Can you purchase a mobile home park using a lease option? If so, what is the best way to structure? What would be the benefit to the owner?
Bill
Bill,
Yes, you can lease/option a mobile home park…I’ve done it several times. The benefits to the seller are:
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Tax deferred money in the form of an option consideration.
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Steady monthly income in the form of lease payments.
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No more management headaches.
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Little to no transaction costs.
The benefits to the buyer are:
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Complete control of the park without ownership.
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Don’t have to get a new loan.
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Gives you time to turn the park around to make it more profitable before trying to secure financing.
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You can ultimately sell your option to a new buyer down the road and actually make a huge profit without ever owning the park.
There are several other benefits, but these are just a few.
In most cases, I would much rather lease/option a park than buy it. Controlling real estate without owning it is a strategy John D. Rockefeller used to create his vast fortune.
Steve
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Bill,
Steve already hit on some of the big reasons that a lease and option are a great way to go. I’ll add this - under the current tax code, if the Option is owned by your Roth IRA - you can legally eliminate capital gains FOREVER!
Karl
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Hi,
Just to confirm additional info once one l/o a park besides making money payments to the owner, I would assume in general you will pay or responsible for the followings: tax, insurance, util, handle law suit,environmental, infrastructure maintenance/repair, and everything else just like a owner uses to do, correct? or it is all negotiable? The possible pitfall might be if the owner defaults on loan or die, then not much you can save?
I am just trying to understand more. Thanks for your advise.
Post Edited (03-16-08 17:51)
If the lease is NNN (Triple Net) then the tenant pays for everything. In some cases a NNN lease may be structured “subject to” the loan where the tenant pays the loan directly. If this is not the case you can have a clause for the right to “offset” a portion of the lease payments to bring a loan current. So to answer your question, yes it is all negotiable. It is also advisable to get some help from a competent RE attorney in order to understand these “risks”.
Regarding the chance that the owner dies, this can be handled a number of ways. The lease should have a number of clauses that say something like this:
BINDING EFFECT. This lease shall be binding upon and inure to the benefit of the respective parties, their successors, transferees and assigns.
PUBLIC RECORDS. The parties agree that this net lease will be placed in the county records.
For those who are really paranoid. If you own an option to purchase some have a deed held in “escrow” with a third party with instructions to record the deed when the option is exercised and the money clears escrow. I’ve heard that this could be challenged, especially if the person is dead and a probate would need to take place. Sometimes a Land Trust can be useful that names the beneficiaries upon death in order to eliminate the need for probate.
There can always be disputes with any business relationship so it is advisable to have well written documents, respect and treat others the way you would want to be treated, and communicate openly and honestly in order to minimize any misunderstandings. IMHO the benefits far out way the “what ifs” in a properly negotiated and documented business relationship.
Karl
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Thanks Karl,
I have a due deligence question on how do you find out how many tenants and payment, who are not paying, and are there eviction in a park that you are interested in if an seller doesn’t give you the info and you want to verify. Do I simply send out estoppel letters and talk to each resident one by one.
Not usually done by the buyer. It’s submitted to the seller as a request of the buyer. If they are not going to be providing the management files with the security deposits funds on file in a check to the buyer. I would not touch it without estoppels . You can ask for whatever you want included in the estoppel. Including a copy of their rental agreement.
If they are not going to provide these files. It should be reflected in the purchase price. Which it sounds like it is. If not I would still be in the bartering stage.
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Here are the details for those interested.
LEGALDOCS - Tenant Estoppel Certificate However, please feel free to complete or review this Questionnaire and the Summary which will be produced. It is educational and will provide some insight regarding which areas, minimally, should be covered, and will let you see if the subject matters important to you are covered in the Tenant Estoppel Certificate
This Estoppel Certificate is a declaration, signed by the Tenant, that certain facts pertaining to Tenant’s lease with its Landlord are true. The Estoppel Certificate is signed for the benefit of the Landlord, and is usually directed to a third party, such as a new purchaser of the property or a lender. The Estoppel Certificate gives the purchaser or lender an assurance, given by the Tenant (and not only the Owner of the property), that the lease is in full force and effect, that a certain amount (and not more) of rent and security deposit has been pre-paid, and that the landlord is not in default of any of landlord’s obligations under the lease.
This document is normally used by real estate professionals, owners of commercial or multi-residential property, or others knowledgable in the real estate field. Purchasers of these types of properties, or lenders who loan money secured by these types of properties, normally require that the seller/borrower provide an estoppel certificate from all, or at least a major portion of all, tenants of the property.
To create a Tenant Estoppel Certificate, complete this form.
If you do not enter data in the following fields, then blank spaces will appear in the coinciding sections of your Estoppel Certificate.
Parties to the Lease:
The Landlord’s full name is:
;
The Landlord is:
an individual
a sole proprietorship
a partnership
a corporation
a limited liability company
The Tenant’s full name is:
;
The Tenant is:
an individual
a sole proprietorship
a partnership
a corporation
a limited liability company
Leased Property Information:
What is the complete address of the Leased Property?
.
(For example, 289 Orange Avenue, Suite 1501, San Diego, California 92101.)
If the building in which the leased space is located has a common name, such as the “Century Square Professional Center”, then complete the following sentence:
The name of the building, center, complex or mall is the .
The approximate square footage of the Leased Premises is rentable square feet.
Facts Pertaining to the Lease Term:
Enter the reference date for the lease.
This is normally either the date the lease was signed, or a date shown in the lease to be the “reference” or “effective” date: .
Enter the beginning date that the term of the lease (the first day of the lease term, also known as the “Commencement Date”) begins:
.
Enter the term of the lease (e.g., “24 months” OR “5 years”, etc.).
If the Lease contains any option periods to extend the term, describe the option periods: .
(For example, “two separate five year options” - it is best to copy the specific option language from the lease.)
If you want to insert the lease termination date, enter the original termination date here: .
(If you entered option language above, the
certificate will show this lease termination date, “as extended by the option period shown above”.)
Facts Pertaining to Rent and Prepaid Rents:
The current monthly rent for the Leased Premises is $.
The Tenant HAS HAS NOT paid his or her rent in full for the current month.
If you have checked “Has Not”, please enter the amount of rent the Tenant is delinquent:
$.
Has the Tenant paid a security deposit? Yes No
If the Tenant has paid a security deposit, enter the amount paid: $.
Other than the rents shown above, if the Tenant has prepaid to the Landlord any other sums of money, enter the amount prepaid and give and explanation for the prepayment by completing the following sentence:
The Tenant has prepaid additional rent to the Landlord in the amount of: $
for (i.e., moving expenses). If you leave the field above blank, the Estoppel Certificate will state that there are no rents or other charges which have been prepaid to Landlord.
Facts Pertaining to Tenant Improvements:
Landlord HAS completed all tenant improvement work as required under the lease.
Landlord HAS NOT completed all tenant improvement work as required under the lease.
If you checked “Has Not”, complete the following sentence:
Landlord is required to complete the following tenant improvement work as called for in the lease agreement: .
(For example: (1) paint all interior walls; and (2) replace all filters within the airconditioning unit.)
Facts Pertaining to Landlord’s Performance:
Landlord HAS performed all its obligations as required under the lease.
(Check this box if landlord is in full compliance with its obligations under the Lease.)
Landlord HAS NOT performed all of its obligations as required under the lease.
(Check this box if tenant claims that Landlord has not performed all of Landlord’s obligations under the Lease.)
If you checked “Has Not”, complete the following sentence:
Tenant claims that the Landlord has not performed the following obligations as directed by the Lease: .
Miscellaneous:
If this Estoppel Certificate is directed to a specific person or company, (e.g., the name of a buyer or the name of a lender) enter the name below:
Will you attach a copy of the written lease agreement as an exhibit to this Estoppel Certificate?
Yes No
This completes the information input for your Tenant Estoppel Certificate. When you Send this Form, this program will prepare a Summary of the Tenant Estoppel Certificate for your review.
www.legaldocs.com/docs/estop_cert1.mv
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and in a thumbnail sketch, I L/O a 26 space Park for 1K ( Option Consideration) for 16K + cash flow monthly. My lease amount is 5800 monthly includes insurance, taxes, lease payyment. My first payment was due Aug 15 and I had collected over 12K from the first until then!
Karl Warner did my Lease and Option paperwork (in the middle of the night with him in maine) and my attorney used it verbatim.
Call me if you have questions
Greg
352.216.2020 Cell
352.288.0046 Office
Greg
Would you please explain the numbers in this message concerning the L/O purchase. Seems that you were able to collect a lot of money from a 26 space park.
Is there a typo or am I reading it wrong?
Darrel
with 25 Park owned homes. Fully rented it cranks out 17.3k rent. doublewides are 750-800 singlewides 600-675. nets 8-9K per month. Like Steve states above, leasing is better than owning sometimes!
Regards,
Greg
Greg,
How did you approach a seller and verbage used with offering l/o?
How do you screen a seller and a park that would fit your l/o criteria?
What kind of questions and objections seller had when offered with l/o as most seller want to sell outright in general?
Thanks
that have the follwing:
Been for sale for a year or more.
Are not easily financed. IE parked owned homes.
Motivated Seller ( Lonnie’s approach)
Emotionally invested in Park and pride of ownership.
Burnt out Sellers.
Free and clear parks.
Owners get a phat check for 7 years and then a realistic sales price. Or, they get back their Park. We have a beauty for 1k down. We can collect 8-9K free cash flow for 7 years then either sell and capture equity or buy and keep as ATM machine or extend the L/O.
I have been offered 6 figures for my 1/2 of park with my original $500 investment. I will probably do this in june.
Greg
Karl,
Do you have a Lease Option Template that you first start with when approaching a Park owner? Do you then have a strategy that you follow when negotiating as far as what points you conceed on first?
Thanks,
Tim King
Jamecc,
Sorry for late response. I’ll answer for you below:
"Thanks Karl,
Q- I have a due deligence question on how do you find out how many tenants and payment-
A- By auditing sellers rent roll, against their bank deposits, against their P/L, against their tax return, and against their written leases AND by physically walking each lot in the park with the parks map to be sure each unit actually exists.
Q- who are not paying?
A- By auditing their delequency report against signed estopel letters.
Q- …and are there eviction in a park?
A- By auditing the residents file for statutory notices of eviction against Civil court records.
Q- that you are interested in if an seller doesn’t give you the info and you want to verify?
A- Any seller trying to maximize their sales price will be cooperative. My contract will also include a number of “deliveries” that the seller needs to provide. Otherwise, let’s say the sellers are dead and no one knows anything about anything - the price will need to satisfy you of the risk of not knowing.
Q- Do I simply send out estoppel letters and talk to each resident one by one?
A- Estoppel letters are a good tool (together with everything else mentioned above). Interviewing each resident would be very impractical and most sellers would not allow you to disturb their business to this degree.
Hope this is helpful,
Karl
Post Edited (04-03-08 05:53)
Tim,
Sorry, no “template or checklist” for this style deal making. Negotiating is more art then science. I found it helpful to learn the science from books, seminars, websites, etc. I also learned the art from mentors, advisors, and partners. I used to hire Ernest Tew to help me and we became friends and business partners. Greg Meade has hired me, we are friends, and if he ever called me to become business partners I’d be flattered.
This is not a sales pitch - just that dealmaking is part art and part science - and both need to be practiced in order to increase your returns and successes!
Karl
All my info has been posted on the “Resources page” under Due Diligence. My office this time of year is -
386.254.8464
Karl
I got one response from letter campaigne to park owner in my area, and had talked to an motivated owner. Operating and older 41 space park with 5 vacant, this guy seemed motivated as he is in with his relatives but singlely do most the work himself, don’t like dealing with city&contractor, park is a bit far about 1-2 hour drive, not making cash flow, want to do something closer to home.
He sent me some income/exp numbers which shown tax(about 20K…wow) +expenses are about 55%+ of income. I haven’t seen the park yet but kind of interested to know more and see what are the problems and how to reduce expenenses and get a good deal. He seems to be opened for l/o as he asked me what it is. He makes about 5,200/mo payment to a seller, and also borrowed 2nd loan from friends and relatives.
Here some numbers. What do you think(I know I need to do more homework)?
income 135,774
exp
util(elec $12488+gas $9387+water $8636) 31,512
ins 6592
trash 7999
repairs 2703
contract labor 8350
govt fees 446
prop tax 20,935
total 78,540
NOI 57,234
Hi Greg or Karl,
Did you offer to pay insurance, and tax as NNN lease or not? Any pro and con on including these in your lease/option agreement.
My other questions are:
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On insurance, how do you(your LLC) handle it given than we are still using seller policy? Do you necessary add your LLC name in seller insurance policy in case of claim?
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I assume tax will be unchanged until the actual sale take place. Do we basically, depending on your agreement, pay tax directly to the county for the seller.
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How do we handle major damage in infrastructure, do we cap damage say $1000 and under, the rest the seller has to pay?
What is a standard term/duration of the lease option before needing to either commit to the purchase or cancel it?