One of the common themes I keep seeing with turnaround parks I am evaluating is there always seems to be at least 10-20% - sometimes more - of the tenants will be at a high risk for having their lease non-renewed or evicted… Typically this is found in the financials when you see spotty payment history allowed by the current management, but there’s also things like sex offenders, people with terribly run down exteriors who may be unlikely to fix them, cat lady with 40 cats etc.
As of now I am just using some high level estimates but it’s sort of a vague finger in the wind type calculation.
Does anyone have (semi) reliable criteria or approach they use to get a reasonable estimate? Any experiences to share using this to further negotiate the Purchase price?
We’ve had experience with three turn-arounds recently. All three were very different but they all seemed to have some common elements. The first element was that we went through quite a few evictions within the first three/four months. However, we’ve been able to work through these quickly by getting the units back on-line fast and using aggressive marketing to get an actual qualified resident in them. You need capital and demand to accomplish this obviously. Second element is that we seem to have a few small surprises that require us to spend money we hadn’t necessarily anticipated on spending. This is usually just due to the growing pains of correcting broken systems. Third element involves travel. You’ll be at the park frequently overseeing the implementation of processes, renovations, large ticket repairs to roads or infrastructure, etc.
Most parks like what you describe need to be seller financed. Since this should be on the table in deals like this, we usually ask for three to four months of deferred payments on the note so we have breathing room while we figure the park out and churn the bad eggs out of the tenant base. We also attempt to have the seller start implementing some of our processes once our earnest money goes hard. i.e. file evictions on every late payer, stop accepting cash, etc. On one of our deals, we took over the actual management of the park three weeks before closing because the seller was having health issues and his daughter was completely dropping the ball on managing the park.
From a budgeting standpoint, assume that the first few months will take up some of your time and the park will cash flow very little (if at all). However, in every turn-around there is a moment where you can almost see the ship hit the heading it’s supposed to be on. For our last one, we went through 14 evictions in the first three months. In month four (this month) our collections were 96% before the 6th and 98% overall. Couple that with the expenses stabilizing where they should be and you have the first glimmer of a completed turn-around. The first week of this month was clearly the moment when we knew our ship was on the right heading.
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Really good insight @CharlesD, thank you, and congrats turning the corner with your latest Park.
Out of curiosity the 14 evictions was what % of the total occupancy? Is there any consistency with nonpayment evictions versus rule violation evictions (that may invariably become nonpayment after you fix it yourself and bill them)?
All 14 of those were non-payment evictions. I think across the last three parks we’ve only had one person who ever got filed on for a rules violation. They corrected their problem before they were removed. Aside from mowing, we’ve yet to fix a tenant’s issue and bill them for it. We have passed out a few fines though. If you come into a park and clean house on the non-payers, enforce rules, be very selective with new residents, and quickly take care of deferred maintenance; you’ll spare yourself 99% of the problems that others tend to have.
The 14 was out of 52 total units. Our occupancy started at 47, dipped to 42 at it’s low point, and it sits at 50 now. The previous owner didn’t have a screening process so this was normal for him when he owned it. Many of his park owned homes would turn over 3 times in a single 12 month period. He definitely had no-pay no-stay as a policy, but the lack of screening, constant churn, and constant renovations were preventing him from making any money. It was a very bizarre situation that he operated with for 30+ years.
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Enforcing rules and evicting the violators is half the battle (the other half being re-filling the park with “screened” tenants). If there’s demand, I don’t think your gross should “bottom out” more than 10% below your pre-closing estimated number of tenants. Remember, you can choose when to evict the lady with 40 cats and the ratty houses. Start with the non-payers and get payers in there!
Pre-closing you want to know who really pays. I get this from demanding the seller’s bank records showing that rent is actually collected (how much of the rent roll?) and divide that by the average rent to get the number of “paying” tenants, no matter what the rent roll (and/or delinquency list) shows. The seller may not even have a “delinquency list” and just forgive the back rent to make the park look better! (Not that I would ever condone this).
If you’re still negotiating the “purchase price” you need to figure out for yourself what the actual, paying rent roll looks like and compare it to what you thought when you arrived at that price. What are you paying “per occupied lot?” If the number of occupied lots is not what you thought when you negotiated the price, you can walk away or renegotiate.
I agree that the first few months (half-year?) you will likely be putting the cash back into the park to address things that come up that were unknown or unknowable when you bought the park. Nothing is ever “turn-key.”
Brandon@Sandell
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The short answer to your question is it depends on how poorly managed the park was prior to your taking over. Mine was a TOTAL mess and at 6 months were just getting to see the light.
@jhutson , as per your Question:
- “Estimating Non-Renewals / Evictions Prior To Purchasing A Turnaround Park”
Two years ago my Husband and I purchased a Turnaround Mobile Home Park.
Currently, it is still being turned around 
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Below are the results after two years:
- Lots - Total #: 65 Lots
- Lots - Occupied @ Purchase: 29 Lots
- Lots - Evictions In 2 Years From “Original Inherited Tenants”: 11 Lots
Thus, after two year approximately 38% of our “Original Inherited Tenants” have been evicted.
In addition other “Original Inherited Tenants” have moved out of the MHP (but were not evicted).
We wish you much success!
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I really appreciate all the feedback @CharlesD @Coach62 @Brandon @Kristin - great stuff.
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