Long-term vacancy considerations and POH viability over time

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My partner and I have been evaluating the MHP space for the better part of the past six months and have found this site extremely helpful. Our question is what’s going to happen to MHPs over the next 10 years, specifically as it relates to filling vacancies over time.

For example, you own a park that has 10% POHs, but every year some percentage of your tenants leave for natural reasons. When these natural vacancies happen, we can cross our fingers and hope that a new owner brings in a home and pays lot rent, but that doesn’t seem likely based upon my research. It seems like the norm is to buy a rehabbed unit and put it in your park.

So, I buy a rehabbed unit and put it in the park. I can try to sell it, likely at a loss, to get the lot rent, or I can rent the unit and the lot and see my POH inventory increase. After 10 years, I’m going to be 50% POH rentals, but theoretically have cash flow benefits during the interim. I haven’t taken the MHU course yet (taking it in December) and I know that Frank and Dave don’t like POHs, but I’ve spoken with a few +/- 15,000 unit owners and they all feel relatively comfortable with the POH rental business.

  1. What does that do to my exit value? Does my cap rate get affected or is the market now more accepting of this rental unit income stream?
  2. Who is buying new mobile homes and what kinds of parks do they live in? How viable is this segment of the market to fill vacancies.
  3. Where do you guys find info on the demographics of new home buyers?

Any thoughts around these issues broadly would be very much appreciated.

Many thanks,
Phil

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  1. Most buyers and lenders will not underwrite rental income. They will underwrite the value of the park based on income and expenses from lot rent only. They will then create a value for the home and/ or note inventory. The POH stock should not significantly effect the cap rate, so long as the quality of the community is maintained. What it will do is require a buyer to put up down more money, as lenders generally won’t lend on the homes. This limits the buyer pool, which can effect price, time to sell etc.
  2. Many people are buying new homes across all market segments.
  3. What are the desireable demographics of the parks that you want to own or in the area that you want to own in? Seniors who want to downsize from their McMansions buy new homes, families that can’t afford site-built homes and need 3 bedrooms and space buy new homes, parents buy new homes for college students in some cases, young professionals that are looking to simplify are buying new homes, Hollywood movie stars and producers buy new mobile homes in Malibu. A senior park in Florida is different than a family park in Michigan is different than a suburban park in Dallas, but they all fit the needs of the community. The beauty of MH is that almost everyone can afford new homes if the financing is right and it is often their best option in terms of affordability and quality.
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Your initial assumption is that homes leave, which is not generally the case. Residents can leave, but the homes typically remain. When they leave they typically sell their home to another person who then moves in, or abandon it, in which case the park owner takes it through abandonment laws. The park owner then re-sells it. So the issue is not the pressure to bring in new homes, but to re-sell the old ones. This demand can be gauged with a test ad in due diligence. In most markets, the demand for affordable housing is huge.

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Thanks guys,
This is really helpful. Frank, I look forward to meeting you in December.
Phil

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I can’t answer your second and third question, but in addressing this question, we have a park that has 50% POH. Probably more, but many are empty. The Homes portion makes money (quite a bit). We went to refinance this park.

From the Lender’s perspective, they only care about what happens if you default. Because they don’t share in any upside.

  1. Lender does not want POH because the loan will be packaged into a REMIC. REMICs have strict rules about what can be collateralized. So POH is a drawback. Lender wants a higher rate in exchange for this drawback to selling the loan in the secondary market.

  2. Lender does not want POH because if there is a default, they will be stuck with tons of POH that they then have to manage. Lender wants to repo a low-hassle piece of land and will bring in an expensive mgmt company to “buff up” the park in the time prior to REO sale. The rental income may be worth it to you maybe, but it’s not the Lender’s business. This is a management headache.

  3. Lender wants to collateralize the homes but will not lend on their value or income stream. So it is difficult to deal with changes in home inventory (have to get lender’s approval, etc) but you get no benefit, only hassle. (You can’t sell the collateral!)

  4. Lenders do understand the rental park model, but renters are not as “sticky” as owners, so that is factored in to a higher interest rate.

  5. 50% POH gives owner a huge leverage over any negotiation - “If you don’t do what I want, I’ll let these homes go to waste and …” Lender has to protect against this by collateralizing the homes or higher rate or both.

  6. If owner is on brink of default, the homes are going to be filled with warm bodies that don’t take care of them, so in case of default the homes are probably worthless or even a liability (have to trash out, repair, demolish maybe, etc).

That said, we took the loan (10-year fixed) and switched to sale-only mode. Goal is to sell all homes within the 10 years before next refi. Now the rental income stream is drying up and we are sprucing up the homes for sale as fast as we can, but we cannot go as fast as rental turnover. This is worrisome. You have this problem even if it’s rentals and not sales.

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