Purchasing a park in WI with existing RTO contracts

Hoping to get some thoughts from the community on this. I am currently in due diligence to purchase my first park in WI that has 2 RTO contracts in place. From my understanding, these contracts are illegal as they require the tenants to perform all maintenance, etc. There is only approximately $6k worth of value left on the contracts.

How would you remedy this with the seller? Perhaps I ask the seller to eat the small cost here and gift the homes to the existing tenants early?

Thanks in advance for any input!
Dustin

If I was you I wouldn’t worry too much about it - it’s only 2 contracts. And it’s likely that the buyers won’t skip a payment, force an eviction and argue in court. If you are worried about it, like you suggested, you can ask the current park owner to gift the homes. Or, you can just gift them when you take over.

The issue isn’t that the tenant has to make all repairs, the issue is that they’re considered a disguised mortgage as related to Dodd Frank and SAFE Act.

You could always look at restructuring this as a lease with option to purchase as some states this is legal.

Treat your people fairly with the intention of them owning the home. If you don’t like them (RTO agreements) then get rid of them as prior poster rightfully stated.

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@jhutson is right. The issue is the liability of being chased by moneygrubbing lawyers eager to claim part of treble damages.

If you do your DD see if you have something that the Tenants agreed to in writing. Will you honor that? Then it’s probably not a problem unless they don’t. What are you going to do if they don’t keep paying on their contract? evict them? And their home to boot?

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How much are you purchasing the park for? Because maybe you can get a lower price to leave the Two RTO’s to the seller.

I have purchased parks with rentals. The rentals normally pay more than a RTO deal. However, renters leave quickly sometimes without notice. RTO’s work better. Always have the RTO sign new RTO agreements with your LLC along with new rental agreements. I find the best parks are parks with good management, ownership and relations with tenants. A good relationship goes a long way with your tenants. Most of you’re tenants in a mobile home park don’t move for decades. Be kind and clear on you’re expectations and everything will be alright. Don’t worry too much of RTO’s that are in the grey area because all of them are. Betting of people is just part of the game.

Good luck,

Dustin

Thank you very much for the reply! I agree that since it’s only 2 small contracts it seems relatively low risk and I will probably not worry too much more about it.

100% agree. I think your point on treating folks fairly is the best course of action. At the end of the day, these are two small contracts that will probably not ever become an issue as long as everyone is happy. They become homeowners, I collect lot rent.

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Gotta love lawyers, right?! I think everything will end up working out ok. The existing tenants have paid consistently on their contracts to date, so hopefully they continue doing so for the next 12-18 months and everyone wins. Thanks again for the reply!

Great tip on signing a new agreement with my LLC; I did not think about that! 100% agree on putting some faith on good relationships and treating people fairly. Thanks again for your input, much appreciated!

One extra note is you can actually get out of the RTO game pretty effectively from this position if you have the titles of the homes. Try not to pay for the balance of these contracts or pay very little on the front end of the deal, then after closing sell the home to the tenant for a grand or two in cash (unless the contract is 10/20 grand) this will get you out of the park owned home repair business and into the land business. Moreover they’ll have a paid off home and likely won’t leave in very long. It gives them stake to stay.

If your state titles them as mobile homes, I don’t see how there is an issue. How is it different than a car loan? I would be curious to see exactly how the contracts are worded. I know in nj they got sticky with rto on houses, and the work around was they pay a fee to purchase an OPTION to buy and there is a second agreement that is a lease. That way, if they break their lease, their option contract is void. Of course that option fee is NON REFUNDABLE. I have stick built homes where tenants are required to do maintenance. With option purchases, I would have the heat/air and roof inspected in advance. If either were to need replacement, my contract addresses how that would be paid for. Normally a percentage split. I welcome comments from others…

  1. Get estoppel agreements from the buyers.
  2. Make sure the seller paid the tax on the sale of the home at the signing of the RTO agreement. That is when they are due.
  3. A lot of operators claim that lease option agreements are good vehicles and should be used to avoid taxes and keep the cost of selling homes down. They do not. Avoid them. They are in a grey area in the tax and the legal meaning of sales. Avoid taking these over. I like the comment where someone suggests the seller keep these agreements. They are probably drafted incorrectly.
  4. If you don’t know what all of this means, get a lawyer to represent you in this deal.

Todd