Expenses on homes for Lease with An Option to Purchase, RTO, RC, ETC

mobile home university
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Hi all,

Quick question regarding expenses on homes under 'lease with an option to purchase, rent to own, or rent credit agreements.

I understand that park owned homes will generally break even, or lose money (assuming a high enough home rent) mostly due to turnover costs and repairs and maintenance, but when I am underwriting parks that have some POH which I will need to sell via any of the methods above, how should I go about underwriting expenses for these units? Can units under a ‘lease with an option to purchase’, rent credit, or rent to own be profitable prior to become a TOH?

The lease in the Bootcamp Reference Library for a Rent Credit Agreement is set up such that any repairs under $100 are the tenants responsibility. I understand I will still be responsible for taxes, insurance, and repairs above $100, so are homes which are in process of being converted actually more profitable than POH? Assuming a high enough home rent, are POH unprofitable only due to the turnover and maintenance costs? And what, if anything, makes lease with an option to purchase, rent credit, or rent to own, more profitable, besides the eventual tenant ownership and not having any of the aforementioned expenses?

Would I be correct to assume if a tenant sticks with the agreement until they become an owner, that these homes can have slight profit margins after taxes, insurance, R&M, or would it be better to always assume I won’t make any money on these, similar to POH?

Thanks!

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Following this - I have a park I’m acquiring with 25 POH’s and want to get them converted to TOHs asap. They are late 80’s / early 90’s models and not worth too much but utilizing bank financing, which I am doing on this park, it will get very complicated keeping the homes. I’m thinking of possibly just gifting them or selling them super cheap and raising the lot rent up closer to what the rent currently is (although that’s above what market lot rent is). I’m just confused as to the best process around this process. I know there’s been a lot of discussion around it but any input or suggestions would be appreciated.

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Two ideas:

(1) IF the homes are worth anything and the bank is going to hassle you about them (e.g., if the bank wants them as collateral but assigns them no value in the LTV equation) then one possibility is to purchase the homes with a separate LLC by which they are not part of the bank’s collateral (or income stream). Clear it with the lender first, though.

(2) Or, as you said, sell them cheap or give them away and fiddle with the lot rent. The problem is you can’t do this before closing so what is the lender going to say?

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Didn’t think about the first suggestion transfer to Different LLC…not a bad idea.

And the second , they are a very flexible bank I’m more worried about the appraiser trying to get “comp” lot rents

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Both the original poster @JD and @Rob_Estes you seem to be worrying over the value or cost or appraisal or some intrinsic sense of “worth” of [MH that might come back to be your problem some time in the future.]

I suppose every home in a MHP meets that description. But unless it’s abandoned, a TOH won’t be your problem. Unless the tenant is a problem. Or keeps their home in a problematic condition and won’t fix it. At any rate, the point is, you won’t be on the hook for anything to do with the home except in relatively rare circumstances.

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Now if you have occupants of homes living in the MH paying rent, or on a giveaway, or a handyman special, or a RTO (illegal) or L/O, RC, or any other like situation, then you have to worry about (A) they may leave at any time (+/- likely) and (B) the condition they leave behind may cost $$$ and (C) you won’t have rent while you remedy B.

When you put together A + B + C – you are in the Mobile Home Remanufacturing Remarketing and Compliance business. Congratulations. This is a tough business with no profit margin. Just try not to lose your shirt.

The homes IMO have 2 values. The “Retail” value is the value that home would fetch on market if you fix it up and market it normally. The “Wholesale” value I figure is generally about 1/2 of that and goes down from there depending on the condition.

If you’re looking to purchase and your question is “how do I value the POH” the answer is – wow, depends on the POH and the market and your management and your labor. It very well could be NEGATIVE.

As a back of the hand estimate, and the way I’d do it as an appraiser, is look at what the homes would sell for, as-is, right now, in-place, compare to the price of selling it for “haul-out”, and if they’re not ready to sell as-is, how much it would take to get them there. Somewhere between the market comp for a “fixed up” home less the “cost of repair” and the “haul out” value is the actual retail value.

Obviously if you’re buying a park you’re shopping at the “wholesale” value. Your customers are paying “retail.” And if you can get a NOI (rent profit) off that value, great good for you. In the long run, it’s really, really, really hard to sustain a profit renting mobile homes unless you have long term tenants (in which case they’re essentially owners already) and high demand (for when they do move out.)

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Thank you, @Brandon. I appreciate the detailed response!