Rent Credit when selling a park

mobile home university
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Thinking about starting rent credit program.

So, what happens when you want to sell your park that you’ve instituted rent credit at?

All those residents who are expecting to trade their “credit” for purchase value may not have the opportunity if you sell the park to just anyone – who may not abide by the agreement or offer anything for sale, or have the same sales price, etc.

Do you have to keep the notes as IOU’s, or give the Seller a credit for liabilities that might be claimed at some point in the future or what? Doesn’t Rent Credit make the park unattractive to a banker? Does it put the kibosh on selling?

Any stories or experience welcome.

Brandon@Sandell

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Why the heck would you want a rent credit program?

I just talked to an attorney who convinced me that there is no legal problem selling a home and carrying the paper. He is going to charge me $500 to draw up the contract and $125 for each home I sell. That is much better then the rent credit program, where you never really get the capital you have in your stock of POHs returned. My experience with the 30 POHs I own confirms what Frank teaches in the bootcamp – you make no money in renting homes. In fact I am down some $10k or so in the last 12 months on my rental homes. The problem is you have all the repairs, taxes and (the really big one) make ready costs, which eat up what should be profit from the rents.

What that means with the rent credit program is, you rent out you stock of rental homes for years, dealing with all the hassles of the POH rental business but making no income from them and then at some point you turn the titles over to renters. If your stock of homes is worth $100,000 - $200,000 you just lost that much capital and had to put up with years of hassle to do so. Crap.

Look at this:

If you had a home worth $18k, you could sell it with $3k down and carry back a $15k, 6%, 4 year note. The payment on the note would only be $352/month.

And then:

Say you want to get your cash out quicker then 4 years; after seasoning the above note for a year, the remaining balance is $11,579. If you sold the note for $11,233, the note buyer would be getting an 8% return. If you are worried about the $346 you would be down, you could front load it. You could offer a personal guarantee on the note, making the note very marketable. If you think about it, the personal guarantee does not make you much worst off then if you held the paper yourself, and you would still be miles ahead of putting the home on a damn rent credit program.

What about the Safe Act and all of that?

It is not a mortgage, it is an installment sale. MHs in a park are not real estate – that is why you pay your taxes to the DMV and not the county tax collector.

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This is an interesting thread and would like to hear other opinions. In general, we make no money on rentals and their only value is to fill the lot to pay us lot rent. Frank said a long time ago that the homes were worth one dollar each. Perhaps giving the home away to a lot rent payer who maintains the home is better in the long run (or selling very cheaply). You lose a little money compared to break even, but lose aggravation along the way.

However, I disagree about Randy’s 4 year note as an “installment sale” being exempt from SAFE Act compliance. If you sell a home as a park owner and hold the paper, it is certainly subject to SAFE Act. If you sell just one, you might be able to argue that it is a private sale which is not subject to the SAFE Act, but if this is a regular activity, I suggest that you be very, very careful.

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For years, I believed all that talk about Safe Act that we have all heard thrown about and never pursued another avenue. I saw home rental as just an unpleasant and unprofitable necessity of the business.

Then I got legal counsel. I recommend you do the same, since this is a very big deal. Take my case for example; I estimate that my POHs can be sold off for about $200k. That is $200k I will never see through the rent credit program. Also, that opens the door for me to go out and start filling my parks with decent used homes that I can sell for $3k-4k down and $625 a month, lot rent included for only 4 years. I can do this without putting who knows how many tens of thousands of dollars into rent credit homes and watching all that beautiful capital evaporate over the years.

Hey guys – isn’t one of the big reasons we got into this business is so we would only have to worry about collecting rent and making sure the lawn gets mowed when it really needs it? I know that was one of my big motivators to get rid of my apartment buildings and get into parks. And now I find myself still cleaning up the mess – at great expense – left behind by renters, just like I was doing when I was an apartment landlord. I don’t want renters in my life. I want home owners.

Oh dear, but what if my attorney is wrong?

I don’t think he is; his reasoning seemed sound and he is the only one I have heard address this issue who actually has a law degree, but say he is wrong and it becomes a problem. In that event I will call him up and tell him, “You have a problem.” That is why I am willing to pay him $125 for every transaction to have him fill in then blanks on the contract of sale, which I could very easily fill out myself; cheap insurance.

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Dodd Frank and SAFE Act are about dwellings. If someone is living there as their primary residence then it’s applicable. There’s also other regulations like FinCEN, among others that Ken @RishelConsultingGroup talks about quite a bit on BiggerPockets - here for example: Lonnie Deals - Then and Now - The original method won't work

All of this is untested in the courts, so there is a balance between paranoia and risk tolerance each person needs to evaluate before making the decision. If you’re operating a 10 pad Park you can probably fly under the radar, but if you have 100+ pads I would seek expert counsel that specializes in owner financing mobile homes and also the applicable regulations. Finding both in one place is difficult hence guys like Ken with their services that have packaged them up. I do not use any of his services, so evaluate them with your own judgement.

And on the repair end, you stipulate in the RC Agreement that anything repaired on behalf of tenant is added to the value of the home, so they technically pay for at least half of it depending on your credit allocation.

@Brandon my belief is that under the program you need to value and sell your Park as if the homes on the RC program are Tenant Owned Homes and that the credits these people are accumulating must carry over to the new ownership. Does your ideal buyer really want POH’s anyway? It just helps the story that you’ve taken action to get these off the books and all they have to do is some simple monitoring to unload them. And given that these programs usually work out after 5 years or so for 90% of homes, what’s the likely materiality of homes you would have upon sale? I wouldn’t want to haggle over the value of CFD’s or other notes anyway. It complicates things.

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Randy –

Generally I agree with you that selling is better. My question was about rent credit, not selling homes; We are currently licensed to sell and finance homes in Texas and I feel we have excellent legal counsel. However, sales are not a panacea. One major issue is that your lawyer is not correct about any distinction between an “installment sale” versus a “mortgage” under Dodd Frank and other federal law. The government will deem a transaction a sale if it “smells like” a sale &/or mortgage. If title transfers after a series of payments are made over time, and title does not transfer if those payments are not made in full, it does not matter what you call it (Lease Option, Rent Credit, Installment Sale) – it will be viewed as a secured mortgage.

Whether or not, and what you do if you get caught is a different question.

On top of the federal issues, there are state laws that vary by state. Also, each state is left to implement regulating Dodd Frank through its own means. So it matters very much what the “rules are” in each particular state.

Another issue is that some who purchase on credit will default, and you (the seller) will end up with the home just as though it was a rental anyway. A big advantage of Rent Credit, as I see it, is that you can make a good argument that the sale takes place at the “end” (when the customer converts the credits to purchase a home without financing) – rather than some time before that, when the customer would have some ownership rights but the Park would have some reversion interest (such as a mortgage).

Thus, a sale is better than a rental, but straight rental is better than sale-then-repossession which is a hassle for all sorts of reasons, not least of which is paperwork. If you could predict which (credit) sales would become repossessions ahead of time, you’ve got the game nailed, but under normal conditions this is difficult.

Still with all of the “hype” about Rent Credit on this Forum, I thought there might be someone on the other side of the fence willing to explain what such a program did to the marketability of the park.

Brandon@Sandell

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OK, you guys might be right about the SMART act but consider this; the problem is who carries out the transaction – not who funds the transaction. If you had a SMART act compliant office do all the legal work, disclosures and all of that, you would be fine being the investor in the note – which in our case would be a owner carry-back. Where you run afoul of the law is if you just go out and do the transaction on your own.

For years I was a trust deed investor. Another name for it is hard money lender. I knew a mortgage broker who would call me up when he had someone who needed a bridge loan that the banks turned down and was willing to pay a high rate of interest and put up real estate as collateral. All I did (besides my due diligence) was sign some papers and write a check. The mortgage broker and title company did all the legal work. If there was some regulation broken, it was on them, not on me.

Today such brokers need to be SMART compliant. I was hunting for such a broker – one that did private money deals and was SMART compliant – when I came across the attorney who told me he could do the transactions for me and stay complaint with the law. He does the same thing for other parks, and it was a park owner who recommend that I call him. I would prefer to have a mortgage broker handle the transactions for me, but I was unable to find one in South Dakota. I would guess in Texas you would have no problem finding such guys – just talk to the title companies and ask them who does the private money deals in the area. Title companies see everything.

Now, on to fatal flaw with the Rent Credit program and why I think (hope) it will be better selling the homes.

It is always the case that among those people who are looking for a place to rent, are a relatively high percent of people who’s lifestyle is one of moving through other people’s property and leaving a trail of destruction behind them. But of course, as a landlord, you know this to be true. As a seasoned landlord, you also know, these people are very good at hiding their true nature. So good, that despite your best efforts at filtering them out, they do get through from time to time and become residents in your homes. The damage they have done to your business and your property by the time, 6 month -12 months hence, when the Sheriff escorts them off your property and you change the locks, is so great that it wipes out whatever little profits you’ve made off the other POHs with more stable residents. Sometimes they even leave behind a home that was OK when they moved in but is now ready for a trip to the Mobile Home Graveyard.

These people are the number one reason why POH rentals are not profitable.

The problem is, when we rent, we have to charge a deposit that is unrealistically low to cover the damage that could very well be let behind when they move out. Charge more and you will never find a renter willing and able to pay it.

But – this is my theory – if you sell a home and require, let’s say, a $3,000 to $4,000 down payment you will effectively filtered out these destructive fly-by-nighters, because they tend not to have that kind of cash put together and they know they are going to be kicked out in a year or so. And while no one will pay a $3,000 to $4,000 security deposit on a low income rental unit, there are people who will put down that much to purchase a home.

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Randy, I like your thinking about getting new tenants to own their units, and it makes total sense to me that the tenant should both own and carry the paper in anything they move into. I see you are in CA. Can you share the name of your attorney, and let me know if they will write up the paper on a mobile home in Oregon, or other states?
Thanks: Miles

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Sorry Miles, while I am in California, the attorney is in South Dakota but is also licensed in Nebraska. But I think you could find a mortgage broker in OR or CA who could do it without too much trouble. Mortgage brokers make such loans legally all day long – it’s their business to do so. I would not look to big banks, but guys who do private money deals. Call some real estate brokers and ask them who can do the paper work on an owner carry back. Or, as I said above, talked to some title officers.

I just shake my head:

I want to tell you guys about a conversation I just had. On Friday I was talking to a person who works for a large owner of mobile home parks about all of this. She told me of their programs of getting people in with various lenders and different programs they have with very little down. In fact they can sell off homes with about the same down payment as a security deposit on a rental unit. She was very proud of that fact.

That misses one of the biggest points:

It makes no sense to me to sell homes with a down payment below $3,000, because people with little to no equity in the home, will be just as likely to walk as the usual renter. And we landlords will be stuck with the clean up bill.

It is mostly the cost of cleaning up the homes and finding new residents that make POH rentals unprofitable. If you think it through, it makes no difference if you sold the home, or rented the home, if a resident moved out after a year or so and left you with a trashed out home that will take thousands and thousands to put back together. The only way I can see of filtering out those people who would do so is to require a $3k, or so, down payment before turning over the keys to them.

Can it be done? I have yet to try it.