Thoughts on this


#1

Through my buyer’s agent, I made an offer for the park needing water line replacement:

One-year lease with option to buy for $550K provided owner replaces water lines during lease period. This way I would not own the park until the problem is fixed. My mgt. LLC would lease the park for that year and oversee the installation of the water lines.

Owner complained that I might walk once they get the lines in and they will have to find a new buyer. They would really like to sell it outright, as is, yesterday.

The water line replacement will be $200-250K.

I thought of putting up money in an escrow account but there are 2 problems. 1) It still doesn’t mean I’d release the funds to them. 2) I could stand a year to come up with $550K.

The park would be worth closer to $900K with the water issue fixed.

This may be a tall request but those of you with your thinking caps on may be able to see something. Any ideas on a structure that would shield my ownership of the park until repaired, buy time for money hunting and lower their risk of my walking?

Thanks,

Steve


#2

Pay your 12 months of lease payments up front, this may ease sellers mind that they are dumping $$ into this project for a buyer who has nothing to lose, and will walk unless everything goes perfectly. This probably won’t completely smooth over sellers concerns, but it may get you two closer to agreement.


#3

I know nothing about this particular park, but the economics of the transaction doesn’t particularly impress me. You are paying 250K up front and in the end (if all works out) your park will be 150K under market.

Couldn’t you do better with some other park with 250K of improvememnts?

If you bought a partially vacant park with competent plumbing you could buy repo trailers and sell them on terms. This would give you new housing stock and many years of income to pay off your debt. The plumbing improvements don’t give you more income in the long run.

Maybe I’m being too critical, but my instinct says you should walk away.

How old are the houses in the park? If really old, why not make a value play where you upgrade your housing stock? That’s really better for the future IMHO.

For 250K investment in a normal MH Park deal you could build profit centers like a retail store, vending machines, payphone, laundry, clubhouse (not all parks would be appropriate for these, but some would) which would have an obvious impact on the desireability of the park. New water lines isn’t going to seem all that sexy to the next investor or someone who wants to live in the park. So if you made this kind of investment in a normal deal, you might actually reap similar (if not greater) benefits.

Just my 2 cents, do it if that’s what you really want to do.

But I think you are getting too little benefit for the risks you are taking. After spending 250K, what happens if this isn’t enough?

Also, if the water lines are that old, what’s the condition of the rest of the infrastructure? How old are the homes?

Get better terms out of the seller or I would walk.

Hope this helps.

Post Edited (10-24-07 04:33)


#4

I think you’re misreading the post. He’s paying 550K after the repairs. The owner pays for the water line upgrade during the one year lease period, ARV of 900k.

Why not get an estimate for the water line replacement, deduct it from the sale price & take the owner out of the picture? I don’t see any reason not to do it this way unless you can’t get an accurate estimate.


#5

If the “Option Amount” is right and it cash flows to your spec.

Something the present owners need to realize is if even if you don’t exercise Option, they have dramatically improved the Park and made it much more saleable. a possible way to approach this would be, " I’d be crazy not to exercise Option…the Park would then exactly fit my needs"

.Something I like in this type of situation, is “benchmarks”. IE If 1/2 of Park is not improved in 9 months, lease payments are reduced 25% or some such…creates urgency, and time is of the essence.

Any way to increase Lease term? 2 years? maybe, " This is a big project, are you sure you might not need more time to perfect repairs?" Maybe add a “mutually agreeable extension clause”?

This gives you more time to raise capital, or better yet use free cash flow to minimize out of pocket dollars at exercise.

Steve, I know of good MHP loan programs here in Fl and almost all of them want verifiable one year tracking of revenue and expenses (for refi purposes). If you could even get an 18 month L/O this would give you a year to track and a few extra months for dd and finance, Phase 1, Appraisal,survey.

Given the choice between a pretty park or a sound (infrastructure) Park I’ll take the latter each time. Cosmetics are cheap…sewer, water, electric (just ask Corey), are expensive and can bankrupt you.

Good Call on fixing this problem first Steve. Call me if I can help in any way. I look forward to seeing you at MOM.

I have done a L/O as you know and I would have Steve Case or Karl Warner look over any lease/ option before I signed. The one I sent you was from Karl and he saved me 50K or more at Option with one para. His cost? Less than my 1K Option…worth EVERY penny. They are both class acts, and I’ll bet either can write a more comprehensive L/O than most (all?)attorneys in your area…my own RE Attorney stated that Karl’s was a more “viable” document and reduced his fee $300!!

Good Luck Steve,

Greg

352.216.2020


#6

Good morning,Dr.B.

A Performance Bond is often helpful to keep the other party honest !

Bernd & Alexander


#7

Thanks for the thoughts everybody.

The owner of this park is a trust that funded the 90+ y.o. mother’s care at $5K/mo. She died in Feb of last year and the 80 y.o old daughter/trustee wants out. She and her husband of 82 do not want to fool with looking for a loan to get the water lines done.

Almost all the homes are older 12 x 60s, there are 110 spaces, about 90 useable, 62 homes in place. There is 1 acre next door for sale that would allow extension of up to 19 of the lots for longer homes. Rents are $225, park owners pay water, sewer and trash-$48K/yr. Sturdy 1 BR home, block office, block 10-car garage. Gross income from '05 $172K, '06 $159. Very clear shenanigans with collections in '06. Current expenses $118K.

Again, I do not want to OWN the park until lines are fixed because I don’t want the liability of tenants suing me over no water service, putting them up in hotels and having my name/picture in the newspaper with the bad news. Not a good way to start off. Current thinking:

Lease park from owners for nominal fee so I can have cash flow to make water line loan payments. Submetered water and trash billing will reap additional $40K when lines are in.

No increase in lot rent for 1 yr due to tenants having to pay for water and trash.

Start placing new/used homes on useable lots. Sell new with 3rd party financing. Sell used Lonnie style.

Contract for park with $20K earnest $$ and defined closing date 12-18 mos. after lease begins. Price $550K MINUS cost of water line replacement with bills presented. They may want to cap the cost of water line replacement which will cause me to spend $$ now on an engineer and detailed estimate. I like the mutually agreeable extension clause idea Greg.

I guess, I need an out if the Phase I environmental is negative. this would mean I’d do that first before spending any money on water lines. Any idea how long a phase I takes?

Thanks very much for your comments,

Steve


#8

Phase I (in CA )will take about standard 3 week turnaround time . Call or email some local environment companies(Geologist etc.) and ask for free quote and how long will it take. It might cost around 2000-3000.


#9

One concern I would have is the quality of the work. You know the seller is going to try to get by with the absolute cheapest work possible and will cut corners every time. Is there any provision for having the work inspected by an independent inspector or even a requirement that a licensed contractor do the work and not the seller’s brother-in-law? There is often damage to other structures underground when doing this type of work and you would probably never be informed and the damage might very likely go unrepaired.

Just my $.02 from someone in that line particular of work.

Rolf


#10

Good point Rolf

Doc,Maybe you should get 5 competitive bids for the work, based on set specifications, from licensed & insured contractors, & then you can average the prices, perhaps after throwing out the high & low bid. Maybe some bids from an engineering co or three for inspections, then you can use these numbers for an allowance at closing.

There may not be a way to eliminate the liability that you fear, but you can minimize it by planning ahead & perhaps do some or all of the work yourself. But don not neglect call before you dig & remember contractors have expensive insurance for good reason.

Prepare the tenants with advance notices of possible interruptions, maybe even rent a water source from a neighbor for a just in case backup.

Again, if you plan ahead the logistical elements of the project, you will begin to think out the worst case scenario’s and plan around them. You should be able to put a temporary water source in place, and avoid, or minimize service interruptions.

Rick


#11

Be very careful who you retain to perform a Phase 1. Believe it or not, if you use unqualified persons they might not constitute a good faith effort.

One of the posters mentioned a geologist. You need someone familiar with hazardous chemicals.

I once heard that a geologist wrote a phase 1 recommendation recommending that the owner strip off a very hazardous chemical. Bad idea since it would have increased the likelihood of contamination of the ground water. Contamination of the ground water is the serious problem you don’t want to contribute to since it is unbelievably expensive to remediate. Many of the superfund sites have remediation estimates in the billions because once the groundwater becomes contaminated no easy solutions. In some sites the remediation doesn’t even have a clear deadline—or it is in decades in the future—meaning that even the EPA doesn’t know when remediation will occur.

You might want to ask your title company to recommend someone.

But make sure they have a background in hazardous substances so that they comprehend what can and can’t be done.

Post Edited (10-26-07 06:53)


#12

at MOM. There will be 7 Park Owners there (some with multiple properties). This sounds like a great opportunity and I will gladly give up my 50 minute slot for you to present to the group.

The more sets of eyes you get on this the better.

I think you need to get a Phase1, survey,and appraisal done prior to signing L/O since it is such a short lease term. Another idea I like a LOT is set up an"Option Trust" using Self Directed Roth money for funding. At excersise funds (rental or sales) could enter SDIRA tax free and at age 591/2 leave tax free!I have not done one like this, but I know several folks that have and at least two will be at MOM.

I called Sunshine Utilities here in Florida and asked them what my small park would cost to replace existing water lines. 6" main 250 per foot,4" branches 210 per foot, 2" and 1" 160 per foot,meters 300 per home. This includes pavement sawing, pipe placement, hydro testing, soil replacement tograde, permits…about 33K by my figs. The one exclusion is pavement replacement. Another 6K. Maybe call your utility company for round numbers? If I ever did this, I would do my own using my crews for a material cost of 5400 and labor about the same, and 6K for pavement replacement.

I’m a bit confused on who foots the bill for this. In your original post you state you will not exercise Option until owners have relaced lines. In your second post you say they don’t want to get involved in a loan to replace lines. Who pays for this work? When? This is a huge chunk of change.

Maybe bring some outline of deal to MOM. Keep address and particulars generic and maybe we could let some real experts look it over and give advice. I have done one L/O for a Park and don’t have much expertise.

This sounds like an absolutely great Park to L/O,

Greg


#13

Thanks all,

I remembered my my geologist nephew and called. He also advised a phase one from a local company recommended by a commercial realtor, 2-3 wk turnaround.

I spoke to the contractor from whom I’ve gotten the only bid so far (2" mains plus water meters $197K) . He has repaired lines in that park and says they are shot (but he wants the contract, doesn’t he?) Greg, thank for your water line prices. If I use your numbers I come up with $220K

I had hoped the sellers would get a loan on the property and put the water lines in. They refuse. They just want to dump the park. I got a call from the seller today, bypassing his own realtor, questioning me how I know the pipes are bad. He tried to tell me the pressure is only down in the winter when so many people are running their water to keep it from freezing. The maintenance man tells me otherwise. They are trying to blame the maintenance man for making the park seem bad and may fire him for it. They just want to dump the park and be free of it. They don’t want to fool with a lease or water lines or anything. Heck, they didn’t want to fool with the park for the 15 yrs she was trustee, after the previous trustee, her brother, died!

If I bought the park outright, I’d need an appraisal, phase I, survey, engineer’s waterline specs, 5 contractor estimates and somewhere to get cash/financing. I’m thinking they might unload this thing for as little as $200-250K. But I’d need some way to insure against the potential risks outlined above.

I don’t mean to be a jerk but I’m to this point: Either they seriously consider a lease or I’ll wait them out through the winter. They will either get some unsuspecting buyer or come back to me.

Thanks again for your responses

Steve


#14

Doc,

Sounds like you want to have your cake & eat it too… & that is ok, maybe not possible, but ok.

You can spend a pile of money to justify a low offer, & only the phase 1, & title policy will give you any sort of protection. Or you can just get the phase 1, & title policy and use the estimates to justify the lowball offer.

Use the 60/30 method & back out any repair estimates, & add a generously low amount for any POH, & offer the result. $125k?

An all cash, or large cash offer is usually attractive to motivated sellers.

This business is not without liability, and responsibility, & you can buy all of the insurance you want, but ultimately the buck will stop with you. If you accept the rewards, the risk comes, usually with additional charges.

If the reward outweighs the risk, at a price acceptable to all, you may have a winner(or just purchased a job).

Rick


#15

Rick, I really liked what you wrote:

"This business is not without liability, and responsibility, & you can buy all of the insurance you want, but ultimately the buck will stop with you. If you accept the rewards, the risk comes, usually with additional charges.

If the reward outweighs the risk, at a price acceptable to all, you may have a winner(or just purchased a job)."

That comment would fit just about any part of the mobile home (and probably most other) investments. Take it out of this context and put it just about anywhere.

Great point.

Tony


#16

Steve,

You obviously have more information and solid numbers on the property, line conditions, and numbers than you had at the MH Bootcamp. Great job on that!

Why don’t you get at least one more estimate from a qualified contractor on the line replacement?

Bring everything with you to the MOM meeting in Troy and let’s all sit around Friday night and come up with a win-win solution for you and the seller.

I’m looking forward to it…you know how I love to analyze deals and come up with creative solutions.

See you in a few days.

Steve


#17

Thanks Tony,

See you all in a couple of days…

Rick