I am evaluating a MHP and during my analysis of rent roll (Only one month Rent roll was shared), i found that 20% of the homes are delaying the rents. What are the risks involved in this? Thanks in advance for your advice.
When you buy a park, you institute “no pay/no stay” and evict those who can’t or won’t pay the rent. If there are 20% of the tenants not paying on time, that would imply that you are going to have to file eviction on 20% of the tenant base. Once served probably half will pay, but you may be needing to evict 10% of the tenants. As a result, you are going to have to take those homes through abandonment, remodel them, rent them, and incur a bunch of costs. Meanwhile, you’re revenue will drop 10% until you get the job done. So you have to build a bunch of capital cost into your budget for the homes, as well as a buffer to not hit your revenue numbers for a period of months.The bottom line: the price of the park just went down significantly with the revelation that 20% of the tenants don’t pay.
I call this phenomenon the ‘J’ curve. I call it that not because it is the first letter of my first name ;), but rather because this is what your revenues look like. They go down right when you purchase the park and enforce NPNS, then they go way up once you run the property properly. The bigger the difference between how the current MHP owner runs the park and how you will run the park, the bigger the J curve. We purchased a park where the previous owner did not do background checks and never took security deposits. They seemed proud that the park filled by word-of-mouth, but obviously they were inadvertently filtering for the worst element in society - people that do not want their background checked, and that can not come up with a $450 security deposit.We experienced 50% tenant turnover in the first 6 months in that park (this was a higher percentage than the percentage of rents collected late). Less than half that was from evictions, most of the turnover was from people voluntarily moving out once we enforced health and safety rules and regulations (people who have not had their backgrounds checked are more likely to have cars up on blocks, have pitt bull dogs, etc.).Now, prior to purchasing the property, we had done our homework on the local economy (very strong) and had run test ads that pulled well (5/day), so we got those homes re-filled relatively quickly. Despite the high turnover (spread out over 6 months) we were never more than 25% vacant in any single month, and we were generally turning the homes over on Rent Credit contracts, so we were taking $1,000 - $2,000 down as the homes re-filled, which generally made up for a month or two’s missed rent.So ‘all is good’ now, and we have mostly homeowners in that park. But you need to be prepared to infill homes quickly when there is a big difference between the way the current park owners run the park, and the way you’ll run the park. You’ll need to run ads on CraigsList and in the local large newspaper. Have those ads list your phone number and your website. Your website needs to have a ‘Homes Available’ page that lists photos inside and out of each home, rent and RC pricing, viewing hours, etc.Once you survive that initial period of tumult, you’ll experience (relatively) smooth sailing in your new management direction. You will have helped deserving families own their own homes in your community, homes will be better maintained, and health and safety issues will have been addressed.To your continued success,-jl-P.S. While the previous owners’ poor management of this property lead to the high turnover and ‘J’ curve in the revenues, it did also present other operational upsides. For instance, the previous owners’ poor management also meant they were not repairing water leaks or billing residents for water usage. We invested around $5,000 to fix water leaks and install water meters. The result was that our net water bill went to $0, and we improved the annual profitability of the park $19,000 by no longer wasting water and encouraging residents to conserve. When expenses drop and stay low, I call that the ‘L’ curve. Gads, that’s the first letter of my last name.
Thanks Jeff for the excellent advice. I am still on the learning curve and looking to close my first MHP. Thanks for all your encouragement.