I was shocked when I read Frank’s post dated 5/22/13. The post reads in part: “I think the key decision any park operator has to make is to become SAFE Act compliant or to get out of the “mortgage business” and just go back to renting homes. As long as you set reasonable rules for how repair and maintenance works, there really is not a big difference between renting and selling. The biggest difference between renting and “selling” – that’s the difference between an eviction and a foreclosure. To be honest, even if SAFE had never come to exist, we would have probably retreated to renting homes due to the difficulty in foreclosure.”
Having read the 10/20 book as well as the home study courses, renting rather than selling would seem to be a major change in the business model. I would be interested to know how this has impacted both the acquisition criteria and the operation of the parks. Do you now rule out parks with more than a couple of park owned homes? Do you still acitively do infill projects with new and/or used homes?
I look forward to finding out how this change in philosophy has impacted Frank and Dave as well as other park owners
The SAFE Act was definitely not our idea. However, all park owners have to work around the reality that it appears here to stay. Equally important is the advent of extremely tough foreclosure rules and attitudes, caused in part by the robo-signing mess. The bottom line is that selling homes and carrying paper is pretty much a fantasy for most park operators now.
The reality of putting someone in a home (whether renting or selling) is that they are often there for less than the period you had hoped. Locking them into a sale does nothing more to hold them in place than a simple rental does. The only difference is who pays repair and maintenance. If you enter into a rental agreement in which the tenant pays for the repairs – effectively triple net – then the difference between renting and selling is zero. We use a blend of this: our tenants pay for all minor repairs and we pay for the big ticket items, like air-conditioners. The net effect (we are still in the testing mode) has been better tenant retention – they would normally run off when these items occurred, and the cost to renovate and re-rent the home is bigger than the cost to make the repair.
We are still bringing in homes as aggressively as rentals as we were under selling and carrying mortgages. We still buy parks with many park-owned homes in them. Nothing has really changed since we wrote the book, except that we now must follow the SAFE Act, and we’ve elected to change over to rentals rather than become SAFE Act compliant. To be honest, even if SAFE was amended or repealed (there has been talk of a $50,000 minimum on sales) we would probably never go back to selling due to the changes in foreclosure laws. So renting is here to stay for us.
There are variations of straight rentals that you should research such as rent-to-own and rent-credit, which ultimately make the tenant the home owner – but make sure whatever you choose meets the requirements to avoid falling under SAFE. Another option is to simply rent the home until the economic value is exhausted and then give the home to whoever lives in it at that point. But whatever you do, put in the necessary research as to SAFE and how it relates to your plan.
Frank, thanks for your response. While I realize you are still in the testing mode, The following questions come to mind: What percentage are your expenses running? Do you rent the homes on a month to month or lease term basis? What do you require for a security deposit? How would the maintenance clause of the contract read?
Frank, we have been wrestling with the best form of a rental contract since SAFE forced us to transition away from seller financing all of our homes. We have yet to find a consensus answer from other park owners on two issues - repairs and upfront payments.
In every state within which we operate, the landlord-tenant act prevents us from passing the responsbility for repairs onto the renter. I know park owners are thinking like you about divvying up the small and large repairs, but my opinion is that doing so violates the typical landlord-tenant act. Have you found a creative solution to get around this provision of the law?
Also, we would like to get a large “down payment” from our “rent-to-owners”, but have found that having an option contract (with an upfront option fee that) can present a host of issues (one of which is that it complicates the eviction process) that are probably more trouble than they are worth in the long run. One thought we are considering is marketing our straight rental contracts as a “rent-to-own” (with the intention of attracting residents who want to become homewoners) by including a “gift” clause whereby we give the home to the resident who remains in the home for 7 years, or however long we would have required under an installment contract. The one problem we cannot find a solution for, however, is how to collect a significant amount upfront (like the 10% down we were collecting under installment contracts), when most states usually limit upfront rental payments to first month’s rent plus 1 or 2 months of a security deposit. Any thoughts?
We have pretty much given up the ghost on being able to avoid the repairs, but aren’t ready to do so on having the resident put more skin in the game up front than a traditional renter.
There is no room for guessing here, so you need to start off by talking to your state MHA on the requirements of the SAFE Act and the resulting rules regarding “rent-to-own” options. You do not want to do anything that can be construed as a “disguised sale”. If you plan on “gifting” the home at 7 years, someone might interpret that as a “disguised” 7 year mortgage. There are certain rules that apply to a “disguised” sale – such as the tenant being required to buy it – that you need to know in your state.
On the repair side, it’s the same story – you should start with talking to your state MHA on what the laws are regarding minor repairs. In most states, cosmetic repairs are not required by law. Minor repairs normally fall under this category. The state law regarding “minimum habitability warranty” includes the “large” items such as AC, heater, roof, hot water, etc. Appliances do not fall under this category unless you provide them – better to let them get them at rent-a-center. But all of this should not be left up to speculation - your state MHA should be able to answer it for you or tell you where to get the information.
On the deposit question, the normal procedure is first month’s rent, last month’s rent and a deposit. Depending on the home, this normally is pushing the amount well over $1,000. That’s all that our tenants normally have, so it’s a non-issue trying to get more. The amount of the deposit allowed by law would be another question for your state MHA, but on a new home, the deposit might be fairly large.
I was at MHI Las Vegas this year when I heard someone proposing a lease-to-own or lease-option type contract but with the “catch” that the option payment would be financed without a security interest.
In other words, maybe the home would sell for $25k. You get someone in for $250 a month (plus lot rent paid separately) for 5 years and you collect a total of $15,000. Figure they still owe $10,000 (assuming the depreciation exactly offsets the imputed interest on the installment sale).
You have already seen that they are committed and able to keep current on their obligations. You know they’re good tenants (you haven’t evicted them yet, right?) So you transfer title to them for $10,000 payment but finance that $10,000 for $250 per month – i.e. another 4 years if you assume 10% interest rate. But you don’t take a security interest in the home. If they steal the home, well, your loss and you can’t get it back by going to court. But because that’s so unlikely you might be willing to take the risk (at a 10% interest rate).
The advantage is that because you never take back a secured interest in the home, it’s not a mortgage and you fall outside some of the regulatory mess. I haven’t explored this in enough detail (has anyone?) but the idea is intriguing.
Anyone remember this from MHI and/or want to comment?
This is the kind of stuff we should be talking aboout at these annual shows - real issues facing real park owners. Too many of the panels and speakers they have (like at Louisville last Jan) were too far off topic for most of us smaller operators. Would be nice to have some roundtables or splinter meetings with park owners comparing notes and methods on all kinds of operational issues.
Most of the speakers and topics at these events were of no value to large or small operators – just time-filler junk that has not been relevant since chattel lending died in 2000. I noticed at the Tunica show that the only “customers” were park owners, yet the event was set up as though the real customers were the general public – how out of touch can you get? Prior to 2000, mobile home retailers and manufacturers were the 800 pound gorilla in the industry and at the events. Today, park owners are the 800 pound gorillas, yet we still get treated like chimps. I could not agree more that the information presented needs to be of more current value. Dave and I have considered holding a “virtual” convention to discuss industry items of interest to real park owners, without having to waste time and money on travel. Maybe have speakers on the SAFE Act and other hot topics in a webinar format or similar venue, with Q&A after the speech. What do people think of that concept?
One- the selling of the homes and qualifying the buyers… that is really the safe act.
there is another player- the IRS
Now this might open a whole new can of worms- but
We hired a really sharp CPA that understands financing on the sales side and the lease / option side…
and he has proved to us that a lease / option that spans more than 12 months is treated as a sale by the IRS, and… as the seller you MUST report ‘implied’ interest on your books. It is VERY complicated to track, and we are going back several years and filing amended returns. One more thing, if the home goes bad- you have to add the moneys you received on the ‘lease’ (home, not space rent), and add it back into the basis of the home. this works the same way you would track a installment sale- the IRS views them the same. Now the part of the payment you split into ‘implied interest’ you do not put back into the basis.
So- if your doing lease options you should talk to a CPA, not a book keeper about this. I am certain most people do not track their lease options this way…