There is no better feeling on earth than when you own a mobile home park and you have absolutely no money into it. Not only do you have no worries (assuming your debt is non-recourse) but your rate of return is infinite (since it’s based on your down-payment and you have none). You can literally own an empire of mobile home parks and have zero money at risk. So if zero-down is living the dream, how do you accomplish it?
Many people who claim to have done “zero down” deals are not telling the truth. They may have put up zero down-payment at closing, but they then poured massive capital into the deal to clean up the infrastructure and that certainly has to count the same as a cash down-payment. A true “zero down” deal starts with explaining to the seller that the property is in really rough condition and requires your down-payment be focused on bringing the property back to life, but that turn-around is not, in reality, capital intensive. There are mobile home parks out there that have huge aesthetic problems that are not that expensive to rectify, such as mowing, trash removal, and simply bringing back law and order of rent collections, rules enforcement, etc. These are the type of deals that are truly zero down. To achieve them you have to find them and engage in artful negotiation. Your reward is owning a great property with your capital still in reserve to buy the next one. We have done 12 of these deals over the past 25 years and they are some of our favorites.
Master Lease with Option
In this concept, you find a deal that is horribly mis-managed and you take over the management with a contractual right to buy the park at an established price after you fix it. You only have three tools to use in fixing these mobile home parks: 1) raising rents 2) cutting costs and 3) filling vacant lots and homes with low-cost options like RVs. But for most properties, that’s all you need. Between enacting a “no pay/no stay” philosophy on collections coupled with higher rents, you can increase revenue substantially and then cut ridiculous costs, normally centered on the manager’s salary (we have seen many mobile home parks with manager salaries over $100,000 when the market rate is closer to $25,000). With a Master Lease with Option agreement you basically take control of the park with zero down and then – if you play it properly – you can end up owning the property or selling it with zero down at the time you enact your option to buy. We have done several of these deals.
This is a zero-down concept that does not end up with you owning the property, so it stands in stark contrast to the rest of these strategies. However, it can be very lucrative and the correct choice when the park you have under contract does not ultimately meet your goals. Effectively, you tie up a mobile home park with a contract that states “and/or assigns” and this gives you the right to assign the deal to any person or entity – yours or another’s. These assignments are typically marketed on the forum section on MHU.com and buyers typically pay 5% to 10% of the face value of the deal as a fee (for example, a $1 million mobile home parks would have an assignment fee of $50,000 to $100,000 based on the quality of the park). We have bought $500,000 worth of assignments in a single year before. And we are just one of many buyers of these deals.
One of the best ways to do a “zero-down” mobile home park deal happens only at the end, and that’s when you buy a mobile home park, bring it back to life, push up its value, and then refinance and get all of your capital back while still owning the property. Here’s how it typically works: 1) you buy a turn-around park at a low price with seller financing (although bank financing works, too) 2) you raise rents, fill lots, fill homes, cut costs and bring in professional management 3) you season these improvements to your bottom line for a period of time 4) assuming you have now increased the value of the property by around 50%, you can now refinance the property and get all your capital back – and even more based on the appraised value. Best of all, the CMBS and Fannie Mae/Freddie Mac lenders make loans strictly non-recourse.
Every park buyer will reach a time when they have exhausted their own capital on a park or two that is now theirs and they must either give up looking for more or find an investor (often referred to as “capital partner”) to give them the dry powder to buy more parks. Capital partners typically all share a similar structure of a 1) “preferred return” on their capital (which can typically run from 8% to 10% interest) and then a 2) profit split (which can run from 20% to 50%). These type of situations are a win/win for all parties, as those rates of return are hugely attractive for the investor yet mobile home parks are so lucrative that they can hit these splits and still make huge profits for the operating partner.
“Zero down” is a mystical nirvana for virtually all investors. It’s essentially impossible in all real estate sector except one: mobile home parks. We hold that monopoly because of all the upside to be harvested from so many properties that need to be brought back to life when the torch is passed from mom and pop owners to those who view them as an actual for-profit business. The mobile home park business model is truly the greatest on earth.