Let Me Know What You Think...Be Gentle

Just found this forum while looking around for something I’ve been thinking about and want to see if I am way off base or on to something.

A little background on me first will set the stage. I’ve been building houses and doing small commercial for over 7 years. I’ve survived this market by only having one lake home sitting, one new development (main reason for this post), and a wife who has gone back full time to help bridge the gap.

Myself and another partner bought 26 acres just outside of Knoxville about 2 years ago. Underground utilities, everything provided by local utility company, 59 good size lots and a nice playground area of more than an acre. We have a really nice model home on the property (1,800 sf, 3 br, 2 ba) and cannot sell anything, or if we find a buyer, they cannot get financed. After building and dealing with all the headaches and now trying to survive in this market, I began thinking of converting this to a mobile home park several months ago. I am getting serious about it now and need some opinions.

My thinking is this: make the 58 remaining lots into 100 mobile home lots, use the model home as the clubhouse and office, and find some investors to put the trailers in for rent and/or fill it with owners who rent the lots. Clayton homes has a financing arm in town and a good friend is the manager. We’re to meet next week and discuss ways to get our name out there.

Now, let’s talk math, because this is a different animal than building houses. At 100 lots, our current note plus extra to do what we need to do would be right at $1.5 million, or about $15,000 per site. Our monthly note on the model home is $1,200 per month as well, so factor that into monthly debt service.

So, my major question is, does this sound like the way to go? I KNOW, all too well, that banks are not lending for homebuyers unless they are perfect. I also think this is just the beginning and affordable housing will grow in demand. This property is 20 minutes from Knoxville, about 2 miles from the local high school, and within a 20 mile radius there are three major retirement communities with multi-million dollar homes and golf courses.

After building houses and getting my snowball rolling, I have watched it go back to a cube of ice this year and really want a long-term viable business with decent cash flow. Any thoughts or help on this from what looks like a very knowledgeable community would be appreciated!

Thanks,

Mike in TN

It sounds like a well located property in a good city. However,

I can

Mike,

I’m with Shawn on this one. However, you could consider buying 5 y.o. repo doublewides and putting them on these lots for a better look and a lot less cash outlay than new houses. Rent them or sell them on a note.

Steve

Shawn,

Could you expound on your thoughts? Too much money and never make a profit or other reasons?

Steve,

Would this cash flow the note and the double wides? I’m pretty sure I could find people to buy the double wides and place them on our lots if we’re not able to buy them on the front end.

Thanks to both of you. I really appreciate it.

Mike

From what I read, you need income, and quick! Buying an occupied,income producing MHP is a long term investment. But a brand new start-up will provide no income (but will require a lot more investment) until many, many MHs have been sold in order that you will have some lot fee income.

Before you can hope to sell, you must first buy, tarnsport, set-up,a selection of MH’s, just like building more spec houses - it takes lots of money. Vanderbilt and 21st will require a better credit tier customer to finance your MH sales than is required to qualify for financing of your stick-built display home, so in order to get the velocity of sales high enough to get infill moving you will need to carry the paper yourself. You could only hope to convert your notes into cash with full recourse to the investor, but you have no income stream to provide funds for you to write checks to investors from, or to pay legal fees, or to repair MH and ready it for resale when the first round of deals go bad.

At $200 mo lot fee, fully occupied, with low expenses, the value of each lot would be $14400 at a 12% market cap. A 100 space MHP isn

Shawn,

Thanks again. We would increase the lots to 100 and you are right on about it taking awhile to cash flow. If opening this park is something that could be good down the road, I’m somewhat confident I can find some investors to help with carrying costs until it’s positive cash flow time. I was thinking about $300 per lot in rent, but you’re $200 number may indeed be the way to go in a new park, then up it after a couple of years.

I’m at a point where I know I cannot sell houses fast enough to make it profitable, but if this could pay off down the road as a MHP, then I am ready to make a go of it.

Do you think year 3 would be a typical “in the black” time for a new MHP?

Mike

I think most MHPs were built as a complementary business to an already established MH street dealer type sales operation - when MH loans were easy to qualify for and conventional home loans were tougher to get-Relying soley on an in park sales operation is a slow go under ideal conditions.

Determining the year that break-even can be reached is anyone guess. I would think a property such as you have described would need to be in the 70-80% occupancy range with LOW expenses in order to service the debt and pay the bills.

Mike you are getting lots of great advise from Shawn and Dr B.

I will gladly send you a 3 year operating statement for a 150 space developement community I own in Burlington NC. You can then see the capital required to fill a new community. Does your area have the demographic need to warrant another community. Check your area vacancy

You are about to take on a very capital intensive venture.

Let me know

Mike,

I’m curious, what makes you “…pretty sure I could find people to buy the double wides and place them on our lots if we’re not able to buy them on the front end.”

The mobile home industry has seen significant decline since 1998.

By Oct. 2009 sales were at 42.9 thousand. That is off 37% from 2008 (prorated for 10 mos.).

2008 is down 14.4% from 2007 (95.7 thousand units).

2008 is down 37% from 2003 (130.8 thousand units)

2008 is down 67% from 2000 (250.4 thousand units)

2008 is down 78% from 1998 (373.1 thousand units)

The last time shipments were higher than in 1998 was in 1973!

Shipments have never been lower than 90.2 (1961) since 1959.

Shipments to TN are down 48% since 2003. Worse than the national avg.!

As you can see from the data, likelihood of finding 100, 80 or even 25 people to buy a DW or SW and put it on your lot are slim.

To me, the more important question is: Are there enough jobs to create demand for housing? Any housing. What is the economic strength of the area? You have already experienced that housing is significantly off. If you look at the economic strength of the Knoxville Metro area (Bount, Knox, Loudon, Anderson, and Union counties) by one economic outfit, it has slipped from 58th out of 366 metro areas to 74th. Granted, it has not slipped as much as Chattanooga, Asheville, and Memphis, but is down 16 places as compared to Madison WI, which is up 14. Cincinnati has dropped 4 places and Nashville risen three. (http://www.policom.com).

Yes, the latter are much larger areas BUT that is partly my point, larger areas tend to be more economically stable and less dependent on one industry. Detroit is an exception.

I also think it will take a little longer (2-3 yrs.) for people to “get it” that the no-money-down $250K houses are gone. It will take them a while to “get it” that their FICO score means squat, banks are actually looking at their ability to pay!

So in conclusion, you are wisely asking questions before plowing ahead. Pay heed to all the answers, Mike, do more research and formulate a plan. Move forward with that plan and be prepared to change it midstream.

Steve

Steve,

My comment on finding people to put homes on the lots is referencing investors who would buy them and place them on the lots for rent/own. I assume that would be a better idea than waiting for those who can qualify to show up. (Same problem with houses right now!)

On your numbers of MH sales I have a question. Do you think this is because of a move away from them, or a move towards housing when it was easy to get into a house? So, if it’s the latter, do you expect a renewed interest in MH’s and/or cheap housing in general? I think it ties in with your comment about it being 2-3 more years before people “get it.” Option ARMS are starting to come due and I think we’ll have more foreclosures in the area and people looking for a place to live.

Part of my search for information on this is due to a sign I put out about 1 month ago at the property. Sign says “Lease/Option”, “Homes Under $1,000 per month” and I have probably met over 10 people at the property and talked with over 30 and the recurring theme is “credit not good, can afford $600 to $1,000 and small down payment”. With the property being so close to the high school and downtown, I started thinking about MHP.

So, even if this were to take 2-3 years to get to positive cash flow, IF it’s something that will be a good investment years down the road, then I want to proceed. Otherwise, I want to find a buyer for the property as it sits and figure out what to do next. Whatever that is, I know I want it to be continuing cash flow and NOT build and sell and then worry about being a landlord anyway to someone who has bought the place.

Real fast, getting back to your comment about employment. This area is certainly hurting, but full of lower to low middle income people that are likely to start losing their houses in the coming two years. If the economy gets worse, and I think it will, then either all bets are off for all of us, or MH’s for rent may make a big comeback. Just my thoughts on that.

Thanks again,

Mike

Rick,

That’s very generous and yes, I would love to take you up on that offer. On the capital side, I would be looking at a $1.5 note right off the top, plus the expenses of getting it to full capacity. So, looking at that will certainly be helpful.

Like I have said before, if it seems worth it in the long run, I will claw and scratch to get to the other side. Luckily my wife has a good job and should for awhile, or until national health care kicks in! So, I could partner up with some people and carry this thing, I think, until it’s in the black.

I’m just tired of worrying about debt service on a project that will likely never return any money, not to mention dealing with banks who are so scared right now they probably wouldn’t even lend money to someone working the oldest profession in the world!

Thanks for your time and offer Rick.

Mike

Mike,

I agree, finding investors to place the homes is a better strategy.

If MoHo sales dropped because of easy SFH financing, then it would be improving for 2008-2009. Instead it has hit a 50-year low!

It is hard to know where this is going. A colleague of mine sold off his seven parks 3 yrs ago because he couldn’t tell if they were going the way of Drive-In movies or were going to hit a low and come back.

Mike, what is the demand for retiree housing in your area? Perhaps you can sell the homes, rent and maintain the lots like a 55+ MHP.

BTW if you could find out more info on why this park is for sale, http://www.mobilehomeparkstore.com/p4sale/knoxville-tn-120.htm , you might get a better picture of the viability of your future park.

Pardon my pessimism, but unless you find fast-moving independent investors willing to buy and sell the SWs or DWs on your land, I believe going from an empty park to cashflowing will take more than 3 yrs. I would predict 5.

P.S. have you checked with the County to see if they will even approve a MHP or is this in an area of no zoning?

I still believe you would be better off placing slightly used DWs on these sites. Almost every buyer/renter prefers a DW to SW. You would have more exit strategies. 1) rent home and land. 2) sell home, rent land, 3)Sell home and land (financing easier than SW). 4) create 55+ community with indiv. deeded lots 5) economy returns, sell off homes, build SFHs as originally planned.

Steve

Mike

Send me your personal e-mail address

Rick Ewens

rewens@charter.net

Steve / Bernd / and all who post

The facts and figures (meat and potato) of your posts are fantastic. I believe anyone wanting to become a cash flow real estate investor should become a true student of the game and learn how to use economic and historical data. The road map of successes and failures is available for our viewing in high tech 3D imaging almost. We live in this phenomenal era where data for success is so readily available to those that take the time to find it and use it in formulating action plans, business models and ultimate decision-making. I will post some of the web sites I use to compile data. I will keep it simple. We should work hard at avoiding the mistakes of the past and not let history repeat itself in regards to our own investment portfolios. No speculation and no square pegs in round holes just fact based investing is what I am talking about. Cash / Positive Cash Flow is King.

The title of the real estate conference I attended at UCLA was

Great Opportunities Or Falling Knife

The BILLIONAIRES said there is many falling knives out there proceed with caution.

Consumer Confidence

http://www.conference-board.org/economics/consumerConfidence.cfm

Corporate Profits

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Economic Indicators

www.economicindicators.gov

Exports

http://trade.gov/index.asp

Gross Domestic Product

http://www.bea.gov/national/index.htm#gdp

Job Growth

http://www.bls.gov/

Personal Savings Rate

http://www.bea.gov/regional/index.htm

Small Business hiring

http://www.nfib.com/research-foundation/

Some of these sites give region specific current information.

Do you want to make millions? Figure out when this formula is going to happen and where.

GDP + Consumer Confidence + Savings Rate + Job Growth = Recovery

Post Edited (12-07-09 17:18)

Wonderful,

Thanks Rick.

Steve

Steve,

A few answers for you. 1) Zoning in this city for R1 covers mobile homes. We just have to go back and let them know about it and re-plat. If they argue, I’m taking an attorney and threatining to sue and also let them know it’s vacant land, likely foreclosed on if we don’t do this. 2) I’m not sure about 55+ demand, but you’re the second person that has mentioned this. What would it look like for DW’s and this model? More lot rent? Fewer problems? Longer to fill park? 3) Don’t worry about your pessimism. It cannot possibly run deeper than mine at this point, and I’m rarely pessimistic. Everyone and their brother has their hand out around me right now and I can’t find one person with their hand out who has ever tried to do anything on their own!

Oh, one other thing Steve. What do you think about the price on the park for sale? That is about 10 miles from where I live and I might look them up and go talk to them. If it’s positive cash flow at that price, maybe I could strike a deal to learn from the seller and use this park to sustain the other one?

Rick,

You and I have had some exchanges off this board I want to say Thank you. Rick has been very generous and helpful. On your post above with statistics: It’s bad and I think will get worse. How do we interpret the data? As if we are at the bottom and run against the herd, or think it will get really bad? Either way, shouldn’t we (being all of us) move ahead like it will get better, because if it does, GREAT!, and if it doesn’t, Oh boy…we’re all in a mess. Then, we should all be buying farmland and growing our own food!

Thanks again to all. I have a meeting today with an owner in town who can possibly shed some light on the local market and give an opinion on whether we should move forward.

Post Edited (12-09-09 06:52)

Shawn

Will you send me your phone # I have a question about the social media article.

rewens@charter.net

573-467-3100

Hey Everyone,

I’m back from the GMHA show in GA and have a few questions I didn’t want to ask there because they were a bit off topic.

Anyone have any statistics or ideas about what we could expect on filling our new park. Something like, 2 new per month, or 15-20 per year? Just wondering if there is a good way to gauge this. The broker at the show mentioned a national 12% vacancy rate right now. I’m going to check local parks and see how they look.

Mike