I’m looking at a park with 41 occupied lots in a good market. 25 of the homes are owned by a guy that rents them out and pays the park lot rent. Obviously this is not an ideal situation with one person owning a large percentage of the homes in the park. However, the park owner is willing to sell at a very attractive price (high teens cap rate). And the homes being rented out by the guy are older 70’s and 80’s models and so not very likely to be moved out of the park.
How would you protect yourself as the new park owner? Or is this simply a deal killer? I’m on the fence about this one…
That’d be a huge red flag for us. The way to neutralize this problem is to have the Lonnie dealer sign long term leases with you for all his homes. Another thought is to purchase the homes from him (perhaps he provides you the financing over the next 3 - 5 years) and then you RTO them to individual owners.
While I know it is ‘not likely’ that he’d move all 25 homes, it could happen - especially if he is a cantankerous old coot perhaps more motivated by spite than practicality. If you say something wrong to him, will he view you as a ‘young whipper-snapper’ who needs to be taught a lesson? Are there parks within 10 miles to which he could move 25 mobile homes?
I would not buy this park without really nailing down this issue with the Lonnie dealer in writing. Something has got to happen - either he signs a lease with you to keep them there for, say, 5 years, or you agree in writing to buy the homes from him.
My 2 cents worth,
Another consideration is the age of the homes themselves. As Frank has stated, homes can be maintained almost indefinitely, but as rentals they are reaching the end of their economic life. Are the lot spaces big enough to fit newer homes if a home is pulled or trashed (for whatever reason)? If the lots are too small, I would pass.
If the market is strong and you are financially able to purchase replacement homes for rent or sale (consider SAFE Act), you can overcome the big wart of one owner with 25 homes. At a cap in the high teens (if you are calculating correctly) you can afford to lose some homes and the loss of income until you replace the home. However, you have to be able to replace the home and set aside funds for that. This does not seem like the kind of park and opportunity to purchase homes on the CASH program from 21st Mortgage.
One owner with over 50% of the homes is a person to be reckoned with. They will have considerable leverage and can simply refuse to comply with your community rules.
I would defiantly pass on making any offer on this community.
Robbie, I would be very wary of the Gentleman who owns 25 of the Mobile Homes.
I would try to purchase (create a contract contingent on you buying the MHP) the Mobile Homes from the Gentleman BEFORE closing on the MHP.
If that Gentleman is just renting out the Mobile Homes, he probably does not have as high a standard for Tenants as you would have.
When we first purchased our one MHP, we had a Gentleman who owned 2 Mobile Homes that he rented out. Our Gentleman said that if there was ever a problem to let him know and he would resolve the problem immediately.
Unfortunately, our Gentleman did not resolve any of the problems that we presented to him.
One of our Gentleman’s Tenants decided that urinating outside was appropriate. We brought it to our Gentleman’s attention that urinating outside was NOT acceptable to us. However, our Gentleman just thought it was funny.
Our business plan is to provide nice and affordable housing. Urinating outside is completely UNacceptable.
We ended up evicting our Gentleman’s Tenants.
Our Gentleman then moved his one MH out of the Park.
He would have moved the other MH out of the Park also but it was too old to be moved. Thus, we ended up purchasing it.
In our experience the Gentleman’s qualifications for placing Tenants in our MHP was that they were breathing. I seriously think that he got most of the Tenants by standing outside a Bail Bondsman’s office.
We wish you the very best!
Are they selling or renting the homes? If renting, the only way to do the deal would be to buy all the homes from the guy prior to closing, and budget that into your numbers. If he is selling and carrying paper, it’s a little bit better algorithm as the homes cannot leave unless his customer defaults.
This is typically at least a 50% deal killer, based on the numbers. We once bought a park like this at a foreclosure auction. When the mega-Lonnie called and threatened to pull his homes if we did not discount his rent we said “actually, your homes are not even in our budgets, because we figured you were going to pull them all out after closing” – which was true. Faced with the fact that he had no power, he chose to keep them in the park, which boosted our numbers enormously.
Great advice everyone, thanks.