Creative Deal Making

We have long been an advocate of being a “deal maker” instead of a “deal killer” as one makes money and the other misses out on endless opportunities. Although every deal cannot be constructed in a successful manner, many mobile home parks require some creative thought in order to work out. In this event, we explore the theme of “Creative Deal Making” and discuss the different methods used to bridge the gap between deals that can’t be done and deals that can. If you’re looking at buying a mobile home park, this is a conversation that should be of extreme value.

If you want to learn even more tips and tricks to be a creative mobile home park deal maker, consider attending our Mobile Home Park Investor's Boot Camp. You'll learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks. The course is taught by Frank Rolfe who, with his partner Dave Reynolds, is one of the largest owners of mobile home parks in the U.S. To learn more, Click Here or call us at (855) 879-2738.

Creative Deal Making - Transcript

All right. Welcome everybody to our next lecture series event for September 26, 2019, and of course our topic tonight is creative deal making. Dave and I have always been advocates of the idea of being a deal maker over a deal killer. Let me point out the difference. When you're a deal killer you approach every deal looking for the negative, however minor. You then use that as an excuse not to do the deal by saying, "No, this deal will never work," because of whatever that item is. Being a deal maker is an entirely different attitude, different mindset. As a deal maker, you look at every deal from the perspective of the glass being half full and saying, "Well, this deal has some attractive items going on with it. What would it take to make this deal work?" So it's more of a creative expression that what the deal killer does.

But to me, a creative deal maker requires you to know all the different tricks in making a mobile home park possible from conditions which wouldn't appear to be satisfactory to make a deal. And let me start off by saying as a giant asterisk this entire presentation we're talking about parks here that have the right raw material to be made into something. So if we're trying to bake a cake we have to have certain attributes. You'd have to have flour and sugar and egg yolk and different items to bake a cake. And there's no point in wasting your time trying to figure out how to bake a cake out of some mud and some straw because it simply will not work.

And to recap as we start off what that raw material would be I would say any deal you can come across which has the following items you can put it on your deal maker hat. Those items would be 100000 person metro or greater. Although that's not even necessarily a minimum. It's kind of a guideline. If you're looking at a deal in some states like Colorado you can do incredibly well with a metro as small as 10000 people, but in general across America 100000 plus metro would be attractive. $100000 and up, single family home price. That would also make something attractive.

$1000 a month three bedroom apartment rent. That's good raw material of a market vacancy rates have a roughly 12% or less, which is the US norm. A density... and the density gets hard because it's hard to look at a deal from the onset and tell the density. You don't know [inaudible 00:02:24] is actually used for the park and how much of it is not. But you have to have a density that would allow you to bring in new homes that are at least roughly 14 feet wide and 48 feet, which is a two bedroom, one bath. And you've got to have a permit. You have to have property rights. You have to have the rights of [inaudible 00:02:41] as evidenced by that permit. So you don't put all your effort into a park that does not have a good and working permit. So that's the raw material you have to have.

So I made a list here of 20 different creative deal making secret weapons here. And I thought we'd just go down this list one by one, and then when we get done we'll open it up to questions. I'm sure there'll be a lot of questions on some of this material and questions just on parts in general. So the first creative deal making tool would be called the master lease with option. Now what that is, this is a very effective tool in situations when the seller wants more than the park is worth. So they can't drop the price because they have their own debt on the park which is about the same as what they're asking. This is a very common structure on deals which headed for REO, headed for bank foreclosure. The guy paid too much for the park or he refinanced the park for too much and now because occupancy has dropped or any other reason the park no longer supports the amount of the debt.

So how it works is you go to the owner and say, "Well, you know the park will never appraise for the price you're asking. I acknowledged you can't drop the price because you've got a mortgage on it. So here's my plan. Let me have some time, three years, even five years in some cases to turn this part around with the option to buy it at anytime during the lease, all up to the final day for a certain price." And that price is typically the amount of the note because that's normally in those situations what the seller is after.

Now, what you do then during that three year or five year master lease period... and when I say that there's no Robert's Rules of Order. There's no law on how long a period can be. It might be one year, two years, three years, whatever it is. But what can you do during that period any better than the person you're buying it from did? So how do you make the thing worth more in this case then the note value? Well, the key thing you do is you look through what they're doing for obvious faults.

Sometimes these folks who have these situations where the park is worth less than then the note they've done some really dumb things. They sometimes have a manager who's massively overcompensated, and the biggest one they normally do is they have not raised the rent in line with market. So literally these mom-and-pop quantitatively ease themselves into effectively potentially bankruptcy. So during the master lease period you could go in and you can cut costs. You can often rent some lots if it's RV only. You can't bring any homes in during the master lease. You have no right to do it. It's not even your property. And if you do it, you're crazy. [inaudible 00:05:25] your capital and bring in homes at a park you don't own. That's not a smart maneuver. And most of the lenders like 21st will network with you on that anyway.

The biggie, however, is raising rent. So if the park is a $200 rent, the market is at $400 and you say, "Well, if I can just get the rent to $300 then the park will value as much as the note and I can exercise my option."And year one you might raise it 250 and then you raise another 50 the next year to get to 300. Maybe you do it at $30, $33 a year for three years, whatever the case may be. That's another way to do it. Then you'll say what's the master lease amount? How much do I pay? Typically, what you pay is the amount of the guy's mortgage. Now you'll say, "Wait a minute now, but you just said it's not worth the amount of the mortgage." That's correct. Often in these master lease situations your lease payment is not going to be supported necessarily by the net income of the property. So you'll be in a negative situation. That's no way as uncommon. Negative two grand a month, negative one grand a month, whatever the case may be.

So you have to move quickly. If you say to yourself, "I can take this park over, and I can lose 2000 a month and I can raise the rent up enough to get it where at least it's break even," and it takes 90 days in this state to do that then you're out basically $6000. So you have to factor in your own psyche that you're going to lose maybe $6000 there. And then also perhaps you say, "Well, one reason I can't get the rent up is the park just is aesthetically horrible. So I want to put a little white vinyl fence on the front. I want to go ahead and put it up a new sign." And it's all going to cost another $4000.

So now you've effectively put in $10000, but at the same time on typically the smart master lease deal you'll make that money back during the term of the lease, is if you can get the thing to break even in year one, well, the next year, if you raise the rent again now you're at a positive and now you're going to get your $10000 you've invested back. But it's a very, very customized concept. We've done it several times. We've never had one that did not work out. So I think it's a real winner in the right [inaudible 00:07:38] with the right raw material.

So that's the first one, master lease with option. Many a deal that appears to be impossible because the price the seller demands because that's the price of his mortgage and it cannot be supported with the existing NOI. You can fix that. You can control it. You can fix it and buy it under a master lease with option. And let me also point out, which probably everyone already figured, master lease with option has some very interesting attributes, one of which you can sell the park, right? You can close on and simultaneously sell that park during your master lease with option period.

So [inaudible 00:08:17] into a property for just about zero down, because you can get in that thing, take over that thing, harness the value of it, and then sell that and never take possession of it. So there's actually several ways you can play master lease with option. Let's go on to number two. Number two, one of our favorites, zero down with non-recourse seller debt. That little phrase cures almost every deal problem. So why is that so effective? Why would a zero down with non-recourse seller debt be such a creative way to make a deal? Well, because you have nothing to lose. When you buy a property and that structure you've got nothing in it and you don't happen to ever put anything in it. So you can try all kinds of crazy stuff under that structure and you never know what'll happen.

I once bought a park at zero down non-recourse seller debt. It had two lots roughly. It only had one occupied. It had a pool. It had a clubhouse. It has a second little building. It had paved streets. So all kinds of great stuff but it had no revenue. That one residence lot rent, just that one lot rent, that wouldn't pay anything. That wouldn't even cover the cost of keeping the pool in chemicals and water. But I had a theory that perhaps I could find somebody else who would pay more than I was paying if they would only use the land that came with it at the front for a mobile home dealership.

So I went around all the mobile home dealers, and I found somebody, lo and behold, that wanted that for their dealership. Now, I took the gamble because I had nothing to lose. I had zero down and my non-recourse seller debt had a period in which I didn't have to make any payments at all. So I had absolutely nothing to lose. Many, many times even the very first deal I ever did I'd put down 10000 on a $400000 deal with seller non-recourse debt. I had a little to lose. I had 10000 to lose, but if I hadn't had that structure I probably would've never gotten in the mobile home park business back in the '90s. Would've been too afraid to do it.

So a lot of deals you look at, even if they're fairly screwed up, you still might go forward on that structure of zero down non-recourse seller debt. It doesn't have to be zero down. It can still be a low amount, 5% 10%. The important point is you're getting into with not a lot at risk, and that makes difficult deals look more attractive when there's not a lot of risk on it.

Number three, the seller finances the park on homes with zero down debt. Let's assume you got a deal and there are many out there, as everyone knows, of a park that comes with the old dreaded park owned homes, which we've got several different ideas on coming up. So [inaudible 00:10:57] seller park owned homes. Well, if they can't sell or carry the park for whatever [inaudible 00:11:06] the homes. Just bear in mind the bank wants nothing to do with the homes. You're not going to collateralize the homes. They're not going to give you any credit for the homes. The appraiser is not going to give you any credit for the homes.

And if you've got a sizable number of homes in that park, let's say you're looking at 100 space park with 30 park owned homes it's quite possible that the seller, if he wants $1 million for it was structured so that he's going to carry a $300000 seller carry on the homes and 700000 then on the park. Now, if the park is worth $1 million without the homes now you have an interesting deal because you can go in and basically you know, number one, you'll get the bank debt because you know it will appraise more than $700000. So it takes a lot of the stress off the bank side.

And it may also give you a lot better deal theoretically on the down. You buy it for 700 and put down 20%. That's 140. If you bought it for two million and that'd be 200000. So it saves you $60000 down. So there is one constructive way to do it when you've got park owned homes, plentiful park owned homes, and you make that into a zero down note with the seller.

Another idea, fourth idea, this comes up where you have a park that has private water or private sewer and the idea is to connect it to city water or sewer. This is has saved many a deal. Mom and pop have a park. It's on a well. The well is failing. So what do you do? I bought a park under that exact methodology in Missouri and there was no way I was going to own a park in Missouri, a water well that was dying. It just wasn't working. It wasn't extracting enough water and it's time was limited.

So in my diligence I immediately went to the municipal water people and said, "Can I connect to city [inaudible 00:13:00]?" "Sure. Our line is right out in front of the park right now." So all I had to do was I had to pay only half the cost to connect it to city's main. The problem was completely averted. Mom and pop had for years been scrambling to keep their well alive, constant money and repair and stress and would they run out of water. They were hitting water ration all the time. Well couldn't produce enough water. The tank was nearly dry. They'd have to have periods where they have to turn the tank off and tell people you can't have water except through certain hours of the day [inaudible 00:13:35] run a business.

I realized I couldn't do that, but I came to find out I could connect to city water very inexpensively. That's how I creatively solved that deal. And you'll find the same on sewer. If you have some kind of private sewer that's just not going to work as, just not making it, then maybe the solution is to connect to city sewer, but you always look at creatively a deal with private water or sewer one of the first things you should look at is can [inaudible 00:14:02] because among other issues if I can connect to city water or city sewer it's also going to make the value of that park go up. So that was always a good creative deal making tool.

The fifth one is if you've got a failed lagoon or failing lagoon or just a lagoon, period, and the lagoon again is a cess pool, it's a pit. The sewers goes into the [inaudible 00:14:27] it evaporates. It's nasty. It's unliked by most every state. They don't like them. They think that they've got health issues and just nasty stuff. So a lot of states are trying to mandate the eradication of [inaudible 00:14:40] Colorado has been one of the most aggressive on that [inaudible 00:14:42].

So what if you can't connect to city sewer though? You've got a lagoon. They're trying to shut you down. There's no city sewer for miles and miles. Is that the end of the park? No. What you can do is you can convert to a packaging plant. I know a park owner is the Denver metro who just recently did this. They city thought they were going to get rid of him. They thought they had a way to shut the park down. So they just sat on that lagoon and they harassed him and drove him insane on his lagoon. And so it appeared they were going to make the lagoon end, and if a lagoon died then what would happen is they would be successfully eradicating in the park.

But what happened is [inaudible 00:15:25] outsmarted them. He went to the state and [inaudible 00:15:27] packaging plant and the fact that park has no longer a lagoon. It's now a packaging plant. So that's another creative deal idea for the sewer and you have a lagoon in a park is to convert that into a packaging plant. Now, it's very expensive. A packaging plant is typically a half a million to a million dollar item. So you obviously has to buy the park really inexpensively to make sense of that. But in some cases a desperate mom-and-pop with a filling lagoon might sell it insanely inexpensively.

Item six, converting a master metered electric park in into direct build electric. Now, this is a fairly tough one to do because the way the power company sees this is they're already collecting the money, the same exact amount of money from the park owner without having to chase after 50 or 100 residents. So what do you do when you're looking at those kinds of parks? Well, you may say to yourself, "Oh, I don't know if I want to buy this thing as a master meter power park, that is I'm responsible for all the lines and the meters thing." But sometimes you can convert it.

Our experience, and we've done these before, the way it works is you have to go and do diligence to the power company and say, "I don't want to really have a master meter tower park. Is there anything I could do to get you Mr power company take this thing over?" And typically if they say maybe, many will say no, but if they say maybe then what they're going to require is a hefty amount of money from you to really make it worth their while. They're going to have to go in and put all new lines and all new meters. Most importantly, they're going to have to now deal with chasing after residents who we all know are sometimes financially challenged.

So it may cost you to get that accomplished, several thousand dollars per lot. They might say, "Yeah, we'll take over your power system if you pay us 2000 a lot or 4000 a lot." Well, in some cases that may be the smartest thing you can do. Those master metered electric systems, if you have to go in there, if this thing is not been modernized in 50 years you may have to go in and spend $2000 per unit just to update the power enough where it's safe. And if you can instead give them the money you're way ahead, because what's going to happen now is they're going to take over the system and you don't have to mess with it anymore. You don't have to chase the people after the money. You don't have to worry about repair and maintenance.

So in some cases you can convert a master meter metered electric system. And again, just to define that, that is a system in which the power company has a giant meter out at the front and you and everything after the meter. If you can get that converted to city electric then that's a definite deal making tool that can actually work really well. The same is true with master metered gas [inaudible 00:18:12]. If you can convert a master metered gas system into something other than that you have massively improved your life and massively improved the value of the property.

Now, what are the options? Well, the options are number one, propane. Unbelievably mobile homes are already come out of the factory ready for the propane or natural gas. All they do is change out the apertures. So as a result if you can get it, if you can bring in the tanks, that's a relatively inexpensive solution. It'll cost you probably $1000 per home to bring in the tank and run the line from the tank to the home. The important part on propane is now you've also made it the tenant's responsibility to pay for the propane. So you're no longer the middleman, which is where you want to be. They have to prepay the propane, have the propane tank filled. And if it runs out, it's not your fault. It's theirs. They forgot to fill it with propane.

The other option is to go to all electric. Now, that is a much more difficult fix. To go all electric what you'll have to do is you'll have to replace every gas suppliers in the home, whether it's the furnace, hot water heater, the range, or all three. That is expensive stuff. The furnace alone is two grand. The range is probably going to cost by the time you get it in 1000. Hot water heater, probably the same. And then the home may not be able to handle it if you naturally wire the home. So between those two from a deal making perspective propane is definitely the way you would want to angle, but it would all rely on what the city says. Now, if you can't get propane in it but you can do all electric, it might still work if you can get a big enough discount from the seller.

Item eight in our creative deal making lists, building a cinder block firewall between homes to fix a fire marshal violation. I put this in here because I thought it was so darn smart. I didn't do it. Another park owner I know did it. He did it out in California. Here's what happened. He looked to bringing an old mobile home park back to life in California, but the city didn't want him to because as we've discussed a thousand times to these hate mobile home parks they hate them mostly because they lose money like crazy for the city in the form of low tax income versus high tuition. But also they have stereotyped Americans. So they would love to have the mobile home parks all shut down.

So the guy was looking [inaudible 00:20:31] and the city was saying, "Well, if you buy that thing we're going to shut you down because your homes are too close together." Now under the code, perhaps they were. Most of these want 10 feet spacing between mobile homes, and in this case, many of the homes didn't have it. So he took an interesting course of action. I'd never heard of it before. He researched the laws in California and the separation between structures of less than 10 feet, and what he found is there was a loophole that all you have to do in those circumstances apparently, and again, I'm not in California and I didn't do the deal, he found that if he built a cinder block firewall between the structures of a sufficient height that it didn't matter what the spacing was.

So that's what he did. He went to the city and said, "You know what? You're absolutely right. The structures are too close together." And instead of them saying, "I'm going to drop the deal," or he'll be torn down. He said, "Well, so I'm going to go ahead and build a cinder block firewall and I'm submitting the plans hereby for your approval to build them." They had no choice but to approve it because it's what's the law demanded. He built the firewalls and never had to remove a single home. Very, very creative deal making the approach.

Number nine, renting vacant lots to neighbors to improve your occupancy percent, and also just to generally spruce up the park. Here's the situation. You're buying a [inaudible 00:21:50] that's got massive amounts of vacancy. Now, [inaudible 00:21:54] called stabilize occupancy, which means typically 80% but sometimes at least 70% occupancy to make that attractive to a lender, to make it look like people want to live there, that they care about living there.

But what happens when you're so vacant it'll take you forever to get there? Let's assume you're looking at a park at 200 lots. It only has 70 occupied. You have to get to 160. You have to fill 90 lots to get to a stabilized occupancy. And during that entire period you're going to have to be mowing all those vacant lots and keeping them up, and it looks like something that's nearly impossible. But here's a creative deal idea. What if you take those vacant lots and rent those to the neighbors? So you've got home, vacant lot, home, vacant lot, home, vacant lot in the layout. What if you just talk and you just rented the vacant lot adjacent to each home to the person in that home for a very small amount?

Let's just say you charge $20 a month. Here's what happened. Your 20 bucks a month did not only make that now an occupied lot theoretically on the rent roll, but it would also mean you don't longer have to mow it, take care of it. This new person would watch over. He might even have pride of ownership and put it in some other feature on it. That's all good stuff for the park, and most importantly now your park will no longer be so very vacant. You might just adopt that as a permanent feature. You might just say that your park is going to have double size yards going forward. Not only does it eat up your vacancy but it makes your park stand out. It might ultimately lead to higher lot rent. So it's a very, very creative tactic that many people have used in the past.

Number 10, again, these are creative ideas. I can't vouch for them. I've never done this one, but I know of a park owner on several occasions [inaudible 00:23:43] not buying the entire park but only buying 51% and leaving 49% of the park with mom and pop. Now [inaudible 00:23:55] wait a minute now. That is wacky. Well, it isn't truly wacky. What you want to do is he looked for opportunities which bound everywhere where [inaudible 00:24:05] no debt, [inaudible 00:24:06] in the park free and clear. But after [inaudible 00:24:08] they really want to sell it or not and they can't really know how to price it. And he would say, "Here's the deal. I'll buy 51% and then I will go in and jazz up the management. I will go in and raise the rents and fill the vacant lots and you'll share in all that upside. You'll still have 49%." It's a very interesting angle.

Now, I've never done it. I went over the deals that he did with him and it looked like it actually was fairly smart. When you do that obviously one hurdle you'll have to have you have to have a huge bonding with mom-and-pop because they're trusting you as now the majority owner to not screw up their 49%. So this will require a real leap of faith by mom-and-pop. But I can visualize in certain instances how that would work perhaps very well. Mom and pop have a park at a great location with a lot ability to drive the rents up to market, a lot of opportunities to fill lots, and they're on the fence because they kind of want to do with themselves.

Now you're throwing out the olive branch by letting them share in all that upside, and that could turn the corner and make it attractive to them. And you don't have a lot at risk because you still control the whole deal. You control 51%. You can still elect to sell the park, refinance the park, and they're just stuck a long on the ride. They're merely in the back seat. They have no ability to reach the steering wheel or the gas pedal. But it's a very interesting structure and one that I would definitely consider a creative deal making idea.

Number 11, subdividing the whole park and selling off anything you don't want, selling excess land, excess buildings, whatever the case may be. That's a lot. Many people who've done this, but on this creative deal making angle is the fact sometimes you can get extraordinarily good pricing on the subdivision far more than mom-and-pop are harnessing because some people just like to own stuff. If mom-and-pop have a rental home at the front, a frame structure, a brick structure running that is not that profitable. I'm not a big fan of the stick-built rental housing because typically they need so much in repairs and then assuming [inaudible 00:26:23] capex periodically on roofs and foundations, it's really hard to make [inaudible 00:26:28] of appreciation. And since I'm not really buying this little single family home before appreciation I'm not going to make any money with it.

However, if I [inaudible 00:26:37] that home and sell it to another person who's an actual owner of it people will pay a premium in United States for ownership. Look at how much homes are rent for versus what they sell for in many neighborhoods. People pay a big premium. They don't look when they buy. They don't look at the cap rate. They say, "This is my home, my homestead. This is where I wanted to live." And sometimes they go a little crazy. The $400 rental house might sell for a significantly higher price and that would ever tap out to someone who wants to actually take ownership.

So subdivided land and parks is sometimes a very good idea. You also won't get very much pushback from the city because cities hate parks. So they figure every square foot that's not in the park there's one less square foot of mobile home park they have to worry about. So you can often go in and get the subdivisions done without a lot of effort if you simply ask. And in many cases that's exactly what you need to do when you take on land or buildings or anything that's not mobile home park related because you want to be in the mobile home park business, right? You don't want to be in the quick wash laundry business, and then perhaps a self storage business. All these different things that mom-and-pop, little business models, momma pop stick you with that they did for the last half century you don't want to get involved in. Sometimes subdividing this and selling those off is a good deal making idea.

Next one, this of course is a huge one in our industry although people don't like to accept it, but mobile home lot rents are insanely, ridiculously low. It's not just my opinion. It's anyone who's sane opinion. Charles Becker from Duke university, the economist, it's his opinion. If we brought in 25 different people and blindfold them and they didn't know it was a mobile home park or rather just an apartment building and you gave them the marker read and where you're at they'd say, "Oh, my gosh, those rents are crazy."

That's our industry. We're in an industry where the rents are averaging across America we figure at 280 a month, and at the same time the when you look at affordable housing and where they could be, where they should be, where they are in some markets the average would be more like $500 a month. I mean, I'm not even saying that that's the limit. But that's more where they should be. That's what they were back in 1960 when they built these parks. Most of these parks were built at a $60 a month lot rent which today with inflation would equate to $500 a month. So often when you buy these mobile home parks from mom-and-pop it will be called mom-and-pop quantitative easing, which means they refuse to ever raise the rents, then you've got decades of inflation that was never accounted for.

But that's right where the rents need to go. Sometimes without a very large rent increase you can bridge the gap between what the seller wants and what you want. You look at the value of the park at a $25 rent increase and you say, "Yep, all my numbers tied together if I just get a $25 ready to increase," then why the heck can't you buy it based on the value of that mom-and-pop want given the fact, if your state allows it, in 90 days, if that's what the state's timetable is you can raise your rent up $25 and now the park [inaudible 00:29:49] all day long.

In some markets, in fact, you have to engage in that or you can't really buy any parks. If you're looking at buying parks down in Austin where lot rents are now at 650 and 700 a month and you're looking at a park that's got a 250 rent which you find frequently down around Austin then you can't model your deal based on 250 if you know that within a short span of time you're going to be at 300 or 350 or 500 or 650 or whatever the market rent is going to be.

So in a lot of deals today you've got to bridge that gap using sensible, reasonable rent raises, not crazy stuff. I'm not talking where, "Oh, yeah, I'm going to raise the rent $100 in the first year." We're not advocates of raising rates ever $100 in one jump except in very, very unique situations. So if you save yourself at a reasonable increase, one that the residents can happily pay, one that is supported by improvements in the park, improvements in management then you're going to have to take that step and do that. I guess probably of all the items on this list it's probably one of the most important creative deal making tools of all is simply the concept of raising the rent to hit the targets that you need.

Number 13, fill in lots to bridge that gap, filling lots with a number of items. When you look at a typical mobile home park the value of the park if the lot is vacant is zero. But the value of the park with each occupied lot, maybe each lot is worth 30 to 50 thousand dollars of value. So often if you were $100000 off in your evaluation between mom-and-pop and what you want to pay it may be that you say to yourself, "Well, to get there I've got to fill two of the four lots."

So then the question is how do you fill two to four slots to get to where you wanted to be? Well, the least expensive way is with an RV, but the problem with an RV is RVs can be temporary. So to many people that's not considered the best way to do it, although it's not a bad bridge at all. The next way is what I call organic move ins. These is someone who lives in another mobile home park but wants to live in your mobile home park. In that case, you pay the cost of the move, typically $5000. They move from wherever they are into your park, and the beauty of that is they already own their own home. You don't have to show or rent a home or anything. So they just move right in and you're not in the loop anymore.

Up from that are [inaudible 00:32:18] dealers. A [inaudible 00:32:19] dealer is someone who brings in a home on their road. Now, typically you'll have to do some things, some financial give back or something to bring them in to remain competitive with all the other park owners. But nevertheless, it's not your home. So once they bring in their home we say then seller [inaudible 00:32:33].

Then of course there's two final where you are in the loop and it's a bigger capital investment [inaudible 00:32:38] used homes. You've got buy a used [inaudible 00:32:41] say 1990s used home for 8000 bucks. You bring it into the park for 5000. Now you're going into 13. You do 4000 of renovation. You're in it for 17. Now, that home you can sell finance through groups like 21st Mortgage or PEP. So you can still tap in your equity. You don't have to pay it every home individually out of your own pocket. You can lever that money. The same as with new homes. New homes, for example, a 21st Mortgage program, those are basically going to be free to you. So you don't have any costs in those homes at all as long as you're able to successfully find a customer who has the right credit and down to buy the home through 21st Mortgage. That's into the cash program.

So the bottom line is when you're out there creatively deal-making, particularly on parks that have some degree of vacancy and maybe that you have to model slowly in a certain number of lots to make the numbers tie together. Now, it's not that hard to do. There's parks out there where people have successfully filled easily four homes a month, two homes a month, one a month. I mean, that's not stretching whatsoever. And if you just need a few homes to make the numbers tie you can do that.

Now, if you have to do a whole bunch of homes then maybe you're stretching too far. So if you said, "Well, I have to tell 60 lots to get a price of what the seller wants," I'm not sure that's good creative deal-making. I think in that case what you're doing maybe is you're overpaying because why are you giving the seller so much credit for things they didn't do? So there's a lot of deals out there with the number of homes you'd have to bring in is very, very small than they make the numbers tie, and it's a very good creative deal tool.


Number 14, giving the park owned homes away to the residents or selling to the residents and raising the lot rent internally. This is one of the best things about park owned homes because the person in that rental home all they know is what the total payment per month. Mom and pop don't even break it down. So let's say they're paying 700 a month for that rental home, but mom-and-pop they're lot rent on the privately owned homes is only $200 a month, but the market rent is 400. So you could look at that and say, "I got 200 to rent and 400 of home rent." But you also on your own choice could reallocate that where you've got 400 of lot rent and 200 of home rent. That's up to you. Customer doesn't know the difference. No one knows the difference.

But if you put that money in the lot rent and not home rent something amazing happens. Now you have rent that can actually be capped. Now you've got rent that actually is worth 10 times the amount. So the nice thing about park owned homes, one of the biggest positives, is that they allow you to internally allocate huge numbers day one. So you can actually jump that rent from 200 to 400 in that example, or if the lot rent and market was 550 you could jump it internally from 200 to 550 leaving only $50 of rent on the home. Now, if you the home to the customer or you gift the home to the customer they'll still be happy because they were paying 600 a month and now you're paying 400. That's 200 less than what they were paying. So it's really a win/win for everybody. That's one of the few times you can raise the rent all the way to market and not have to wait a period of years to do it. So that's another good creative tool.

Number 15, finance 70% of the park with about 70% LTV and another 30% of the LTV with the sellers. So it's effectively a zero down deal. Now, I've never done that. And to do that, well, you have to find a bank that was okay with this idea. The down payment is coming in from the seller and not from you. So in other words, the bank says to you, "I'll do 70% loan to value in a first lien position." So what you do is you [inaudible 00:36:33] such that the seller is going to do 30% and a second position. And so basically you get the 70% LTV. You pay that to the bank, and then the seller floats you what was effectively the down payment.

Now some banks will say, "No, you cannot do that." It's very specific. And Dave and I have never done the structure, but I know of park owners who have done the structure. So know it's achievable, but this one's a little difficult because you'll have to have a ledger who's on board. Many lenders, as you're aware, they like to see what they call skin in the game. They like to see you putting in your own hard earned money because they know therefore you'll really give the deal sufficient attention so you won't default.

Under that structure they may say, "Well, the only one who's got any money in this deal is mom-and-pop, and as a result you don't. So I don't trust making a loan with you because you have nothing in it." But you may find a bank that will do that because some banks all they care about is that 70% LTV in a first lien and they don't care where the down comes from. So in the event of that lender that maybe a creative deal structure for you.

Idea 16, have the seller keep a home and just pay lot rent. This is a deal where mom-and-pop have got a couple of homes that they think are way too valuable. They got that double wide at the back that they think is worth 100 grand, and you know you can't sell that thing for more than 29 grand. So what do you do? Well, you don't really want to be in the home business anyway. You know their evaluation is too high. So you simply say to them, "You go ahead and keep the home. You pay the lot rent and you sell it for 100 grand if you think that's what it's worth." It's perfectly sensible. I mean, it's completely morally right, makes complete sense. They're saying it's still valuable. Well, if they believe it, put their money where their mouth is. Just keep the darn home and sell the paper for 100 grand because you don't think they can.

Now, of course, the way that normally ends is mom-and-pop when you give them such a rational response they immediately retreat and they say, "Oh, well then just keep the home," because they know better. They know it will never sell for a 100 grand, and they know further if they sell the park and therefore don't own the park they only want to tangle with the homes, because the only reason park owners tangle with the homes is they want to get the lot rent. So in the absence of any lot rent encouragement they don't want to do that. But that's something you can do whether it's one home or 10 homes. If they really value them too high, you can't come to agreement on the value of the homes, then best thing you can do is just spin it around and tell them, "Well, you just keep the homes and pay the lot rent." And sometimes that's the creative deal tool that really gets things working in your favor.

Number 17, fill the existing park owned homes to bridge the gap with the seller. We've talked about raising rents, right? We talked about filling lots as a way to bridge the gap. Well, what about filling those existing vacant park owned homes? Now, if you're going to go that route you've got to remember that those homes are going to need work typically. If they're vacant, if mom-and-pop haven't filled them frequently the reason they haven't filled them is because they need substantial renovation. And you're not going to be able to do that substantial renovation for free. You're going to have to put some money out of your pocket, and sometimes that amount of money can be very large.

Typically, remodeled mobile home in most parts in about a four to five thousand dollar proposition. But there's homes out there that would cost you 10000 or more because they're in such terrible condition. Also, don't forget that every dollar you put into renovating those homes is money you could've put it into maybe a better home. If you're going to pour $8000 into a 1960s home with a crummy floor plan, it's pre HUD, you might just be better off taking the same amount of money as a down on getting a newer 1990s repo home or even just doing a cash program brand new home.

But sometimes the park owned homes that mom-and-pop leave you may be from the '80s and the '90s, floor plans are decent. They're not in terrible condition and all you have to do to bridge your number or gap is to simply fill them up, put in the [inaudible 00:40:46] figure out the plan of what you're going to do with the homes. You can often finance those things through 21st Mortgage or PEP. So often filling up those old homes is a good way to help bridge the gap and stuff that you can get going pretty quickly.

We've seen homes that mom and pops have that need very, very little work, 1000 or 2000 dollars. It's kind of mind boggling they never bothered to finish the project. But sometimes pop was doing the work himself. He was old, he didn't feel good. He didn't want to do it. And next thing you know, the home has been languishing for a long, long time, But often you can jump in there yourself and you can fix it.

Number 18, do a loan assumption with an existing bank at 0% down. So here's the deal. A bank has a mobile home park. They hate mobile home parks. So they got this park and they want to get it off their books in the worst possible way, but they don't want to have too embarrassing a sale or loss on it. So let's assume they say, "Well, I got to get at least 450 grand for this mobile home park." One thing you can do to them, because they just want to get it off your book, is to say to them, "Hey, what if I make it back into a performing loan and to pay your price I'm going to need get a zero down deal." Now, unlike seller where it was zero down non-recourse often with a bank you will not achieve that. It may be zero down with recourse. So not quite as attractive as the non-recourse debt, but sometimes that's what it takes in order to get the deal done.

Now, when that occurs what you do then is you basically have taken over the property. You've got nothing in it. So now it's a REO situation and often, of course, there's problems with it, which is why it is an REO situation. But sometimes those problems are quickly remedied based on these ideas we [inaudible 00:42:33] over. I remember one deal we bought once but the big issue was that the bank's customer had never raised the rent to get in the market. They bought the thing massively under market and unlike a sensible person would and raise the rents to market they, for whatever reason, had cold feet about doing it. So when they should've been raising the rents $25 a month they were raising them like five. So the problem was the rents weren't were where they should be.

We were able to do just this. We were able to take over the loan, make it reforming again. It was zero down and then we went in there and raised the rents and therefore bridged the gap and everything worked out beautifully for all parties involved. So one thing you could do an REO deal that may make it more attractive to you, may give you your creative deal making moment, is simply to get the bank to carry the paper. Because again, in almost every mobile home park deal a small amount down, that's what really triggers you to feel like maybe this deal won't work. That's always a big part of creative deal making.

Number 19, expand the part by making a nasty park a nice one and use that as the trigger to trade the city for giving you the rezoning you need to build a bigger park. Now, this is a strange idea to grasp but let me just [inaudible 00:43:49] everybody. All right? If you have a nasty park the city is not going to want to have that park looking that way any longer. It does not look good. So what they're going to do is in the back of their mind they have a desire to make this nicer. And if you go to them and say, "I'm going to go ahead and make this nicer, only if you let me have 20 extra lots at the back and 40 extra lots." That's a pretty good bargaining position.

What you're bargaining is you're going to make that park at the front, which is so very important, attractive and not pull down the value of the neighborhood, make the cities unhappy. So basically what you're doing here is you're giving something to city which is very valuable for them, but yet what you're asking from them to them isn't that valuable. Adding some spaces in a mobile home park for someone who's not in the industry, they don't even know the monetary value of that, nor are they really that concerned about the fact that at the back of that piece of land you'll have more mobile home units. That doesn't really bother anyone. No one even would see that. All they see is the in-tray.

So often by trading them a nice looking entry you're able to do the expansion. We tried to do an expansion recently of a park hat looks fantastic. It looks like a country club. I had nothing to trade to the city to put in more lots. That was the problem with the deal. I've done the exact same negotiation on expanding an ugly park by trading and making the ugly park pretty and I had that approved. So often one of the key items if you're going to want to do this expansion is to have an ugly park as the raw material to do it, but again, this is an interesting creative deal making angle that I think makes complete sense to everybody.

Finally, number 20, buying a nonperforming note on the cheap and then getting the deed in lieu of foreclosure for releasing the personal guarantee. Now, let's go over this one. This is one of the most sophisticated and odd deal making creative concepts, but it's a heck of a great idea. Here's how it works. And this would work not only on mobile home parks, this could work in almost anything. Banks typically are afraid of borrowers. When things get bad, they're very concerned that the borrower will do damage to the mobile home park. So that's a problem for them. And they're also afraid that the borrower will fight them in court and tie it up for years and years and years.

So a bank doesn't really typically always want to go to foreclosure. They would instead rather buy the note or sell the note and offload those worries onto you, the note buyer, because if you buy a non-performing note you still don't have control of the asset. You have a note and you won't have control until you foreclose. And let's say that you foreclose and the guy just destroys the park. He pours concrete down the lines. He lights the clubhouse on fire, who knows what. You're stuck with it. The bank got their money. They're out of the picture. They could care less. Now when you go to foreclose on your notes you're the one that gets killed on that deal.

So here is a creative idea that we've done before that I think is pretty clever. What you do is you tie up the note for diligence on the note, which they'll let you do. No one buys a non-performing note without due diligence. So you tie that up and then what you do is you go to the person who's not performing. You go to the borrower and you say, "Hey, borrower, here's the deal. What would I have to do to have you not fight me when I foreclose on this part? Because that's why I'm buying the note. And here's my idea to you. If you'll sign a deed in lieu of foreclosure, which means they'll deed the park over you, if different steps are taken closing, I'll release you from your personal guarantee."

Now, think about this for a minute. The bank typically, all of these banks other than conduit lenders and Fanny Mae, Freddie Mac lenders, they're recourse notes. So what will happen is if you go bad and it's sold as a loss then the lender can come after you personally for the amount of the loss. That's called having a recourse loan. But what if you just forgive the recourse? You're not a bank. You're not going to go after the differential. You're not going to go after the guy's life savings or his house or his car.

So it will not harm you at all to give up the guarantee. You've lost nothing in that arrangement. And as a result, the guy will [inaudible 00:48:18] destroy the park perhaps because often the only reason they were going to be so contentious is because they thought that the bank was going to ruin their lives. So they threatened the bank with the idea that, "Oh, if you try you take this from me and trigger a recourse and come after me for all kinds of money I got I'm taking everything down. I'll just go ahead and torch this place," kind of the attitude.

You could get around that [inaudible 00:48:41] the lenders don't understand it because the way the lenders are they're never going to drop that recourse. They just see some kind of moral imperative that they got to have the recourse even when it doesn't make any sense to them from a [inaudible 00:48:55]. But it makes infinite sense to you from a business perspective, and you'd be shocked how many of these deals, if you simply go to the borrower. I don't think they'd ever think you do it to begin with to be the honest with you. I think that probably shocks the bank anyway. But we go to the borrower just say, "Hey, I'll go ahead and draft you from your personal guarantee if you won't fight me on this and simply deed the park over to me." It always works. Every time we've pitched that it's always worked successfully.

But in the absence of that I don't think I would probably buy in this. I've seen so many mobile home parks destroyed when the novice note buyer goes to foreclose. I don't think I want to get involved in that. But if I can go to the borrower and get them to agreeably assign the park to me in deed in lieu simply for dropping the personal guarantee then I would definitely do that, and I would rank that as a really important item in creative deal making.

All right. Many different ideas that you could use to do creative deal making, and let me again explain why each of those 20 is important is because often what separates people who buy deals, and in our case buy [inaudible 00:50:09] is that they have this idea, this positive idea that every deal they look at that has the right raw material they're going to go and do whatever it takes to make that happen, and they go in and they try it and then check out what it would take to make the deal where they figure out the narrative would make the deal possible. Then they throw out the price and the terms, whatever it would take to make it work just to see what happens.

Now, will the seller always agree to it? No, they won't agree to it. It's a volume business like anything [inaudible 00:50:41]. However, if you do it enough, if you thread enough offers you will definitely get takers. And on those deals where you have takers you can check out your creative deal making idea through due diligence to see if it really will fly, and if it does fly what you've just done is you've done what most buyers can't do, is you've taken a deal that looked tough and you found creative ways to make that work and [inaudible 00:51:06] successful ways of buying mobile home park.

On top of that, when you're a creative deal maker you can often get really good deals because what happens is they're buyers that can't figure out how to do it. They can't figure out how to tie the numbers together. They can't figure out how to solve this or how to solve that. So when you have those tools it's very powerful. It gives you a much stronger position in getting a deal done. You may recall here [inaudible 00:51:33] events. Think one or two back [inaudible 00:51:36] there's a guy that we called Sean [inaudible 00:51:38] who has some parks up in Pennsylvania. And that's what Sean is. Sean is the ultimate creative deal maker. Now, he looks at things that are so reprehensible that most people would be just too terrified to even come up with a creative deal solution. But it's a very, very effective strategy. He buys his parks at literally a penny on the dollar because no other buyer has the how to fix it.

One other asterisk on this, once again to reinforce it, no one gets into trouble here. These are ideas on parks that have the right raw material. All the time when I'm driving around... I was driving through Indiana this week. I'll be in the middle of nowhere in Indiana. I'll be in places where my GPS shows no signs of life for hours away and there along the farm to market road that I'm simply on because GPS tells me to follow it for 89 miles is a 70 space mobile home park. It's probably 80% vacant and the remaining 20% of the homes are a hodgepodge of '60s and '70s pre HUD homes and then the occasional 1980s home, which must've been the richest guy in the park at one time.

There's no reason for that park to exist. You can't look at that park and say, "I'm putting my creative deal-making hat on now. How do I make this thing work?" Because you just don't have the raw material. You are in the middle of nowhere. There's absolutely no demand for what you would be doing. There's typically no city water, no city sewer. There's not even any scarcity provision. You could build another park across the street, down the street. You can do anything you want. There's no money in that. So again, so nice lecture on creative deal making that is predicated on finding deals that have the right amount of raw material. Do not get involved with ones that do not. You're completely wasting your time figuring out how to creatively bring back to life a park that doesn't have the right material to ever be successful.

Those parks you should just kind of let him die. That's kind of where the future of those parks. And I pass them all the time, and yes, it's sad because mom and pop when they built that park in the middle of nowhere they could have built it in the middle of somewhere. Typically, they built them like that because they owned that land. It was their farm where they lived in a small town. But it doesn't mean that you can bring back any mobile home park to life. Some you should just avoid them, let them die, let them move on into some other use because that's the best thing they can possibly do. But if you're going to get creative, you got to have the right raw material to be creative.