What I consider one of my primary barriers to owning my very own mobile home park is a lack of capital. Without capital I have no downpayment and if an unexpected problem surfaces I have no money to make the necessary fixes.
A new-to-me concept that has sprung to my attention is the leasing of a mobile home park (A kind of Rent-to-Own for MH Parks). I could lease until I earned an adaquate down-payment and then proceed with a more traditional purchase.
This could potentially get me around my down-payment problem and the perception that I don’t have enough “skin” in the game.
My questions are:
How common are leasing options likely to be? I have not noticed an over-abundance of advertising for them, but maybe it’s something I have to offer myself.
Assuming adaquate due-diligence ala Frank&Daves Due Diligence Manual how likely is it that I could experience a catastrophic failure of some sort that would require immeadiate attention before my budget for capital improvements would be sufficient to cover it? Five percent is the top tier for budgeting for capital improvements according to the manual so I figure that should be my starting place until I have a healthy emergency fund. I realize this may be an impossible question to answer… let me ask it another way…
If something ~Really~ bad happened that needed attention at once (Like a sewer line rupturing) how could I raise the money to fix it? Must it come out-of-pocket? If so, how much money should I have as an emergency fund before considering taking on the responsibilities of a MH Park? I would hate to pour my time and energy into something just to have a sudden maintainance issue bring me to ruin.
One other question, prior to the realization that leasing was even an option, I’ve been limiting the scope of my reseach to only those parks which I felt I could reasonably make an offer on. Think very small, very ugly, turn-a-round parks in very small towns. All together not very attractive propositions.
Now I’m thinking with a standard 10% Cap rate I could either get in bed with an inexpensive park and after ten years own an inexpensive park. Or I could get involved with a higher quality park and after the same ten year period have a substantially higher quality investment.
Turn-a-round parks do not frighten me… make me nervous? Yes. Frighten me? No. I intend to make this my career so I can afford to put my time into it… as of yet, however, I can’t afford to put my money into it. How viable does any of this sound? Are there any major flaws that I am not considering? If not, what price range should I be aiming for in a Park? I want something large enough that I can devote my full attention to and could support a modest lifestyle as I pay it off. Am I reaching too high?
You can not afford ‘surprises.’ So focus on good-quality parks. That means 1) city water, and 2) city sewer. You may need to buy a small park, but don’t sacrifice buying city infrastructure. Because, yes, in the event of a major ‘whoopsie,’ you do have to pay for it. Cities have been known to shut down parks that have recurrent sewage and other health problems. So buying a park on city water and city sewer are a must. I’d also look to buy in decent-sized metros - 50,000+. Once you’ve been through boot camp and have built your network, you’ll be comfortable buying ‘there’ when you live ‘here’ and manage from afar.And lease-to-own is always the best way to get into the park business. I’ve just never met a seller that was willing to sell their park on those terms.Good luck,-jl-
Jefferson has his way and that is fine–I have never bought a park in the city, or had city sewerage or city zoning. Have always bought exceptional high demand semi-rural properties and as noted my first park of 225 sites with $10,000 down was a start with me being the mule. I was not a city boy an KNEW from my farm experience how to fix anything and with college knew common sense vr. text book head knowledge. Some buyers with no prior park experience can do fine with a park with septic’s and wells depending on prior experience. I believe Frank stated in a park they bought in Springfield, Mo got caught with needing a new well and than spent $40,000 on a new well thus he had a bad experience. We spent $5,000 just recently on a new DEQ approval well not far from Springfield. From EXPERIENCE at age 25 understood Geology and the yield of a water aquifer and BEFORE buying talking with an well driller knew the pluses and minus. It is all about have smarter people with experience around you and then choosing your plan of action. Our cost for water and septic per site is under $1.75 per site per month–that is being efficient, period.
Jefferson: H’yup, that’s what I was afraid you’d say. I am extremely interested in having as much city owned and operated utilities as I can. Keeps costs low and takes worries off my mind. I did do some research on the costs of starting my own park (Prohibitive) and running septic lines. The lowest numbers that were being tossed around was enough to convince me that septic lines are not for the man on a budget.I have been told, though, that in business-- ALL things are negotiable. As a buyer, I am primarily inundated with strategies to talk a seller down off of his asking price and negotiate the best price I can. I wonder, though, if what I really should be doing is negotiating financing-- even if it comes at a premium. By being willing to accept a lower Capitalization rate I wonder if I can make headway on financing… considering it objectively-- if I continue on my same trajectory doing as I have been, on a good year I may be able to save maybe $2,500. However, if I could arrange some form of acceptable financing on let’s say a $100,000 dollar value property at even a %5 capitalization rate then I’ve effectively doubled my progress for the year… More, if I can manage the property better than the former owner.I would hope I could negotiate better terms than that, but that’s essentially the idea. While it pains me to over pay, the cost of staying out of the game seems higher.Do you think sellers would be open to this kind of negotiation? It strikes me that it doesn’t address the fundamental issue at any sellers heart (e.g. Will I pay?) however it does sweeten the risk/reward ratio. Is this kind of negotiation even a good idea? Carl: I can appreciate your experiences with septic. Were it not for the fact that ANY problems what-so-ever with such a system would be just the nudge to send me toppling over a financial cliff I could afford to be a bit more caviler about my attitude toward wells and septic lines. Jefferson is right though, I am not in a position to absorb the costs of surprises. Any surprises I do face I need to be able to defer the cost of for a while as the park generates the funds to pay for repairs. Septic is vital. Well water is vital. I would not have the luxury of waiting-- If a problem occurred within the first two years I’d be done for… maybe even longer.Also, I am a city boy. I have neither your skills or confidence that I can fix any problems that arise and I KNOW I don’t have the tools or equipment. Not that I am unwilling to learn-- just that these were not the emphasized skills growing up.
Aris, from your comments you need experience and money–there is a way to do it and talking will not give you either.
Carl, I disagree. Talking and listening seem to be working just fine for him. That’s a good way to get a foundation. Action first is a weak game plan. He seems to be on the right track. The thing you have going for you is honestly… a blown septic system means what? Losing the property? Bankruptcy? Decidedly bad outcomes but the downside is not the end of the world, with a low net worth you aren’t losing much. If I had less to lose I’d be more willing to take risks, for instance. So, yes, you have two options. You can work at hitting the ground and finding/wholesaling that good deal to someone else and take a cut or get into your own smaller deal. Either way it seems to me you’re thinking a long the right lines.
To set the record straight, I did not spend $40,000 putting in a new well in Springfield, Missouri – I spent $40,000 to connect the park to city water when the existing well failed.Also, to set the record straight, we have done a number of “Master Lease with Option” deals, having just closed on the option purchase of one of them a few months ago. All of these deals – including zero down deals – require two things: 1) an owner who is sick and tired of their property and just wants out of the daily operations for a number of reasons (sickness, depression, etc.) and 2) great bonding with the seller such that they trust and believe in the potential buyer. These deals are not advertised as such – you have to create them.The best thing that anyone can do in this business is to talk to as many sellers and kick as many tires as you can. It’s no different than the show “Antique Pickers” – if you go in enough barns and sheds you’ll find a great deal. You cannot buy good parks like you buy on ebay, in the sterility of your home on a laptop. You have to make calls, send postcards, talk to every broker, scour every listing – go in as many barns and sheds as you can!
The last two paragraphs of what Frank says above are VERY IMPORTANT and offer tremendous opportunities for ALL buyers of parks. The times is coming when 90% of all park owner will hold a strong hand and the (sickness, depression, etc) will disappear from the market. The owners will be very wise owners that plan their strategies like a doctor performs a surgery and the recovery. They will experiment to the degree that the business is energy efficient and keep trying ways to increase their net and yet have happy residents so social media gives high marks. They will not have a love affair with their property but will use new technology as a science that is evolving. !0 to 20 operators will own over 50% of the market in 7 years–times are changing do not become comfortable–adapt or be a relic.
Frank - just curious- how long are your lease periods on your Lease/Option deals? We are selling one of our parks with sort of this model in mind and are thinking 6 months to allow the buyer to “test drive” the property, then do the sale transaction?As far as city utilities vs private, we have some of both and while the city owned are overall less headaches, they are not necessarily cheaper to operate when you consider all the factors. For example, if you are submetering city water and you have a major leak in your lines, you could end up with a very large water bill. If you are on well water that same amount of lost water will not cost you nearly as much. The real advantage of city water is if it is direct billed to each resident. There can be lost water in your system (all systems have losses to some extent) and the provider does not really know it unless the leaks are really obvious.
Bret,Our Master Lease with Option deals are typically 3 to 5 year option periods. Bear in mind that these are extremely screwed up parks on the front end – it’s not a “test drive” but more like a “test pilot” trying to get the 'Spruce Goose off the ground.
When contemplating a master lease what percentage of gross would be used for payment to the owner? any ideas or examples? Thanks for all the help
I believe I read in another post that there may be some tax benifits for the park owner when using a masterlease type of structure. What might some of those benifits be? Thanks for all the help
The owner of the MHP would get heavily taxed if he collected the entire amount in a lump sum. It would show as a huge profit for the year therefore he would get taxed significantly on the sale. He would have written off most of the expenses already. The only way he could get out of it is he would put the money into another investment or put it into escrow and only collect an x amount per year to fall below certain tax table thresholds. He could also accept payments from a buyer and also earn interest on those payments.
So we work to make great investments and the reward is taxes–what an incentive. Our government with its present appetite may need to have 50% capital gains to sustain the freeloader’s votes and than the hard working people just keep working for the non-producers so maybe we need to have a real discussion of HOW to keep the government out of our underwear. 1031’s do end and taxes will be paid, maybe we need to be like GE with all its profits paid no direct taxes to our government or maybe even Mr. Buffet who pays less than his secretaries. The bottom line is it does not matter how much you make-- but how much do you keep.