Should I buy these 19 homes?


#1

My wife and I purchased our first park about 6 months ago. It is an 81 space, nice, 5 year old park in a somewhat depressed area of Michigan. The area has strong demand for rentals, but not many people would now qualify for purchases, and have very limited down payments. Our biggest problem is collecting lot rents in a timely manner, but we are working diligently with the courts to tighten up on this.

I have a situation which I’m not sure I should be happy about or run away from.

The previous owner owns 19 single and double wide rentals, all relatively new (1998 and newer), and has guaranteed the $300 lot rent on them as long as they are in the park, regardless of whether his tenant pays rent or not. He is getting tired of the management issues with these homes, and wants to sell to us. He will finance, but only for 4-5 years, and insists on a personal guarantee from us. He also is threatening to move the units out as they become vacant, if we don’t purchase them. So:

  1. What is the best way to structure the deal both financing wise, and tax wise. Should I get title on them immediately? How could I offer financing on them to a potential buyer or rent-to-owner if my financing is due in 4-5 years? What if I can’t sell them and they remain rentals? Do I even want to get into the rental business?

  2. Could I buy some of them outright through my IRA if they sit on the park that I own? Would that be a prohibited transaction?

  3. If the typical rents are $250/300 month for the homes, what ballpark price should I expect to pay for them?


#2
  1. If he’s requiring a personal guarantee for the financing then he should be ok releasing the title and giving you clear title for the mh’s so you can resell them. At least that’s the way I’d look at it. Or, if you can arrange other financing, that might be an option too. You may also be able to buy a few mh’s, sell the mh on a note, sell a partial on the note to get your capital back, use that to buy a few more mh’s, rinse, repeat. I’m sure there are many other ideas & ways of doing it. What does he need? What is his main concern? Find out that info and negotiate from there.

  2. I’m pretty sure that would be considered “self-dealing” and be a prohibited transaction.

  3. I would expect to pay a decent wholesale price for them. What they rent for would not factor into my decision whatsoever. An additional thought is that a mh already in your park is going to be worth more to you than a home you have to bring in from elsewhere to fill an empty lot. In my mind that justifies spending closer to retail than I’m used to paying for a typical “Lonnie deal”. It’s kind of like the “bird in the hand, bird in the bush” analogy.

I would work very hard to keep the homes from being pulled from your park. It’ll be a lot more work (and expense) trying to replace them.

Regards,

Michael(KCMO)


#3

on most of his post, but i REALLY agree with keeping the homes on your site.

something the present home owner knows is that these homes are worth more set up in the Park to the MHP owner than they are to a person needing to break down, transport, and reset to code on another property.

Cheapest bet is to take over the day to day mangement issues, and as rents accrue pay these to the owner on a contract or triple net lease for a decent wholesale price. Try to structure note so they are paid off in 5-6 years. For instance 300 per month home rent X 12 =3600 per year for 5 years equals 18K per home for d/w homes and possibly 5 years X1800= 9000 for singles. i would ask for 0 interest on his Note as you are solving a HUGE problem for him. home titles revert to you and you can continue to rent or sell on contract or tax wise triple net lease.

This would keep the 19 spaces cranking out rent at 5700 per month (342K over 5 years), gives him a respectable return on investment per d/w(18K investment with 3600 return = 20%), the only caveat is I am sure he will ask you to guarantee payments even if home is empty. I know I would.

Almost any scenario is better than losing the homes and the rent each month, IMHO.

thes are figs for my market…yours may be different, but the principles remain the same i think. The present owner does not want to move them if he can help it i am sure…The deciding issue will be the “who can stand the most pain” syndrome. Him moving homes or you replacing homes.

sounds like you own a nice Park

good Luck,

Greg


#4

Just curious. how did the 19 units ever get off the table of the sale six months ago of the entire park. thanks


#5

There were 3 reasons we didn’t buy them initially.

  1. The bank we got the mortgage through wasn’t interested in financing the units. Also, it would have raised our down-payment amount to a number we didn’t have.

  2. Since this was a 1031 exchange, our lawyer felt the mobile home as personal property definition wouldn’t fit the “like kind” provision.

  3. We thought, since this was our first park, we’d get our feet wet first before grabbing the units.

It sounds like you are optimistic about the prospect, true?


#6

i don’t know… that is my regular signatrue. ust do it. grin but perhaps you should just do it, it’s up to the condition of the homes. let me say this though. it’s nice to just have that lot rent due from whoever, rather than maintenance resposibilities of the homes. i seriously doubt that guy is going to move those homes. i’m serious. he’d never get his money back, and must deal with a new mobilehome park manager if he doesn’t have the developed land. he’s just testing you prolly. he ain’t going anywhere. tell him you’ll let him know in ninety days. never say another word. grin


#7

but this is almost a “no brainer”. I know several Park owners who would love the prospect of having nice homes set up in their Park for sale with owner financing, put another way:

  1. How much would it cost you to replace each home…include cost of home (usually cash in 5 days), transpo, set-up, skirting, porches, hookups of utilities, remodel (if repos), advertise, and hope for a great buyer? In my market approx 26K for d/w and 16K for s/w without skirting or landscape.

26K 10 d/w homes = 260K

16K 9 s/w homes= 144K

or round figs 400K…(a ton of out of pocket)

  1. How will your Park fare (cash flow) without the established cash flow from these 19 homes paying lot rent at 300 per month?

  2. Can your Park still flow (including debt service) without this 5700 per month (or approx. 1/4 of your gross income?)

These are ? I am sure have thought of. NEVER think a person won’t remove homes from a MHP…I’ve removed scores and sold retail to folks wanting a L/H pac or to replace older homes. By selling all for cash he gets cash today and has a dwindling amount of lot rent guarantee each month and fewer “management issues” headaches each home gone. You have an unsightly empty lot with huge costs to re-fill each empty space.

Wait 90 days to discuss if you please…but don’t be surprised to see homes leave your Park. Does he own them free and clear?

I hate to give unsolicited advise, but if it was my Park, I would do almost anything to protect and safeguard 342K( coservative with annual increses) over 5 years in lot rent…of course I am a cheapskate and don’t have much loot! Hopefully Daphne or Fred, Corey, Jim or Ricky can give their .02 as they all own way cool Parks and would LOVE this problem. I would love to own the homes.

Regards,

Greg


#8

you seem to forget they couldn’t be bought six months ago.

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why can they be bought now

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is the owner carrying any of the paper now

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why would he move them

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he’s just trying to complete the sale he hoped for six months ago it seems.


#9

kind of thinking is what if you are wrong? This guy just sold an 81 space Park for cash and has a fistful of dollars.

In his situation I would call a wholesaler and sell the entire collection for all cash. They served their purpose to fill his Park for sale. Picture this, an Oakwood Acceptance Corporation rep knocks on your door in 2001 and asks if the two repoed 16X80’s in your Park can stay rent free for 90 days while the look for new owner’s. Being an astute business person you say NO I need 200 per month per space. 12 days homes are gone onto a wholesale lot in Houston and 4 months later and 22K later and hundreds of hours in permitting, etc. later you have replaced the homes and income you had prior to removal of homes… and have just spent almost 30 times what the rep wanted…3 months free lot rent.

Yup, happened to me…the next Conseco rep that called got BarBQ and beer and lot rent free for 7 months…this home stayed and is still there.

Reps don’t bluff much, neither do MHP Owners (much).

I like the " who can stand the most pain theory" In this case my money is on the owner of the homes…he’s got the ready cash to do anything with these homes he wants ///Place on lots ,develop yet another park and seed with these 19 homes, sell wholesale…

Greg, I would REALLY like to hear how this plays out for you!

Greg Meade


#10

$5700 per month income was guaranteed to the buyer by the owner, as long as they are in the park. The former park owner has the option to rto the units to the tenants and the new buyer could manage the contracts for him, for a fee. He does not desire to move those homes, that is a certainty. The tenants in those 19 homes are living in a new owner’s park, why not visit with them and see what they think about buying their units if the new owner can help them get a contract. Good luck GS.


#11

“he’s just testing you prolly. he ain’t going anywhere. tell him you’ll let him know in ninety days. never say another word.”

I think that a very reactive strategy, not to mention potentially dangerous. I would prefer the more proactive route of talking to the seller, find out what he’s really trying to accomplish, and try to find a solution that helps everyone.

As Greg Meade has elaborated more eloquently than I, a home already set up in your park is more valuable that just the home. Replacing it will be a major cost & headache.

How about a new tagline signature? In some situations “Just do it” can be awfully dangerous. “Live deliberatly” or “Be Proactive” come to mind, neither of which I take credit for.

Regards,

Michael(KCMO)


#12

Each to his own michael michael motor cycle. this is a place to type ideas and create communications helpful to all concerned. it doesn’t have to line up with the norm or any one personal attitude. ain’t it fun, grin


#13

I agree with Michael - he just said it before I did.

However, if Greg Sorter chooses to make his business decisions off of what some anonymous, won’t-post-my-real-name Internet kook says, then that is his peril, or profit.

Signed,

another kook (or is that mook?)


#14

Steve you have never seemed like a kook to me, and this is the first time I’ve seen you act like a mook, but that is your choice. My name is Bill Russell, and I got the same invitation to post and participate that you did from these former and present CRE online posters. Thanks for all you’ve shared over the years. Good luck Greg.


#15

bill russell, the RTO guy? Right on - a few of us have been talking about you, re: RTO storage sheds

wish you had a RTO book, with forms and philosophy

where are you? somebody said they thought Alabama? Come up to Seattle; I’ll buy the latte’s!


#16

Thanks Steve, I would like to have coffee with you, too. I went to Kent 19 years ago to sign up a playground equipment dealer to sell our aluminum bleachers and had dinner with him on the Sound. It is beautiful country up there!

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When the book is finished Steve, I sure will let you know. Writing a good book is hard work! grin

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Steve, I’m in Alabama, way south, an hour from the Gulf of Mexico, and about an hour west of Dothan, and an hour and a half south of Montgomery.

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Reads like yall had a great meeting up there last weekend. That’s what I like about these cash flow forums, everyone is so good about share’n and networking. Good luck, Steve, from Opp, Alabama, grin…bill russell


#17

It sure would be nice to know what finally happened to these 19 homes.


#18

Did anyone find out what happened on these 19 homes?


#19

We bought 13 of the 19 back in March. The other 6 went to the renters on land contract from the previous owner. The previous owner had a change in heart about financing them to us by himself, so we went with a local bank. Got a 10 year loan at about 8.0%, so we feel we did OK with the financing. All the homes are currently rented at between 250 and 300 per month, so given the prices ranged from 12K to 17K, we feel we did OK. We would have had a disaster if the houses were moved, since it would have been 25% of our lot rent as well.

We would like to get out of the rental business though, but are finding our tenants will not be getting financing anytime soon. So, we are content to hold onto them as rentals. Surprisingly the headache for repairs and maintenance hasn’t been much of a problem.

Our biggest surprise has been that in Michigan, rentals of mobile homes are liable for a 6% sales tax on the monthly rent. We also hear that if the homes are held for resale, the tax doesn’t apply, and are looking into it.

Now, we just have to figure out how to fill the park to 80%, given the current financing and repo environment in Michigan (#1 in home foreclosures in country)


#20

We bought 13 of the 19 back in March. The other 6 went to the renters on land contract from the previous owner. The previous owner had a change in heart about financing them to us by himself, so we went with a local bank. Got a 10 year loan at about 8.0%, so we feel we did OK with the financing. All the homes are currently rented at between 250 and 300 per month, so given the prices ranged from 12K to 17K, we feel we did OK. We would have had a disaster if the houses were moved, since it would have been 25% of our lot rent as well.

We would like to get out of the rental business though, but are finding our tenants will not be getting financing anytime soon. So, we are content to hold onto them as rentals. Surprisingly the headache for repairs and maintenance hasn’t been much of a problem.

Our biggest surprise has been that in Michigan, rentals of mobile homes are liable for a 6% sales tax on the monthly rent. We also hear that if the homes are held for resale, the tax doesn’t apply, and are looking into it.

Now, we just have to figure out how to fill the park to 80%, given the current financing and repo environment in Michigan (#1 in home foreclosures in country)