I recently received a call back from one of my mailings in Oklahoma. The seller bought the 53 space park a year ago with 35 vacancies and bought homes with all cash to fill up the park. Most of the homes he purchased were 2005-2006 FEMA homes. He would be interested in possibly selling the land to me, while retaining the 35 homes that he owns. He would also be willing to sign a 10 year agreement to not move any of his homes out of the park. If we had such an agreement in place though, what would happen during the eviction process if he were to go bust or stop paying me?
This conversation is still in the very early stages. The topic of rent increases hasn’t come up yet…
I think you would need a VERY creative agreement. In most states, you can not restrict the buyer of a home. So you can not say you must leave the home in our park.
Maybe you could create a first right document, where you have the first right to buy the home for like $10… but if he were to declare bankruptcy for instance, the judge could toss out any agreement with you and the homes could be sold.
tricky… There would need to be a serious penalty if he moved a home, like monetary with a performance title transfer order…
Even at a 10 year lease, I"m not sure you’re protected. If you buy the park based on a 10% cap rate, and are capping his lot income on the homes he owes, then if he yanks the homes out after 10 years, you do not have much more than 1/3 of your principal back out (very rough numbers), and you’re screwed. It is very hard (if not impossible) to structure a safe deal when one person (other than the park owner) owns that high a percentage of the homes in the park. If he owned 5, then fine. You could survive the hit. But at that percentage, what are you going to do if he pulls out? Buy your own homes to fill those lots at $15,000 to $30,000 per lot?
So… if your still thinking of doing this… and problems are just opportunities to find solutions…
A few years back I was helping negotiate a park where the owner was going to keep several homes. So I was going to solve it by creating a lien on each home the seller was going to keep. Then, in a pretty creative agreement we were going to not charge the owner if the homes was not occupied, but instead we were going to do a paper shuffle with the money and have that pay off homes the owner held. So there was sort of a loose purchase agreement, like a first right say $5000 each home. When 4 months of space rent was not paid, it automatically began to pay off the home. Say rent was $250 / month- after 4 months of non payment- the new park owner could now buy out the home for $4000.
Anyway, we put pretty low values on the homes. So the owner could rent them, and if the owner ran short on money, and most owners will, they would slowly be owned by the new park owner…
In short, the agreement mad it so the homes could not move, the new owner had a low first right to purchase in place, and we built in the purchase price of the homes in lost cash flow and capital improvement expected costs…
So while tricky… and there is still some risk… you can still probably get this done.
one last thought, because this creates a complication, you also have a very strong argument to bump the CAP rate. So if this was a 11 CAP, maybe now it is a 12 or 12.5
At least, I am sure I would be making that argument…