Rent credit vs. rent to own vs. lease option

We are currently doing “rent to own” on our mobile homes we sell in our park. Resident signs the lease agreement along with a seperate Rent to own contract. I would love to hear from any owners who are using Frank and Daves Rent credit process.

I would like to implement it as it sounds like a simpler method but am still a little unclear on a few things such as.

  1. Do you set a purchase price on the home that they are moving into and when the rent credits hit that amount , then they take ownership.

  2. can they use those rent credits to purchase another home in the park?

  3. I received the lease agreement that frank and Dave use but nowhere on it does it say what the purchase price of the home is.

  4. It looks like at move in you have them do first months payment plus deposit equal to first months payment. Do you treat that as a security deposit.

Anyway, any more clarrification would be great. I can definitely see the advantages especially if you can transfer the credits to purchase another home. We have residents all the time that want to move up into a home with more bedrooms for their never ending brood of children.

To answer your questions:

  1. Yes. Any/every home in the park has a price. Residents can have any home they want when they build up enough credit.

  2. Yes. That is the definition of ‘rent credit.’ If they can not use their ‘credit’ on any other home, then it is a ‘mortgage’ and may be regulated by the SAFE Act.

  3. I’ll let Frank chime-in on this. We just tell our residents what the homes cost. We provide credit tables (aka amortization tables) when they want to know how much credit they have with us to purchase a home.

  4. The initial payment (we generally charge $2,000, but each market is different) is considered ‘option consideration’ for the right to purchase a home. As such, it is not taxable until they either default, or take possession of the home (e.g. only when the payment can be classified as a particular type). Ask your CPA. They may need to look it up.

Best,

-jl-

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Jefferson is 100% correct (although Item #4 is strictly up to your CPA and I would not even get involved in that one).

Many of the larger operators, to our knowledge, have adopted rent/credit. It has additional benefits in that:

  1. The customer does not want to lose their credits so they fight to keep current even in lien times

  2. It is a straight rental, and requires us to do major repairs. As a result, the repairs get done and the home stays in good shape. Under the old method of selling and financing, the park assumed the owner would keep it in good repair, but they never would. They would let all problems fester and then give it back to you when it was destroyed. We prefer to pay $1,000 to fix the furnace rather than have them burn the house down with space heaters, etc.

  3. The system allows for many options down the road – it keeps the door open for the tenant to buy the home with part cash/part credits, or just rent forever, or buy a different home with their credits, or buy their existing home. As a result, it gives you greater customer retention.

  4. Tenants seem to like it. They understand it (the system is simple) and that also leads to greater retention

  5. You do not have to file a foreclosure if things go bad. An eviction can be obtained in 30 days and a foreclosure in 6 months sometimes. As the foreclosure laws have become more difficult over time, it would probably driven most park owners away from creating mortgages even if the SAFE Act had never existed.

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Do advertize it as RTO or are there other key phrases that customers identify the process with?

We simply run our ads with the words “mobile home for sale or rent” as that pretty much covers all the options.

I’ve heard there are some lawsuit liabilities with renting older homes so park owners feared using the rent model. Do you have any particular rules/standards now for home quality or the age of homes when utilizing the new model?

Last trip to Alaska, I noticed many of the parks are being converted to rentals where the owner is bringing in top dollar single wides and charging 1200-1300 a mo in rent and slowly getting rid of all of the trashed homes/residents that have been there for 30 years.

Would this model also be applicable in extended stay RV parks? I’m in Western WA and have seen plenty of RVs replacing junky older MHs.

First of all, there are 101 issues with renting and selling mobile homes, so you definitely want to learn as much as you can and make your own decision. I would get the facts from the state Manufactured Housing Association, as well as substantial research on Google, and maybe even call and talk to some other park owners. From liability to the SAFE Act, everyone has their own opinion. While we can get a good handle on liability questions from Kurt Kelley at Mobile Insurance, there is currently, to my knowledge, no meaningful case law from the SAFE Act folks. Just follow the rule of buyer beware and make your own best educated guess on the path to follow.

We do not have any concerns about renting older trailers. In fact, some of the 1960s and 1970s models are finer built than the modern ones (if you look at the weight on the title, the older homes are heavier, probably as a result of more lumber and framing).

Be careful of the business model you are seeing in Alaska, which we refer to as “man camps”. These are intended for oil & gas workers, and when the oil field business declines, you will be stuck with a ton of vacancy and no customers who can pay those rates. If you have built your budget on $500 per month, then $1,200 is great. If you built your budget on $1,200 in rent, then you have nowhere to go but down – real far down.

There’s nothing to say that an RV can’t be as permanent as a mobile home. But most lenders and appraisers (and as a result, buyers) are not going to see it that way. As a result, RVs never are valued the same as mobile homes in a park. The fact that they can just hook up and go vs. $5,000 to move makes the RV riskier. I’d much rather have an old mobile home on a lot than a RV.

Thanks Frank!

Jefferson Wrote:


To answer your questions:

  1. Yes. Any/every home in the park has a price.

Residents can have any home they want when they

build up enough credit.

  1. Yes. That is the definition of ‘rent credit.’

If they can not use their ‘credit’ on any other

home, then it is a ‘mortgage’ and may be regulated

by the SAFE Act.

  1. I’ll let Frank chime-in on this. We just tell

our residents what the homes cost. We provide

credit tables (aka amortization tables) when they

want to know how much credit they have with us to

purchase a home.

  1. The initial payment (we generally charge

$2,000, but each market is different) is

considered ‘option consideration’ for the right to

purchase a home. As such, it is not taxable until

they either default, or take possession of the

home (e.g. only when the payment can be classified

as a particular type). Ask your CPA. They may

need to look it up.

Best,

-jl-

Not to correct JL, just to clarify - the Option money on any transaction is not taxable until default or they option is exercised - in this case when they got the title and fulfilled their contract - as opposed to “possession”.

We use options with other real estate transactions as well - and that is a fantastic way to transfer money to the other person tax deferred.

Hope this helps…

Brad -

You and I are saying the exact same thing. The option consideration money is tax-deferred until you know how to classify it. You know how to classify it when the tenant either:

  1. Exercises the option and takes title, or

  2. Defaults

Am I missing some nuance in your comment about how you see the tax treatment happening…?

-jl-

Would it be possible for anyone to provide the paperwork that you have a tenant sign to enroll them in your rent credit program? Thank you in advance to any of you who would be willing to provide this.

Where can I read about the rent credit program? I missed that!

I have Frank and Dave’s self study course and think it is very good! However, there is no information on the concept of rent credits. After searching the forums for “Rent Credit”, this seems to be the most detailed post on the topic. A few questions (and unanswered questions from comments above:

  1. Does the rent credit concept completly change the business model of collecting lot rent only? If the park owner is now responsible for major repairs (Frank’s example of paying for a new furnace rather than space heaters burning the place down), he/she is no longer in the business of renting dirt, but is essentially renting POHs.

  2. I was hoping that the self study course would have the forms/process for rent credits. Where can this be found?

  3. I know that F & D are not in the business of giving legal advise. Has an attorney signed off on this idea?

  4. Is there a more definitive posting on rent credits that I am missing? The posts above provide a framework, but lack details.

Thanks and Happy New Year to all!

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To answer your questions:

  1. No, ‘rent credits’ do not change the business model. They are a means to help us maintain the liberty to provide affordable housing - liberty the government is earnestly trying to take away from us in it’s never-ending quest to ‘help’ us. Even if you purchase a park with no POHs, you’ll eventually get into the housing business. People will die, or outright abandon their homes. You’ll have to get into the home business at least in a small way. And your goal is always to get out of the housing business as fast as possible. So instead of RTO-ing the houses, you’ll be rent-crediting them. You are still getting out of the housing business as fast as you can.

  2. I’ll let Frank chime in on where we all can download the latest-and-greatest rent credit documents.

  3. I know several attorneys have. I’ll let Frank chime in.

  4. See this thread: http://www.mobilehomeuniversity.com/forum/1/27557/27559/re__rent_credit_vs__rent_to_own_vs__lease_option#msg-27559

Hope this helps,

-jl-

The whole situation regarding the SAFE Act makes everyone nervous – ourselves included. Before you do anything regarding renting or selling the homes, you should:

  1. Talk to your state MHA about the SAFE Act.

  2. Read every article on the SAFE Act you can find on-line.

  3. Think about what you’re trying to do with the homes, and if you have the capacity to abide by the SAFE Act in every regard, as a home seller.

  4. Make your own, independent, educated decision

Why the big preamble? Because nobody really has a handle on this issue regarding the gray areas. So let’s start with the black and white areas and move to the gray.

You must abide by all of the rules and regulations in the SAFE Act if you sell a mobile home and carry the paper. Period. There is no gray area. You do NOT need to worry about the SAFE Act if you are selling a home for cash (although you do need to worry about being a mobile home dealer and those associated rules) or if you are simply renting a mobile home. No gray area there, either.

The gray area comes in if you try to make the renter a future homeowner. You would think that the U.S. government would be trying to help renters become owners, but no such luck. Instead, the SAFE Act has created roadblocks of uncertainty for this simple act which only serves to benefit the consumer. The rent-to-own construction that many park owners use is seen by some states as a “disguised mortgage” and therefore in violation of the SAFE Act. Many have challenged this argument, as the typical rent-to-own is an installment sale and not a mortgage (I have some of the legal opinions on this, and they are pretty darned good) and would render the mere sale of a refrigerator at SEARS a SAFE Act worthy violation. However, because of the uncertainty of that construction – and the complete absence of case law – many park owners have abandoned that type of construction.

The rent/credit construction does not meet any of the SAFE Act-tainted constructions as far as we know. It is used by many large operators, and has been checked out by many lawyers. It is different from rent-to-own in that it is a straight rental (landlord does the repairs, etc.) but gives the customer a credit (like green stamps) of a certain amount every time that they make a timely payment, which they can use as cash to buy any home in the park, not just the one that they are in. Additionally, they don’t have to ever exercise their credits, and can just rent for life.

Would we guarantee to anyone that this is a 100% fool-proof method of giving the customer an attractive benefit for renting in our communities? No. There is no case law. Everything that anyone says at this point is pure speculation. There is no case law to pin your hat on. There is no clear understanding by any individual or group – no matter what they may tell you – that is 100% a sure bet. So you have to do your own research and make your own, independent decision.

If you have done the research and decided that rent/credit is the right thing for you, then contact Brandon at (970) 856-4070 and he can get you a copy of a rent/credit agreement. However, we cannot make any warranties on it of any type. Until there is case law, we’re all in the same boat of uncertainty.

However, if the government ever rejected the concept of rent/credit, then nothing has really happened, as the customer would just lose their credits, and go on renting. That’s a big difference from a typical rent-to-own agreement, which talks about the tenant receiving the title in a certain number of months. If you want to be 100% safe, just rent the trailers and be done with it. We have a lot of pure rental agreements in place, and could easily convert all agreements to simple rentals going forward at the drop of a hat.

You would not imagine that the U.S. government would want to exclude people access to home ownership. But then again, you would not expect Obamacare or any of the failed initiatives we have today, so anything is possible.

I once did an article on the SAFE Act for the Journal. I called 10 different MHAs and 10 different MHA attorneys. None of them agreed on how SAFE worked, or what was and was not allowable. So much for a sure thing.

Just like anything else in this business, you have to do your own independent due diligence and make your own choices. Your options are really to sell for cash (no SAFE worries), sell and carry paper (need total SAFE adherence), rent-to-own (make your own call but looks scary in some states), rent/credit (looks OK to many people but think for yourself) or just rent (no SAFE worries).

If it makes you feel any better, I ask a fairly prominent (household name) real estate attorney about the SAFE Act early on. He told me that he thought an initial violation would result in a warning, while continued breaking of the rules would result in fines – just like anything else. You can eliminate any worries with selling for cash or renting. Or if you want to carry paper, get SAFE Act licensed. It’s only the gray areas that require thought.

One more note, because it’s an important one. Remember the mortgage meltdown of 2008? Well, it pretty much destroyed the ability to obtain a simple foreclosure. Today, to get a foreclosure takes months and thousands in legal fees. So I’m not sure that the SAFE Act is having as much of an impact on park owners’ decisions as the fact that evicting is a whole lot better than foreclosing. Even if SAFE did not exist, we would have abandoned selling and carrying paper on homes because of this.

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Frank, thanks for the extensive explination! Very heplful as always.

As an investor, I have no interest in getting into the POH business. If that is where the MHP industry is headed, I would rather rent appartments. Lot rent is what excites me about MHPs.

Help me think through a few possibilities:

  1. Assume that the rent credit concept gets thrown out in a court challenge. Does that sink the lot rent industry by making it nearly impossible to ever fill vacancies, replace turnover etc. with home owners. In this senario won’t all parks become rental parks over time?

  2. Is there a way to partner with a bank or loan broaker to handle paperwork, negotiation/communication on a loan that the park owner has prepaid (so the bank has no risk) or for a park owner to cosign on the loan (no risk to park owner since he already owns the home). In other words, wouldn’t it be easiest for a park owner to use a safe compliant partner to simplify the issues?

  3. Are there geographic areas with such high lot rents that it would be feasible for a park owner to bring in new homes, fix them up to minimum standards and literally give them away so the new owner would pay lot rent?

I feel bad keeping this thread alive, but this issue is potentially a deal breaker for me. Thanks to all for your thoughts!

Those are all good questions with complicated answers, but here’s the macro concepts.

  1. My personal opinion is that rent/credit will never end up in further examination, as the real target of the SAFE Act is mortgage companies, and not park owners. One mortgage company would write maybe 1 million times more in loans than the largest mobile home park operator would in their best year. Audits are supposed to make money, not waste time, and until they have audited every mortgage company in the U.S., I can’t imagine a park owner being an attractive target. On top of that, I have not seen any reasonable arguments against rent/credit, nor can I really understand where the damage could possibly be for the consumer, by giving them something for free. But all that being said, nobody knows for sure, and are lying if they say they do. None of this means that all parks will become rental parks over time. In many of our parks, we have zero park-owned homes, and we might take back one home a year through abandonment. We could just give that home away, or sell it for cash, and be done with it. But if you buy a park with a bunch of park-owned homes, or are planning to fill a vacant lots, yes, you will be in the home business for a long time. But if you sell the homes and carry the paper, you still get them back at the same speed, so it doesn’t really change anything. We are well compensated with extremely attractive rates of return when we buy parks in a turnaround mode that require us to manage a bunch of homes, so that comes with the territory. You are always free to sell the homes for cash at any time you want without SAFE Act regulation, If you rent the home for 5 years and get your money back out of it, there’s nothing I’m aware of that would stop you from – the next time it goes vacant – selling it for $500 and having the customer sign a 5 year or longer lot lease agreement. SAFE does not have the power to hold you and your park hostage.

  2. There are individuals who offer their services to act as your SAFE Act licensed underwriter. However, there’s no case law on that either, and some people have told me that they worry that it won’t hold up in court because SAFE requires everyone in the transaction to be licensed, and that would not be the case – only the one person who is designated. The manager who shows and sells the home would be your weak point. But I’m certainly no expert on this option, as we don’t do it. Another personal worry I would have is if that person is not following SAFE properly, and you get stuck in the mess while the whole time you trusted them to be in compliance, and paid them for their services. Selling homes and carrying paper – nobody how you construct it – just scares us to death.

  3. We have parks with lot rents of $400 per month. Yes, it is financially possibly to bring in a home, give it away, and still make money in those parks. In fact, the model would still work in a park with $200 lot rents, as long as you can bring in the homes for around $10,000. But why do that? Renting the homes is not as scary as it looks, and you’d be paying a heavy price out of fear of the homes and/or SAFE Act. I think you can find better ways to do it. That being said, if you only have to fill a couple lots, you might be money ahead to bring in two homes and give them away if you take into account the cost of hiring a better manager to sell them, the additional management hassle, the uncertainty of the SAFE Act, and the possibility of needing a dealer’s license. Again, everyone has to look at the options and make a sensible decision on what meets their goals. If giving a couple homes away works for you, then it works for me. You’ll certainly make a couple tenants happy.

Don’t let the SAFE Act be a deal breaker for you on the industry, as there are many parks that have zero park-owned homes. But if you’re looking at a park that requires you to fill 100 lots, then it might be that you need another deal that is not so home-heavy and SAFE Act heavy.

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Mostly I agree with much of what Frank has to say about the lack of case law. I would point out that there are similar cases regarding retailing in the auto industry which is one reason I disagree that the CFPB, the FTC, and the U.S. Department of Treasury will not get around to our industry. If they are coming after, and they are:

Vehicle Dealers - large and small
Pay Day Lenders - large and small

why would they not come after our industry? Frank was a featured speaker at a leadership meeting in Chicago when one of the largest community groups admitted they were backing out of lease-option not because they did not like it, but because they were afraid of what the regulators were going to do to them.

At the risk of being called a “fear monger” once again, my meetings with the CFPB, and the meetings that others have held, give me an entirely different opinion of the dangers that regulators present. In 2008, I was pretty much alone when I started warning people about the potential dangers of the yet unpassed SAFE Act would present our industry if we did not get an exemption, and it was pretty much Tim Williams of 21st Mortgage and I when the Dodd-Frank Bill was being considered. Today, I’m not alone. Numerous state MH associations share the view. The exec from Wisconsin has told his board and his members he is expecting a blood bath because the seller financiers (with the notable exceptions of the two largest community owners in the state) are not paying attention and getting ready. The Texas association has spent over $200,000.00 getting ready and trying to get their members ready for what they believe is about to happen.

We are “low hanging fruit” because we are small. If a regulator goes after a large depository, they have the resources to afford a defense. They may still give some money up and get some penalties, but their resources make them harder to crush. How many readers here can afford the kind of legal talent it would take to fight back? The attorneys that you need charge in the four figure range per hour. As a group, we need to be as compliant as possible, not out there challenging them. The regulators know that, and they count on that. If your seller finance operation has obvious flaws they know you will roll over and give them what they want without a fight. They have done this time and again in 2013 with vehicle dealers and pay day lenders.

Regarding Frank’s comment on using third party firms, I absolutely agree with one exception. Most of what we have seen regarding the use of MLOs and even a couple of name firms will not, in our opinion, pass muster because the structure is wrong. One of those “names” came to the same conclusion a couple of years ago and have been gradually exiting the arena.

Finally, there are many players that are making it work. The solutions are different for different organizations. One size does not fit all, but there are solutions for all size operators. Don’t give up on this industry. Just learn what you need to know, adjust, and move forward.

I agree this is a critical topic so here is my 2 cents. I agree with Frank and I can’t really argue against Ken’s position. So after avoiding buying new homes for many years I think I will bite the bullet and buy new homes and start doing straight rentals going forward.

Pros:

  1. Avoids the hassle of finding used homes and doing the rehab

  2. New homes (I hope) will require less maintenance (and are under warranty for awhile) so this addresses the nightmare of constantly doing maintenance on rental units.

  3. Increases the curb appeal of the property

  4. Possibly increases CAP rate when you are ready to sell

  5. Draws better tenants

  6. Sort of kicks the rent/credit/SAFE act issue down the road because we will probably rent these units for 5-7 years before selling them becomes an issue - and by then the laws may change.

  7. Assuming you borrow on a 7 year note to buy the rental units, you then have a less than 10 year old home free and clear (and can then be very felxible on the sales price as others have described)

Cons:

  1. Requires more capital to buy new homes

  2. Requires better screening and perhaps a no pet policy on the new homes, thus it may take a little longer to fill homes

  3. Requires maintenance of the rental units (sooner or later)

  4. Requires closer inspections of the homes (possibly quarterly) to make sure units are not being damaged

  5. Taxes and insurance are much higher on new (vs used)

So now I am comparing construction and features of some of the Ohio area manufacturers (MHE, Redman, Skyline). If any one has already done some comparisons or has a model they really like for rentals, please share with the group (I’m thinking a 16 x80 3/2 will be the bread and butter - but maybe offer a smaller unit as well?)

thanks

Bret

Ken,

I got to the meeting late in Chicago (due to outrageous traffic congestion). Which operator was that?