As the law of land is now Dodd-Frank and compliance with its
income verification, cash reserves, ect make selling homes and carrying the
paper a none too appealing proposition; Frank has written articles that he has
shifted to a home rental mode of operation.
With Cash sales, bank financed, and legacy lending programs being
unaffected, how rapidly are others seeing the conversion take place? What
changes to your operations/staffing do you anticipate? How do you think this
will affect your MHP profitability?
As the law of land is now Dodd-Frank and compliance with its
Great question for us newbies, I was reviewing previous posts for this subject. Maybe frank can point us to the article
I used to do ‘lonnie deals’ and still have 50ish on my books. After the laws changed I shifted to a true lease / option. My process looks much like that of leasing a car- with the option to purchase it at the end of the lease. The big key for us is we do not create a security agreement. That is a trigger. So if we have a home, it might go like this…1980 3 bed / 2 bath singlewide$1000 to enter into the lease$250 / month- on a slightly modified NNN lease (most repairs and improvements are covered by the lessee)The term of the lease might be 2 yearsOption to purchase- $5,000We will carry the financing if they pay $1,000 down and make payments of $250 / month- 7% interestWe do this on a personal promissory noteWe can choose not to finance the $5,000 at the end of the term, and we might modify the terms based on how the buyer was during the lease part of the term. If they choose not to purchase the home the lease becomes a regular month to month lease, though if they buyer remained current, we would honor the option at a later time. I do not create stepped options at the end of each yearly benchmark, and the price does not go down if you wait 5 years to pull the trigger on the option. We have noticed a uptick on interested parties, as now we advertise in both the home sales, and home rental parts of craigslist. One other note- we have moved away from individual showings and gone to an open house process. So once, maybe twice a week we hold the home(s) open for 2-3 hours. If someone can not make the open house, working etc… we will still show the homes one off…
My understanding was that a lease/option could be viewed as a disguised mortgage and could fall under a safe act violation. How is what you do when leasing avoiding that disguised mortgage trigger?
Our lease is a real lease- it does not have any effect on the price of the home. So none of the payment goes to the price of the home. At the end of the lease they can choose to purchase the home. The home price is not like $100… it is more like $5,000 or $9,000 So while the home is priced less than if it was just finished, it is not a give away.
Also, personal unsecured notes should not fall under SAFE, I believe. (Although I do not have any more knowledge than what I heard at MHI last year).Brandon@Sandell
Correct- it is the security agreement that triggers the safe act. One of the triggers…
There are a million different ideas on how to do this. But I would follow the lead of SUN (the second largest REIT) which has adopted a “Rent/Credit” system, in which you rent the home and the tenant builds “credits” that equate to 50% of the home rent portion of the rent (not lot rent), which they can use, same as cash, to buy the home at any time – or not buy the home, at their option. We pay for any repair over $100, but they pay for all repairs under $100, We did not invent this concept, SUN apparently did. We do not do any type of “option”. It’s just a straight rental agreement that also allows them gain credits as a method of tenant retention (just like Southwest Airlines), and also allows them to buy the home for cash and/or credits if they like. My understanding of SAFE is that you are in danger if you use the terms (or the actions) of “option” or “option money”. You charge a first and last month’s rent plus a normal security deposit on the condition of the home. SAFE outlaws anything other than renting and selling for cash. Consult Google and your local MHA for factual data on your state.
How is that home repair clause shaping up so far? Is it typical for residents striving to get enough credits to have a debt free home? Have retention rates / length of stay been affected?
Thank you for the clarity Jim. Makes perfect sense.
We provide our tenants 100% credit towards the purchase of their home (of the home rent portion). We also guarantee the purchase price up front so there are no surprises for the resident.Anyone else made changes to the ‘standard’ Rent Credit agreement?-jl-
After reading SUN policy of a 25% credit, For my inventory a $75-$85 rent credit monthly on a $16k -$22k MH raises apprehension that the carrot is too far away for the resident to mentally “take ownership.” My guess is that SUN also credits 25% of lot fee too…Also, the credits that are transferable to any home in inventory that others on this forum have spoke of seems likely to have the unintended consequence of encouraging turnover; adding considerable refurb expenses and vacancy.Jefferson, how do you keep your books with respect to the redeemable rent credits?
explain your thinking on this from the financial side? So as I understand what
you are saying an example would look like this: lot rent of $250, MH rent $300.
They pay a total of $550/mo. Of the $300, $150 goes into a perpetual credit and
accumulates each month. So down the road lets say, 5 years they will have a
$9000 credit to buy this home or another in the park?It seems that out of the $300, you have to get the cost of the purchase of the home back
as well as any expenses above $100. Do you just try to break even here? Do
you do this with any of the legacy homes that are in the $20k range?
So from the
park owners perspective is the main goal just to keep the lots full?
First of all, yes, the sole goal is to get the lots full and NOT own the homes – we want the resident to be a “stakeholder” in the business and for us just to rent land. But a vacant lot is a vacant lot unless you bring in a home.Your numbers are not far off. But here’s another way to look at it. If I don’t bring in a home, the lot rent is -0-. If I bring in a home, the total “rent” is $550 in your example. $550 x 12 = $6,600, which means you pay off that home in 3 years if you apply every penny to the home. Remember that how you apply the rent internally is all conceptual allocation. When you have an existing vacant home on a lot, and the lot rent is $300 per month, I can elect to give it away for a dollar and get my $300 rent, or rent the home too and try to capture that extra $250, which is diminished by property tax, insurance, repair and maintenance, sales cost,etc. So there is OPPORTUNITY COST to consider between renting the home or merely giving it away. However, when you bring in a home, there’s no opportunity cost, because the rent will sit idle for 100 years if you don’t bring in a home, and a vacant lot has zero income.One more thing I want to point out. We have had zero cases to date of the resident wanting to apply credits towards any home other than the one they live in. I think the reason is that it’s a big pain to move, and they know the condition of their own home but don’t know the history of the home they might jump to. We were worried about the same concept initially, but are now confident it’s a non-issue.
I also forgot to point out that the % of rent applied to the credit is completely open to your own discretion. We use 50%, not 25%. Others use as much as 100%. So you can tailor that to your market, no different than hotels do with their credit systems. I recently called Holiday Inn to see how many points I had (I always stay at Holiday Inn Express on the road and had never bothered to phone in to see my point total). After all those years, I had only enough points to qualify for one room. So they must be using a 1% of cost points system. Why? I guess that Holiday Inn executives think that people will stay at Holiday Inn because it’s the safe choice when you are on the road and there’s nowhere else to go besides the Bates Motel – and they’re right. However, many of the luxury chains give you a far higher % because they know how competitive it is. So feel free to customize based on your own circumstances. But talk to your state MHA first, regardless. Again, this is all speculation without case law.