We are often asked “so how do you buy a mobile home park?” While this question would be like asking a NASA engineer “so how do you land man on the moon?,” there are some key issues that many people overlook and can have just as disastrous an ending as the retro-rocket on the lunar lander not firing. So here are the key drivers to buying a mobile home park properly.
Know what you’re doing
It’s amazing how little thought goes into some mobile home park purchases. Some people literally by the park and then set about learning what they just bought. I was once a bidder at an auction in which the mobile home park had a failed sewer system which would cost $500,000 to replace. The most any educated buyer could pay would be $500,000. To my amazement, the winning bid was $1 million. I went up to the buyer after the auction and asked him if he thought the park had any significant problems. He told me that he didn’t know anything about mobile home parks, but he drove through it and it looked fine to him. So he basically overpaid by $500,000. Who in the world would waste money like that? If you’re going to get involved in any activity, the smart person learns everything about it before they joint in.
Don’t over-extend yourself
If you have $100,000 in cash, then don’t buy a park that requires $100,000 down – you’ll have nothing left over for any unseen contingencies. We get these calls all the time; the person who spent their last dime on the down-payment and now can’t afford to fix the potholes and want to know what banks make loans on things like that. The truth is that real estate loans are based on having, normally, a first lien on the property and, once you already have a bank in the first lien position, no bank is interested in putting further money at risk. Before you buy a mobile home park, make a list of all the capital required and, if you don’t have it ready to go, assign the contract to someone else or cancel the deal.
Keep your deal volume extremely high
Any good gold miner in the western expansion knew that the formula for success was to sift as much dirt through their filter as possible – the more dirt, the more likelihood of hitting a gold nugget. The same is true for mobile home parks. If you want to hit really great deals, you have to look at a lot of them. At a minimum, you will probably have to look at 100 deals to find a really good one. If you are only looking at a few, the odds are definitely not in your favor.
Don’t fall into the financing trap
The length of the loan is very important. Many sellers want to carry paper for a few years, and then have a balloon. This means that you have virtually no time to fix up and stabilize the park before you are having to hit the streets to find a new lender. If you fail, you could lose the entire park. It is critical to give yourself plenty of room to hit the right cycle and sell the park if financing is not an option. We start working all renewals two years ahead. You would be amazed by how many people call us in a panic, having just started the financing process 30 days before the note comes due.
Do phenomenal due diligence
Benjamin Franklin said “diligence is the mother of good luck”. What he meant was that you forge your own destiny based on how well you analyze the deal and remove the element of risk. Every park we buy goes through a standardized analysis of every component, and failure of any one area normally results in termination of the deal. We would much rather cancel a deal than have a deal cancel us. General Montgomery – the leading British general of World War II – said “I never get involved in a battle I cannot win”. That’s the correct attitude for due diligence.
Mitigate all risks
There are very few risks in buying a mobile home park that you cannot determine and minimize. There are physical risks like open manholes and uneven sidewalks. There are risks in utility lines not working, like a collapsed sewer. There is risk in being to raise your rent due to market forces, and risk that the seller has lied about the expenses. But you can solve all of these risks if you really spend time thinking through what could go wrong. A good park buyer leaves nothing to fate, and has an action plan for every contingency that can happen after closing.
So how do you buy a mobile home park correctly? The key component is to “think like a man of action and act like a man of thought”. The important term there is “think”. It is shocking how many buyers get involved in buying a park while spending less time analyzing their property than they do buying a watch. Buying mobile home parks correctly is a very serious business, and you owe it to yourself to get serious about it. There’s no reason you can’t do well, if you only apply scientific thought to every part of the process.