearish as you. Without much thought, my knee jerk is to say that the home side of the business is cyclical like any other. Let’s think of conventional housing. Many subdivisions grow, stabilize, decline, only to revitalize again. Our residents homes in our communities will likely go through a similar cycle. This said, most of you know that I do not like to own homes. Another example is that in my 1-2 star park, over the last 10 years or so, SW’s have sold retail for 3-5K and in good times as high as 12-14K. The lot rent has only gone up during this time (justified by inflation and the fact that it is still 1/3 of alternative housing options - go much over this ratio and we all get in trouble), but during decline periods, like now, the homes are again cheep. But, during the growth times the homes where 400% more expensive. My homeowners have taken these hits.

Yes, new homes don’t make economical sense so they CURRENTLY are not a solution. But, governments are also not allowing parks to be built at the same speed that parks are being converted towards other uses (especially in places like FL). This should create scarcity and higher demand for established parks.

This industry still provides the best COLLATERAL of any cash flow rental business. Try renting a $600 apartment and asking for (and receiving) a $6,000 security deposit. Well, in the above park, $300 dirt rent is still collateralized by a 3,000 trailer. So, 2 lots brings in $600 with $6,000 of collateral strapped to the ground.

This industry still provides me with the best DIVERSIFICATION of any cash flow rental business (sans mini-storage possibly). Using the above example I have 2 tenants for every 600 receivable vs. the apartment that rents to 1 tenant for $600. I can also buy large enough projects that do not require me to do anything but manage the manger - NO day to day responsibilities except to foster and run a small team.

This industry still provides the most cash in the pocket for every dollar collected. Without considering debt for a second - we expect to keep 60-70 cents for every 1 dollar we collect. Factor in stable long term debt and I’ve never seen more cash stay in the owners pocket.

This industry still provides a CONTRACTUAL obligation with our client. Many people hear me harp about why leases are important. People in the Hotel business have no idea (except past performance) about how many or how much rent they will collect. I like to sign people up for as long as possible - encumbering them (or the home) to the dirt.

With long term financing we also get the benefits of inflation - paying park debt with our tenants money while the purchasing power of the dollar declines. The park I referred to above has 10% owner financing / 30 am / 0 call / no recourse. Since I’ve owned it rent has doubled, expenses have decreased in proportion to gross, and I have already collected the down payment back 6.3 times over. It does not matter what happens in the future because there is no recourse and I have no financial risk. I’m playing with “house” money so if things get too ugly, I’ll just give it back. Many would complain about the 10% but the AM / no call / no recourse makes it “good nuff” for me.

Long story short - I’m bullish on the industry as a whole. I do think it is easy to make HUGE mistakes - but those that fail will leave opportunities for those who know. There’s nothing easy about this game - but I like it just the same!

Karl

Post Edited (03-23-09 12:24)

johnhyre · March 26, 2009, 6:35pm

Karl,

Excellent discussion. Mandatory read and re-read for all. Our parks fell into the 1 or 2 star category, I think we’ll get them to the better side of 3 star (physical infrastructure and local demographics likely preclude anything better). Fortunately, we have owner financing on 2 of 4, bought 1 of 4 super cheap and will quickly eliminate the minor private financing alltogether, and are set to refi last park with cheap-ish private money (8%). While I think we have done the 1-2 star infill thing correctly (get rid of bad tenants, convert remainder to owners, raise rents, cut expenses, especially water, owner financing), your posts really have me thinking about larger, more stable projects. Most interesting. I also appreciate Greg’s approach on L/O, we have used similar approach, albeit on a smaller scale. We are also building a relationship with a small, local bank that knows the area well - we may use them in the event a refi becomes attractive.

Post Edited (03-26-09 03:45)

Sandy · March 26, 2009, 10:56pm

This post would go into the post hall of fame for me if there were one!

The third time reading through it, I took notes. While still absorbing it all, I’m sure I got the value of a course!

Thank you guys!!

Bernd_Hanak · March 29, 2009, 8:54pm

Karl,

John Hyre said it: “a most excellent post”. It seems that most owners desire to and do sell their homes. If the sales price of the homes are in the $6,000 to $10,000.- range , then the relatively short term financing makes sense. However, if a home is valued at $35,000 to $ 45,000.- with a 10% down payment, then the shortest term would probably be fifteen years without a balloon requirement. Given that substantial inflation and dollar devaluation seems to be inevitable, then long term lending, for unencumbered homes borders on economical suicide, or at least on financial masochism. Not withstanding the successful business model of Steve Chase,who sells his homes, I believe in the higher price range,

which fundamental concept am I ignoring ?

Karl_Warner · March 30, 2009, 4:22am

Bernd and Friends,

First of all - thank you to everyone for the kind remarks. I’m humbled by your responses to my words and glad to help whenever possible.

Now Bernd, I doubt you ignore or miss much As you say, the more expensive a home the longer the receivable “term” will need to be in order for that expensive home to remain affordable from a monthly payment point of view. When demand actually allows people to sell a MH for $40K - the buyer pool that can afford to make this choice must feel that purchasing a MH returns an acceptable value on their money when compared to all other housing choices. It is my experience that properly priced “expensive homes” rarely need any financing at all - Seniors with cash are the typical buyer and these folks are good shoppers. Keep in mind that “expensive” is a relative term. A $40K MH is expensive compared to a $10K trailer - but the $40K buyer is likely shopping the MH against a $200K site built house.

So where’s the smart play with these “expensive” homes?

I advocate renting dirt and parks with expensive homes need to meet three conditions. (1) the homes need to be a good deal compared to alternative housing. (2) The lot rent should not exceed 30-40% of alternative housing. And (3), most of the “expensive” homes need to be free and clear, especially bank debt.

Don’t buy the “expensive homes” in your park unless you need to protect your lot rent. Let the housing market (homeowners who live in homes) deal with the ups and downs (and maintenance) of home ownership.

As mentioned above - keep a watchful eye on lot rent inflation compared to other housing. Realize that as lot rent goes up, your tenants home prices will be forced down. Take your fair share of the available housing cash flow stream but do not steal from your customers. I see parks owned by REITS with $500-600 per month lot rents and stick built houses renting for $750 per month. This is not a sustainable business plan. Tenant and home turnover is inevitable. It is just as easy to mess up a 4 star park as it is to mess up a any other cash flow business.

I don’t advocate Lonnie style deals on these expensive homes unless you can procure quality wholesale debt to cover your position (and hopefully without recourse). Collecting the “spread” between payable and receivable can be good business but it is much riskier then leasing lots to regular homeowners. Home values are effected by housing “comps” and our lots are of the more stable “income approach” variety - stick with buying lot lease rental income whenever possible. If you can get your money out of a house then inflation and compounding (putting your money into something else) is again your friend.

To be ultra clear, please enter the world of financing expensive homes reluctantly as the goal is to own such a high quality receivable - lot rent - that these “expensive home opportunities” are few and far between. Remember that I mentioned that we have only had one lot lease default in 4 years in our 4 star park. When you get an expensive home in this manner it is hard to get hurt.

Lastly - buying a “high end” park with lots of vacancies is financial suicide (unless you can sell the lots with the homes and even then it should only be a perk to buying the park, not the reason you are buying the park). Turn around parks are best left to those who can afford to speculate, have access to lots of money, and those who are satisfying the niche of truly affordable housing.

Hope these thoughts help,

Karl

Bernd_Hanak · March 30, 2009, 9:57am

Karl,

Thank you for your informative response. A brief explanation of our circumstances seems to be appropriate:

My youngest son Alexander and I, in order to learn about the practical side of the MH business, developed a micro community of ten lots (100’x100’ each) plus two separate 1/2 acre lots on which we placed 12 DW homes.All homes are renovated and generous size porches were added. All have underground utilities, municipal water and sewer. Our total debt, privately financed, is $ 50,000.- at 12% for 15 years. The homes rent for $695.- to $ 745.-per month. The rents are arguably $30.-to $ 100.- below market. We calculated our lot rents to be $200.- to $ 250.-( 30% of comparable rentals).

We could sell these homes(only) between $ 35 to $ 45,000.-. to some of our tenants with a 10% down payment at 12 3/4 % for 15 years. Their monthly payment, including the lot rent and insurance, would be similar to their monthly rental payment.

Although we would prefer to sell the homes, our quandary concerns the length of the term required because we believe that inflation and the devaluation of the dollar are highly probable and would devalue our investment substantially. Wouldn’t renting these homes be the preferred

approach until the economic outlook has improved ?

johnhyre · March 30, 2009, 6:44pm

Bernd,

As much as I hate renting MH’s, I might make an exception in your circumstance for the reasons that you state. I think 1970’s style inflation (or worse) is baked into the cake. If someone else wanted to finance the homes, great. It just wouldn’t be me, not with those numbers. In the case of my parks, we are looking at @ $7,500 in each home, which we sell for around $13k. If inflation helps get the homes free and clear faster - great, that makes my lots more valuable. Trying the same with your numbers would not appeal to me, so liability issues notwithstanding, I’d be looking at a lease or lease option.

Immer ein Vergnuegen,

Shawn_Sisco · March 30, 2009, 9:24pm

Bernd, I would think that the upside to selling these houses vs. leasing them lies in the profitability of the investment that you would make with the proceeds of your note sale.

Karl_Warner · April 1, 2009, 8:06am

Bernd,

The rent vs. sell question is always a very personal one. To me it all comes down to figuring out my options - the more the better the potential results.

Should you wish to explore selling, and in order to mitigate uncertainty, I’d suggest asking and answering the following questions:

Can you procure quality debt against the potential sales receivable?

What would be the terms to this debt (%, amort, call, costs, recourse, etc.)?

What can you do with the “debt cash” which would allow compounding?

Will your new deal pay for the debt should your tenant/buyer default on their loan to you?

Are your buyers willing AND ABLE to pay you terms that create an acceptable profit and worth the additional risk to you?

For me it has always been “sell and replace” my money with wholesale debt. For others, they have done quite well with renting (with or without leverage). The inflation question mark doesn’t really worry me. Yes - if you have your own money in long term notes that do not adjust or do not have calls then inflation hurts. But, all our lot rents should move with inflation and for every dollar of inflation we get to the bottom line we get a minimum of a 10 time multiple in appreciation.

What I like to focus on is “how much in” and “when does the money come back out so I can do it again”. Wholesale debt creating arbitrage can serve this purpose; yet it also brings its own sets of risks that should be offset by the new deal.

A fundamental of the game is to keep money moving. My 2 cents? Create the profit margin and then take the quick nickel over the long dollar and move onto another deal.

Karl

Jefferson · April 2, 2009, 1:41am

Great posts everyone! My apologies for being slow to respond; I’ve been traveling and busy buying new homes for my community. This thread has expanded well beyond my initial query (which I love to see happen), but let me answer a few quick questions from earlier:

I paid 1/2 point origination to my bank.
They were not willing to extend the term beyond 1 yr. balloon, 15 year am.
When I refinance next year I will not have to pay for another appraisal or spend 7 months playing games with the appraiser and bank (unless I wish to seek refinancing at another bank or private money source).
I expect (fear) my banker will simply say ‘well there has been inflation, your rate is now 11%, start making the larger payments next month. Thanks for playing.’
I’ll try and negotiate, and will certainly refi the loan with other source(s) if his rates are unacceptable, but we’ll just have to wait and see what happens to the cost of the bank’s money vs. the cost of funds from other sources.
Meanwhile, I’m able to continue investing in my community (new home sales and rentals) and earn a net cash-on-cash return of approximately 25%, which goes a long way towards improving my DSCR ratio (currently 2:1 and growing) and to growing the community’s value (which would make it easier to refinance a larger amount in a year - should I need it - or to qualify for a slightly lower interest rate on the same amount of money given the then-lower LTV of my loan once the community’s value increases another 30% this year).

To everyone’s continued success,

-Jefferson-

Deleted_User_ME · May 7, 2019, 11:50pm

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