Park Financed Homes

mobile home university
1

I’m looking at a 58 space park (54 occupied at $200 - he pays sewer & water) that has been somewhat run down. The owner is older and is looking to get out. He’s had the park for about 13 years. manager is weak, maintenance poor, and when homes leave, he buys new homes. He thinks it upgrades the park, and it does. but park is not maintained well. weeds, junk cars, junk on decks yard, etc.

Here’s my question. He has financed 11 new homes to buyers over past few years. many are $30-$45K homes. Has a new $45K moving in this week. Many homes have 10 to 20 years left on the mortgage. He just buys new homes and rolls the debt in with his park debt due to his banking relationship. He is currently valuing this note income at about $310K, and feels this is very safe investment and wants it included in any park sale. But, he won’t keep the homes, I asked.

Since he only gets about $1500-$2000 down, he is taking the risk.

It looks like the park doesn’t make much money due to his home purchases but the financials are pretty vague. Also, I’m just getting started on this deal so I don’t have all info yet.

My question is what strategies do I use to get this park bought when he has this home situation.

2

The basic formula for the value of the lots at a 10% cap rate is 54 x $200 x 12 x .6 x 10 = $777,600. The value of the homes is much more complex.

When you buy a new home, like a new car, the value goes down the second it leaves the factory. The only thing that matters is what the re-sale value is, not the price he paid. Can you really get $45,000 for a mobile home in a park like you are describing? Probably not. On top of that, you will not be able to get any bank financing on the homes at all (he only has because of his banking relationship – the bank probably looks at the home loans as unsecured debt that they hope will be covered by the park’s value).

If you put a much lower valuation on the homes, so that you are 100% covered in being able to get back your investment in them, the real value will need a discount on what the homes actually sell for (maybe 25% off what your diligence shows to be their actual value). But even if you reach an agreement on the value, you still have a problem with how the homes get financed. If the park is worth $777,000, and you put down 20%, then that’s roughly $150,000. But if you pay $310,000 cash for the homes, you’ll be in that park at $460,000 down on a $777,000 park, which is not attractive leverage at all. He has basically ruined the economics by not being a good home shopper, and putting too much money into those homes based on lot rent. The value of one occupied lot in this park is $200 x 12 x .6 x 10 = $14,400. That’s all he should have been spending on each home, under our formula. He should have been exclusively buying used and repo homes to fill those lots. Look at how different this deal would be if he had 11 homes at $14,400, and with some seasoning his remaining balance would be around $140,000 - less than half of what it currently is. Think how much easier it would be to structure a winning deal with that raw material.

If the homes are supposedly so valuable, then he should have no problem keeping the homes and paying you lot rent for them. His refusal is a clear sign that he knows that they are not worth what he is claiming.

The bottom line is that the seller is going to have to come up with a proposal on the homes in which you get a fair price and he carries the paper. If he can not make the deal compelling, then you need to throw that deal back and find another one. We believe in win/win deal making, and that falls on both buyers and sellers. He is not giving you a winning proposal at this point, only what selfishly works for him.

3

I agree with Frank. The valuation of new homes and note income streams is complex when connected with a park you own.

Since we run a captive finance arm (currently on pause until we are confident we are compliant with new Dodd Frank regulations) we are struggling with this question right now, both in our own parks and in parks we might want to buy.

For the short version, I think that if the person you’re potentially purchasing the notes from doesn’t think the notes are worth keeping, you can use this as a club to beat him about the head with respect to the point that they’re not worth buying either.

At his “fair” price, he should be indifferent to keeping the note income stream or trading them for the cash. But theoretical economics can only get you so far in a negotiation, so this point might not be as useful as some would hope. :slight_smile:

My longer thought is below:

A new home depreciates quickly and the owner of a new home will usually be upside-down soon after purchase. Why? Many reasons. One is that is no embedded land cost in the value of the home, so the purchase price is tied to the cost of building (or rebuilding), which is relatively small compared to a car or boat or maybe even a stick-built home. Relative to manufactured homes, old (used? pre-owned?) stick-built homes have a built-in upward bias in price because there’s a perception that they will stand up to the test of time, unlike manufactured homes.

What it all boils down to is that you have to value the notes at a discount to their face value if the underlying collateral is “upside-down.” Actually, a discount to their “face” value is only correct if the interest rate properly captures the risk of default – which it almost certainly does not (these notes probably have below-market interest rates). Depending on the facts, I’d guesstimate a 50% discount would probably be appropriate for new notes at “subprime” interest rate (e.g., 13%). I’d guesstimate maybe a 20-25% discount for notes with 5 years or more of seasoning? Your opinion may be different, and if so I’d love to hear any reasons why. So that’s (50%) * 11 notes * $40k average principal amount gives $220,000 to think that the notes are worth.

Then turn around and look at it from the other side, imagine the notes are just plain rentals (which they may be in all practical terms).

(Price you should pay) + (the cost to repair) - (market price for that home after you’ve repo’d and fixed it) - (the value of your time and energy getting the home repaired) = 0. The homes are $20,000 each in my example (you said there were 11 of them). Would they be worth buying at that price if you already owned the park?

That’s my 2 cents. I’d be happy to discuss further if anyone wishes to.

Brandon@Sandell

4

This whole scenario is exactly why I fear buying new homes. The seller’s mistake is he is trying to sell the park too soon after putting in the new homes. It only works if you are planning on a long term hold. Then you have paid off your lender, and now you have some relatively new rental units (or notes if you prefer - but practically speaking in most parks they are like rentals). I also think it is a bad idea to bundle that home debt with a long term note on the park. You want to pay off those homes in 5-7 years, then the cash starts flowing very nicely. From the buyer’s side of this deal - if you can get a fair price for the homes, it might still work if you consider a long term hold. If the seller won’t carry paper on the homes, look for some family and friends to help you buy the homes. We pay 8-10% over 5 -7 years and it matches up well with the income from the homes. Lots of folks are looking to beat 1% in CDs and MM funds. Pay them back monthly so they can build some trust in you - and then they can keep rolling the proceeds into new loans every year or so (assuming you want to buy more homes).

Bret

5

Frank -

If I understand your math on valuing what the new homes are worth to the park, it assumes the 40% expense load is entirely variable, and not at all fixed. In my experience, the costs to operate the land are mostly fixed. When I bring in a home and infill a vacant pad, that does not increase my insurance costs, nor my property taxes, nor my maintenance costs of the land (the new home actually slightly reduces my maintenance costs because I am no longer mowing that lot). Yes, the new home does increase my utility costs, and (barely) my management cost (I pay $15/month more to the manager for each POH, but my manager’s free housing does not cost more; that portion of management compensation is fixed).

So isn’t your calculation too conservative that the park owner should only have been spending $14,400 on mobile homes in a $200/mo. MHP? I would think that at the margin, each filled lot would generate at least 85% gross profit into the land. So isn’t a more fair calculation of what an owner might prudently invest in mobile homes $200 x 12 x .85 x 10 = $20,400…?

Interested in your thoughts,

-jl-

6

I could be missing something, but I think that the value to the “park” (assuming park and homes are held in different companies) would be the $14,400 because you only can cash out the increased value when you go to refinance or sell. No-one is going to break out the marginal profit margin on the last home installed when you sell or refinance, so it doesn’t make sense to me to do it when calculating what amount would be worth spending to bring in a new home.

There is some additional value beyond that which in my head I allocate to our “homes” entity which is the value of the stream of payments from the tenant/homeowner after the “park” entity has gotten its share. This is very hard to value.

So when you put those together, maybe I’m doing it wrong.

And there are the additional intangibles of new homes that might increase the appeal (and therefore drive down the cap rate).

Brandon@Sandell

7

Jefferson,

We like to play it conservative, and have some fluff in there for such items as water bills we get stuck with, bad debt, extra manager compensation (we pay $10 per lot based on occupied lots in many parks), R&M – having people around just adds cost in one form or another. But every park is different, and if you want to use 85% as the margin, there’s nothing wrong with that. We use 60% and 70%, but we are also eternal pessimists, and like to have over-budgeted expenses so we are always on-budget. We only use that formula vs. home cost as a guideline anyway, so we often violate it in a small way (we’re not going to pass on the perfect house if it results in being $2,000 over the value of the lot). But I think we would all agree that you have to limit the price of the home to the ballpark of the occupied lot value, and you can’t put a $30,000 home on a $85 per month lot in Mississippi (which shockingly people do all the time).

Besides, in Oklahoma you have to put some money in a reserve fund to replace that one tree in the park that gets blown away every other year – just kidding.