in contract to acquire a MHP that has about $240K of debt obligation with 21st and PEP. How have other investors underwritten this risk? The likelihood of all the loan being defaulted on at once is very slim however there is a liquidity risk that i need to factor in. Any thoughts?
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I’m assuming these are the loans 21st wrote to tenants where you are agreeing to takeover payments in a default.
The risk is that you’ll have to takeover the payments so look at what the home could be rented for versus the mortgage payment you would assume. I don’t think it’s an enormous risk unless they are asking you to pay off the loan in the event a tenant defaults. In that case, you’d have to tie up a good amount of capital in reserve not earning a return. That extra reserving cost (opportunity cost over time) would be what I’d discount the deal by in that case.
Not sure if this is too late but a majority of the risk depends on what kind of homes these are. Since the obligation is only 240k then I don’t imagine these are high end homes. As long as the number in the event of default (i.e. you buy the home back from 21st for 50k) is something you can live with, then you’ll be just fine.
Not sure if you have to be approved with 21st prior to buying the park (since you’re assuming recourse). If you don’t, keep in mind that if you want to turn around and sell that home with financing to an end buyer through 21st, you’ll have to be approved for their program. Just know that getting approved for anything through 21st is worse than repeated cavity searches.
Also, consider payment history and stability. We find that people who make it past 24 months in our lease/option program generally stick for the long term. Another park owner I know has +/- 1.3m outstanding with 21st across his parks, all recourse, and has seen the same.
Keeping a cash reserve for one home might not be a bad idea but don’t let it scare you. Even if you have the cash on hand, tell them to come pick up the home. They’ll figure out a way to work with you pretty quick!