Infill - new vs used home proportions

Hi MHP Investors,

When you are adding homes for infill purposes what percentage of new vs used homes do you find end up filling your lots?

I would guess this could vary from market to market, how much effort you put into finding and rehabbing used homes, market ability to support new home purchases, and so on.

I ask because when I am modeling a 5 year projection the proportion of new vs used homes impacts operating performance. For example a new home through 21st century mortgage would not require any out of pocket cash, where as a used home less than $10K would not qualify under 21st century mortgage.

If I had big infill (tough these days I hear with limited home supply) it could require much more out of pocket expense if I have used homes. Or for example if I financed used home purchases to bring into the park with a line of credit I would need to model the debt service for used homes and how that impacts cashflow etc. But would not have any debt service if it was a new home. So what do you use as plug numbers to model before hand? 50/50 used vs new? 90/10?

I assume going in you wouldn’t know exactly how many used homes you could find to buy, but perhaps you have a a good enough idea what’s out there based on your experience that you could model your infill over time with some solid estimates.

Thanks for any insight you can provide.



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How much are homes selling for in your market? If you can sell a new home for cash and break even that’s the only way to go (in my opinion). If you can’t break even I guess the math changes and you have to go used— it’s just so much more legwork in my experience.

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What would happen if you were able to acquire the used home for $10K, move it for $5K, fix it for $5K, and sell it for $25k-$30k? If you can sell for above $20K, my understanding is you can get a third party like 21st to provide a mortgage. If so, you can at least get that capital back. I’m sure there are people who recycle capital, as in, take $50K and buy/fix/sell two homes, get the capital back, and do it again. I wouldn’t do it that way personally, but that actually cuts down on your cash needs if you can pull it off. I believe doing it this way is too risky, because if you can’t actually sell the homes, your whole infill plan goes downhill.

Also, as it relates to underwriting used homes vs new homes on a proforma - keep this saying in mind - “there have never been more lies written, than in excel.” As someone who works in commercial real estate for my day job, I’ve dealt with this issue of trying to underwrite realistically, but also within the ‘market’ because we need to win deals to grow the firm. There are two tacts here-you can underwrite how the ‘market’ underwrites, and assumes a certain amount of used homes vs new homes to keep your costs in check. This means you pretty much know from the start it’s not real, and you’ll “duke it out” when the time comes - or just miss budget and need to put more money in the deal. In my opinion, unless you have the access to capital, this is not very smart. It may also crush your returns, to the point your wouldn’t have done the deal. Or, you can underwrite what you believe will be realistic. Hopefully, the two actually match. However, they don’t always match. If you underwrite realistically, and you do win deals, hopefully you are right, and it turns out to be fruitful. But that’s why it’s called investing - we take our best guesses and try to grow our capital.

Might it also be helpful to look at these deals assuming infill, and no infill. And if the deal works with no infill, it should work with infill as well. To do this, on your proforma assuming no infill, when you model your sale in 5 years, assume you pay yourself back the capital you originally set aside to purchase homes. So effectively, you go into the deal assuming you’ll need $200K to purchase homes, on your ‘no infill’ model, you escrow that money upfront, but it never gets used, and than on sale, you assume you get the money back. This is very similar to if you need to escrow money for taxes/insurance with your lender, and at the end of your investment period, when you sell, you get the money back, and so you show it in your proforma.

Thanks @westewart. I don’t own a park yet and have no experience, but that’s what I thought -that the effort to buy used homes, fix them up is greater than bringing in a new home through 21st century mortgage program. But - I hear it’s difficult to get new homes now.

@JD - you touched on the root of the question - which is about attempting to model your proforma as accurate as possible and how you could handle uncertainty in your modeling.

Agree on going into the deal looking at infill vs no infill or even new vs used and understanding the range of outcomes. I think it also makes sense for my first deal to perhaps not take on a huge infill project. Get my feet wet and on the next deal have more confidence in my infill modeling because I have done it. Your comments resonated regarding “that’s why we call it investing - take our best guesses…”.

Was hoping to find an investor with experience that may say something like “we always fill new homes because it’s easier”. Or “We always aim for new homes, but sometimes you have to find used homes especially given the market, so we underwrite assuming 50/50 because of new home shortage.” If any investors have input on what they do I would welcome your thoughts.

@JD - why is recycling your capital too risky in your opinion? How would you do it instead?

@Travis_H, regarding why it’s risky to not have all the capital. I’m curious to hear what the veterans on here have to say, as I haven’t run into this issue yet. With that said, here’s the risk from my point of view:

You buy a park with 40 TOH and 50 lots. You’re going to go buy used homes, move them, set them, renovate them. Each home, on average, will cost you $15K, to do the above. Total cost of infill will be $150K. You can 100% bring $30K extra to the deal and do two homes at a time. Sell the homes, get the money back, and do it again. But what happens if you find out that you can only sell these homes for $10K each. Not only will you take a loss on the homes, but instead of getting your $30K back, you only get $20K back. Well now you can only infill 1 home at a time for $15K, but on the next sale, you get $10K back, but can’t go out and buy a home again without either: A) using cash flow from the park or B) taking more capital out of your pocket to infill homes. So the risk is you run into being undercapitalized. You thought you would be able to infill 10 homes, 2 at a time, but it turns out you can only infill 3 homes until you put more money in the deal or use cash flow from the park.

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This is not possible. You can’t get the capital back from a sale in a big chunk at the time of sale if you’re buying $15k clunkers that can’t be outside financed. Who do you think wants a $15k-$30k home and is paying cash?

Thank you, @Brandon . I appreciate the insight. Assuming you sell that $15,000 home on a lease option / rent credit, I would be curious to hear how you look at return of capital on this type of transaction?

Assuming $15,000 lease option / rent credit over 48 months, that’s $312.5 per month, plus lot rent. But if the common thread which I hear all the time is that POH are not profitable because of R&M, taxes, and insurance. Are lease option homes / rent credit homes profitable? Or are they money losers as well? And if so, do you actually ever get that capital back via cash, and not just appreciation in lot value?

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My opinion is to go new if the market can support it. Used homes are very challenging to fix and after you dump a ton of cash into them, they are still old clunkers. A brand new home works from day one without the management headache of finding a bunch of contractors to properly fix it, do shoddy work, then fix it again.

Thanks all.

@mPark - is there any way you can determine before you buy a park what the market would support? I took the bootcamp and if I recall someone asked Frank Rolfe this question and he said that unless you already familiar with the market, you may not know. And for that reason you wouldn’t start by buying a bunch of homes at once. You would buy one - see how it sold and then do another one and so forth and fill over time. If after your first new home you find nobody can qualify, or it takes you longer than expected to sell you would switch gears and go with a lower priced model, perhaps used, etc. A bit of trail and error to see what works.

Obviously a test ad would help you understand the demand (number of phone calls) but you won’t know the credit score or income of the callers. Just that they were interested.

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First of all, I’ve got a lending license for this exact reason. It’s not a huge deal but it’s regulated and there’s an exam and required CE. I’ll compare the non mortgage case at the end.

In the mortgage there’s some return of principal and some interest rate. But there’s some default too. And there’s expenses. Figure it’s half interest and half principal, right?

But of that half that’s interest, you get to pay all your expenses. And you’re definitely going to have losses on default. It’s the same as any other home that’s flipped when someone moves out, purchased or rented.

For a mortgage’d home with somebody living in it, the expenses of collecting the mortgage payments are nil. (Stamps, admin overhead, etc). Until they stop paying, of course.

If you figure the mortgage is about the lot rent 50/50, say $300 lot rent $300 mortgage payment and of that $300 mortgage payment $150 is principal and $150 is interest or profit.

For simplicity’s sake, you could just consider a rent credit of 25% of the rent paid.

In both cases, tenants are more or less tethered to their homes by the equity they’re building up. Of course if they don’t maintain things, the home value will decrease faster than the work is just paid down and their equity will vanish. But at least they’ve got some skin in the game, or so you might think that way.

Compare now to renting: the only thing that changes is that the “stake” in the home held by the tenant is virtually nil.

And either case, the return of capital and profit depend heavily on whether the tenant stays or doesn’t stay, maintains or doesn’t maintain, pays or doesn’t pay, and damages on move out more or less or never or not at all.

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Thank you, @Brandon I appreciate the insight.