Buying smaller mobile home parks is often highly lucrative. Some of the best deals – from a cap rate perspective – come from parks under $500,000 in total price. But how do you financing these smaller properties, since most lenders are looking for deals more in the $1 million + range? In this first Lecture Series Event of 2018, Frank Rolfe is going to give an exhaustive review of the different options to finance deals at this price level. He’s going to go over both “inside the box” and “outside the box” approaches, and give real-life examples of each one, based on real deals that he and Dave have made over the years. As the 5th largest mobile home park owner in the U.S – in tandem with his partner Dave Reynolds – there will be over two decades of facts and experience discussed in this event.
If you want to learn skills to succeed with mobile home parks of all shapes and sizes, attend 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.
How To Finance Mobile Home Parks Under $500,000 In Price Lecture Transcript
Welcome to tonight's lecture series event on how to finance mobile home parks with the purchase price of under $500,000. This is Frank Rolfe, and this is a very, very hot topic with many, many people looking for their first park or even their 31st park because you're kind of in a no man's land and when you're under $750,000 to a million dollars in purchase price. What's the difference you might say? Well, the difference is a lot of banks just don't like doing smaller mobile home park loans. Why is that? Well, possibly because many banks look at mobile home parks as being an odd asset class. As a result they look and say, "Well, I could do a single family home for that amount and therefore, I'll just stick with what I know and which my bosses will only support us in lending in the home arena.
Then when you get larger, you become much more attractive because people don't like making loans on homes in the one, two, three million dollar range. That's very risky, so in that arena they would rather do commercial loans such as mobile home parks and that's why there's much greater access to things like Agency debt and Conduit debt where you start getting into the million plus price range. But that does not mean that there aren't some great deals you can find out there in parks that cost $100,000, $200, $300, $400, $500. Both Dave and I started off with parks that were under $500,000. in price. My very first one Glenhaven mobile Home Park in Dallas, the price was $400,000 so both of those began in this arena and really all of our early parks were always a half a million dollars or less.
So how do you do it? How do you get loans at that price point? So that's what we're going to go over tonight, and we're going to start off by talking about seller financing. Now that's how I got in the business, that's my very first park Glenhaven. That's how I got it financed. That's why I bought it was because the seller was willing to carry the paper on it. In that case, carry the paper fully advertising so I would never, ever have to get a bank loan with it. So seller financing is very very attractive stuff.
So how do you get it? Well, let's first start off why people do it? Let's assume you're a mom and pop and you're selling your mobile home park for $400,000 as an example. So you're going to sell the park for $400,000. You're gonna get cash for $400,000, but then you have to pay tax on that so you have capital gains and your state tax and you'll even have recapture if you've been depreciating it down. Let's just assume in this case the tax rate is 30%. We're gonna say that you'll net 70 which on a $400,000 purchase net of tax, you'll make about $280,000. You then you bop proudly down to your local A.G. Edwards stock brokerage place and you go in and say, "I've got $280,000 of cash here what can you get me?" They'll say, " Well how risky an investor are you?" You'll say, "Well I'm not risky at all. I want pure security." So he'll say, "Well, I've got some CDs here that are paying a point, but maybe I could even get you a point and a half." So what's it mean? It means you're going to be getting for your $280,000, the sad and pathetic amount of about $3,000 a year.
Now let's change the movie to where the seller carries the financing. So let's assume you put down $100,000, and let's just assume he throws that out the window and burns it. I don't even have to include that in my example. That leaves him $300,000 that he's carrying. Let's say your interest rate on that note is 5%. Well now he's getting $15,000 per year whereas before he was making three. So he's making about five times more and that's the reason people carry the paper is because they can't get out in the real world right now anywhere approximating 5% which is what securities they have in that park. They know that park very, very well. They've built it from scratch or they bought it decades ago. They know everything about it. For them to get that collateral back, no big deal. They keep your down payment. They go ahead and resale it again, not going to hurt them at all.
If however, they've put their money in Junk Bonds from John Deere paying 4% and John Deere goes bust they lose everything. So really it's a very easy way to make a very high return on a fairly secure piece of collateral, and that's why they do it. At least that's their financial reason that they do it. But there's another reason they do it. The other reason's called bonding. If they like you, if they want to help you they're more than happy to carry the paper because again they're going to get way more money carrying the paper and they get it. It's a win-win because they not only get more money but they get to help out their buddy. So bonding is also very, very important part of seller financing. Now how do you bond with people? You just spend time with them. Our favorite question to get bonding going is, "How did you come to own this mobile home park?"
The answer to that story could last an hour. It could last two hours. Be an attentive listener and you'll start bonding with the seller. Also, sellers sometimes just take a liking to you regardless of what you do because you look like someone from their past that they liked or you seem to be kind of like them at a younger age. So bonding's another reason, but the key reason, the most important reason is simply they will make far more money carrying the paper than any other investment program they can devise.
Now back when CD's were paying 10% interest it was probably really hard to get seller financing back in the Reagan era. I was not in that time in the mobile home park business, I was in the billboard business. But I can imagine when you can go out and get a nice safe CD secured 10% return it might be hard to get someone to carry paper, but in today's pathetic returns of one and 2% on CDs not that hard at all.
Now if you want to get seller financing don't look like you need it on the front end. If you seem desperate for seller financing what it's gonna do is convey a signal to the seller you can't get bank financing. So they're going to think the less of you that you're not really a bankable individual. You said you want to have some rationale of why you want it or why it's in the seller's best interest. Now here's why you might want it. If this park is in bad condition if it needs a lot of work, you may tell the seller, "Hey, I may need to use my down payment in order to make the needed repairs," and that's a perfectly reasonable argument, and in many cases 100% true. Now there's a little wrinkle to that, if you can find a park that looks cosmetically terrible but to actually clean it is not that expensive then it may work in your favor.
But you have to have a reason typically to want the seller finances, so that's one step towards having the reasoning. The other one of course, is the reason they'll just get more money from doing it and it's a win-win for both you and them. Because if you have to go out and get a bank loan it's going to be more costly. You'll have to get lots of costly third party reports. You'll have to be approved. They'll definitely they'll be a time delay on closing. So really for most mom's and pop's the win-win solution to financing is simply to carry the paper. It's a no risk way to really move the sale along quickly and everyone wins in the end.
Now some more thoughts on seller notes while we're on the topic. Number one, they're virtually always non-recourse, make sure yours is too. That's one of the beauties of seller finance and I've never seen a recourse note. Let's go over our recourse means. Recourse means in the event of catastrophe if you give the property back to the person who loaned you the money, they resell it at auction. If the amount they get at auction is less than what you owe that's called a deficiency and they can come after you personally to collect on that deficiency. If you have a non-recourse note they cannot.All they can do, your worst case scenario is they take the property back and you lose your down payment. So clearly non-recourse is the best kind of financing. So when you're looking at that note with the seller make sure that note is non-recourse. Again I've never seen the recourse one, you don't want to be the first.
Other items you want to know about, one is the cure period. So what's a cure period and why would you care? A cure period says, "If you don't make your payment on time you have to be notified by the note holder that you didn't make it on time and then given so many days to make the payment." As long as you have a cure period if you were to default you're always in the know. You know that you've defaulted. You have the ability to fix it. If you don't have a cure period and you send the check in properly on the right, to the right address on the right date, but the postman loses your check, you're still in default of your note and it could be called immediately due in full.
So you got to have a cure period in there. One other item is you want to have releases already established in your note. Now you'll say, "What's a release?" If you get assets along with that mobile home park and they include park owned homes, it might include a commercial building. About anything, mom and pop's home. If you ever might ever, ever want to sell it, you want to establish the price on the front end of what you would have to give the seller to release that from the collateral pool. Because if the seller carries the paper he's going to collateralize inside of that note everything, every park pwned home even the riding lawn mower.
So you want to have release prices if you want to sell those items off. Let me give you an example, let's assume you're buying a mobile home park and there's four park owned homes in that. You want to sell them. You don't want to be a renter, you want to sell those off and you look at them and they're from the '60's or the '70's and you think they're only worth $2,000 each. You could go to mom and pop and say, "Hey, mom and pop, down the road I may want to sell those homes off. If I gave you $2,000 on each of those homes and when the time comes would you give me the title and release that from the collateral pool?"
Mom and pop will probably say, "Sure thing," because they don't think you'll ever do it. If you don't do that on the front end and you come back to them three years later and say, "Hey, mom and pop, I want to go ahead and pay off that park owned home on Lot 14." What do you think they're going to say? They're going to say, "Okay, well, give me $8,000," because when they know they have you over a barrel, the price goes up substantially. Early on when your first buying they think, "Oh, they're never going to do it," but when you come to them and say, "Hey, I'm really going to do it." Then the price goes up a whole lot.
Again, seller financing, it's the best way to finance a park that's half a million dollars or under. It just is, it's the best, so if you can get seller financing you would always want to get seller financing. There's no competition there at all.
But let's say you can't get seller financing, what do you do now? Well, next option would be bank financing. So I'm not talking here the kind of banking where you're going to pop on over to Wells Fargo that kind of a banker, I'm talking about small town banks. You know we've been getting bank loans now for over two decades and there's nothing harder when you're trying to get a loan at large banks with lots of branches because they don't like to customize that's how banks operate when they're very large. Everything is very systematized. They don't want to do anything out of the ordinary. They're more like Mcdonalds then someone who makes a one-off burger like Bob's Burgers. You don't really fit into their box. They don't have a little box that says, "Here put mobile home park loans in here."
So as a result you get a really cold reception. Now sometimes you get a warm reception by the loan officer, of course he's only in it to be able to write in his day timer he met with somebody because most of them have to meet with so many people a week trying to get a loan. The cold reception I'm talking about comes from a loan committee who will look at that loan and say, "Nah, we don't really do trailer parks, we don't want to do that."
So how do you get a bank loan then? Well, search out small town lenders in the market where the park is located. These are banks that don't traditionally have branches, typically down on Main Street. You know, maybe an old Movie Marquee sign sometimes in front of it. Not very many branches, been there forever, but those banks typically date back to the 1920's, 1930's. You go to them with a really, really good loan package because that is where you set your first impression with the bank is with your loan package. A good loan package for a mobile home park is probably about 70% why mobile home parks are great. Then 30%, the actual debt on your park.
You'd want to tout such items as the fact that I'm sure all the things that tie back to my old quote about waffle houses that basically you have a very, very stable customer base that's not going to leave and that's very, very intriguing to a banker who loves stability, loves conservatism. When he hears that the customer base will be there forever that's a huge turn on for them because past experience has proven that businesses that don't have customer stability often lose revenue and go out of business. So that's the kind of thing you want to put in a loan package is the fact that mobile home parks are extremely stable, that you can't build anymore of them. That you don't have to do any repairs on the home, it's just renting land, those types of things. Put those in your loan package, all the things you've learned that make mobile home parks different and better put those in there then after you've really pounced on those put in your particulars on the park itself.
It's also very important when you deal with small town banks that you have a very, very solid plan with plenty of conservative numbers in there. If you have a 50 space park with 40 occupied you would want to show a scenario of not filling all those lots in one year. You might say you're going to fill one or two lots per year, but that really you're buying the thing based on what's already there. You scare the small town banks when you seem like a high roller like an aggressive gambler kind of personality. So you want to go in with very, very, very conservative numbers and when you meet with the bank they're going to ask you questions like, "Well, what would you do though if you lost five lots?" And you better have an answer for that. Because they're trying to see if you're the kind of person who could move around on your feet effectively and survive any kind of hit that life may give you. So it's very very important that you think through any conservative question and have a good conservative answer to go with it.
Also on bank financing it's very important to make a lot of pitches. Don't think you can go to just one bank and be a success, it's a volume business. So make a complete list of all of the banks in that town in that area and pretty much hit all of them because if you hit 10 banks you have a much greater likelihood of getting a loan than if you only hit two or three.
Another item to think about in small town banking is watching out for short loan terms. I don't mean the amortization length, that's typically 25 years pretty much across the board everywhere you go. I'm talking about how long until the note comes due in a balloon because sadly most of your banks out here will not carry a mobile loan park for full maturity. It's sad though, I mean they really should. They do it on a home. They'll do a 30 year mortgage on a home. I'm not really sure why they won't do a 30 year mortgage on a mobile home park, it's just not the norm. They're probably going to stick you with a loan that balloons in three years or five years, try to keep that as long as you can humanly can. If you had multiple offers from banks I think probably one of the key terms would be how long the note goes for. That's what gives you a sense of security. That's what allows you to have the time to get the park better to raise the rents and fill more lots and season it.
A three year note's a terrifying proposition. You typically need about two years ahead to start your seeking your loan replacement. That gives you plenty of time to locate a lender, make your presentation, try and get the loan closed, and if you fail miserably to go out there and try and get the property resold. On a three year note you can see that, that does not give you a very large window of opportunity at all, very little comfort there. Always try and get at least a five year note that gives you at least three years of sleep, seven years even better, and 10 years best, but always watch that. That's one of the key things we don't like but a lot of the small town banks they don't want to go out super long on the term so be very, very mindful of that.
Another item on small town banks is sometimes they can really have magical loan terms. I have many, many examples of cases where we went to small town banks and the small town banker virtually put our hat on and started thinking in our terms of what they could do to help. Now bear in mind again they're small businesses. They're very service oriented. Most of us today are very jaded. We're used to working in a world of automation, automated helpers on the phone, can't find anyone to help at Walmart. These small town businesses are different than that. They're typically generational businesses that were built on customer support and trust so sometimes you can just really luck out. We've seen small town bank terms that go all the way to fully advertising below market interest rates. So it's really a meaty and good place to get a loan in that small banking world.
But what if that fails? What if you can't get a bank loan? So now you've blown though seller financing, you can't get that. You tried bank financing, you can't get that. What else is out there? Well, don't give up. There's still some more alternatives. Another one would be to basically let your friends and family become the bank. How would that work? Well, two options, one, self-directed IRA's. This is something many people might have heard of but don't really know what they are. Basically it's taking an IRA and converting that into a self-directed IRA which cost about $500 to perform and allows you to invest in many things except collectables and art and a couple of other items.
Now can you do it on your own? Some IRA providers say no, but others say that you can. Some say but if you convert to a checkbook IRA you can do your own mobile home park. I myself don't have the slightest clue so I'm not going to advise you one way or the other. I suggest you contact Equity Trust or one of those IRA providers, the SDIR, or IRA providers and ask them. That would be a much better idea.
The beauty of self-directed IRA's is it's very, very patient money. You can't spend it now, often you can't do a darn thing with it for a decade or more so it's very patient. Most people with IRAs despite the fact the market I know is up here for the last few months, yippee that's all exciting. But let's be honest it hasn't done a darn thing good for the longest time. CDs were paying nothing. Bonds are paying nearly nothing. Stock market sure didn't rock anyone's world until just recently. So a lot of these people are very behind on their original targets. I know a lot of people when they sit up their IRAs the initial target the IRA person told them they would hit would be 10% compounding. Maybe if they're lucky they've been hitting two or three percent so they're very, very depressed and willing to try something new and different. If you can get them a good return a lot of them will take a flyer on that to mix that in with their more conservative investments hoping they'll luck out and get higher return.
So self-directed IRAs are so, very, very new and yet very, very potent. Possibly you can do a combination of several people with self-directed IRAs. They can each contribute a certain amount, get a certain interest rate so that would also work. Another would be a partnership, maybe what's called a Rent D506 so that would be really odd probably for just one $500,000 and under park, but nevertheless people are forming those. If you don't know what that is look under the Jobs Act on Google to Rent D506. It's another way that you can raise money. It's kind of an axiom off of the Securities Act of 1933. It's something they passed here a few years ago allowing you to raise money kind of like a public company without as many hurdles.
Or possibly you could just do the classic partnership of the capital partner and the sweat equity partner. So how does that work? Typically in those arrangements you have one party who has the money but they want to be very, very passive. The other party doesn't have very much money but they want to be very active and it can sometimes be win-win. The capital partner gets typically what's called a preferred return which means they get a certain rate of interest for their capital. They also get equity in the deal. So let's just model that out. Let's say you're buying a park for $400,000. Let's assume that you go ahead and get a capital partner because you tried to get all forms of banking, seller bank and you couldn't get it. But of course you've got huge amounts of upside, so you find that partner who will put in the $400,000 to buy it.
So let's say you buy it with cash, let's assume that, that partner has a referred return of let's say 7%. So he pays 7% of the money. You build up the park. You raise the rent, you fill the lots, and you sell it at the end for $800,000. What would happen is you would have first return of the capitol to the partner of $400,000 and then of the $400,000 profit you would have typically a split. The split is normally 50-50, but it could be any number you want, there's no laws on it. It could be 60-40, 70-30, whatever. So under that model basically they got all their money back plus their 7% preferred return and then additionally you would give them half of that 400,000 profit or $200,00 and you would keep the other $200,000. So partnerships are still a way that many people buy mobile home parks, but again you would just need a capital partner to match with your sweat equity position.
But let's say that that again is difficult, what else can you do? How else can you finance a park that cost $500,000 or less? Well, an option that we don't like much and that's why we don't talk about it very frequently at all is the hard money lender. Now what's the problem with hard money lenders? Well first off it scares us and many people that they're not regulated by the banking industry. It's kind of a scary proposition to have somebody floating around out there making loans but in fact is not being regulated by anybody. Ouch. That's kind of very scary to me. Another problem is I get nothing but bad references on these people. Again, I don't know, maybe only the park owners that I talk to are negative, but every story I've talked to someone on a hard money lender always had some strange wrinkle to it, some kind of unhappy ending so I've just not heard a lot of good stories.
I think the biggest problem with hard money lenders is the concept of loan-to-own. Let's go over what loan-to-own means for a minute because it's really kind of an odd concept. When you borrow from a bank what happens is the bank doesn't really want the collateral back, that just doesn't sound very enticing to them. So what they're doing is they're making the loan with the full intention you never, ever, ever default. You just pay the interest on that loan and boy they love you and that's great. The hard money lenders often indulge into a different business model that's called loan-to-own. Now what's loan-to-own mean? It means that they make a loan with the hope, with the dream that you'll default and they will take the property back, and then they'll operate it and or sell it. So it means you and the bank are not aligned in your goals. The bank is aligned with you. The bank simply wants to get their interest. They want you to succeed. They want you to one day say, "Hey, here's my final payment." And they say, "Hey, great job you got it paid off, so have a great life."
But the loan-to-own lender has a different objective. They want you to come in and say, "I can't make the payments." Then they say, "Yeah, you couldn't make the payments now the property is mine." That's scary when your lender and you don't have the same agenda because what happens if there's a hard time? What if we have a recession? What if you have a Lonnie Dealer who pulls six homes out of the park simultaneously? What happens? The bank will typically work with you. You go to the bank, you're honest. You say here's what happened and here's why. Most banks will try and bend over backwards to accommodate you, but not the loan-to-own lender. That's the opening they were waiting for to pull the property away from you. So what does it mean? It means hard money lending just is really hard. I don't really know if I would really say that's the thing I want to get involved in.
Let me give you another idea on financing. Not seller, not bank, not friends and family, certainly not hard money. It's called the Master Lease with Option. Now how does that work? What would that be? Well, basically under Master Lease with Option, you master lease the property so you take control of the property and you pay one monthly fee for the whole property and then you have a price in which you're able to buy it. You have a trigger price based on whatever price you pre-established. Now you might say, "What's the purpose of that? What's so good about a Master Lease with Option?" Let me give you some reasons why.
Number one, if mom and pop have a property that's not looking very good on its financials. It gives you the ability to fix that, to make the property more bankable. Maybe you couldn't get that bank loan because the bank said, "Now wait a minute fellow, you told me you're buying this thing for $400,000. You tell me you can make $30,000 a year of net income but right now it's only making $10,000." Maybe that's why you couldn't get the bank loan. So how does that work with the Master Lease with Option? Well, you're going to go there and fix whatever was making the financial so lousy so you can then go back later and try again. Maybe on the next attempt you can get that bank loan, but you've got to have time to fix the property. So how does it work in real life? Well basically what you do is you make your payments and while you're making the payments normally you fix whatever's wrong. Whatever's wrong maybe you need to raise the rents up to market. Maybe you need to fire the manager who's horribly overpaid. Maybe you need to fix the water leak that's costing $3,000 a month. Maybe you need to fill a few RV lots. But you want to do things that are not super capital intensive.
A Master Lease with Option plan you would never want to do is one where in which you want to bring in a bunch of homes. Because if you bring in those homes it's gonna be capital outlay, very large capital outlay. Unless you can sell them for cash you could be in a position if you don't end up buying it of having to service lots in a park you don't own. Ouch. That's a bad business model. However, if you can get a park that's not performing well with things that are very manageable that you fully control then that's not too bad an idea.
Let's assume you had a situation where mom and pop were adamant they had to get at $500,000. But the park is only making $20,000 it would never ever appraise at $500,000. It would appraise more at $250,000 or $300,000. You could walk away from the deal and say, "I give up," that's an option of course. Or you could say, "Hey seller, here's a situation. You and I both know I can't bank this. It's not even worth our time. We could go get an appraisal, you know it's not going to come out. So I got another idea for ya. What if I go in and I improve this property. And here's the deal, if I don't buy it after I fix it, now it will be worth a whole lot more money and you can sell it to somebody else. But if I'm successful in fixing it then I can get you the price that you want."
Now sellers are not going to jump on that bandwagon unless they've been beaten down pretty good. So only if you've had a situation where the seller has tried and tried and it's been tied up multiple times and dropped will you find them where they're so desperate they would even entertain the idea of the Master Lease with Option. However, if they will entertain it, it's a very potent force. We've done a lot of those deals over time and every single one we've done has worked out well. But again you have to pick situations where you can fix them.
If you were driving around and saw a park on the bad side of town with 70% vacancy. That's probably not a deal that would work under a Master Lease with option. Even if mom and pop said, "Yeah, I'm desperate. I can't give my park way. Fix it for me." How are you doing to fix that? You can't fix the location. Let's say there's tiny lots. You can't fix the density. So what can you fix? In that situation not much. Raise your rent a little bit. You certainly would not want to go out and buy homes to fill those vacant lots. And then on top of that maybe the location wouldn't even work if you did that. So instead you have to stick with things that you can control.
Now how much do you give people under those situations? You never want to give them more as far as your down payment, your deposit, whatever you want to call it. Then you know you can get it back during the term of your lease. So if you've modeled it out and you're going to raise the rent, and you know what they lease payment's going to be, and you can get $500,00 a month pretty immediately out of that. While then you can probably pay them $18,000 down on three year lease with option because you know you're going to make $500 times 12 or $6,000 times three, $18,000, during the term of the lease.
You really wouldn't want to have a lease with option which at the end when you have the option to buy it is coming to a conclusion. You're running out of days where you're going to take a huge loss on it. That might force you to do something dumb and buy it when you shouldn't or it might also give you a heart attack fighting racing the clock to get a loan before it comes due. So you don't want to ever put big amounts down on it. As far as the monthly payment you pretty much want to give them the monthly payment that they're already getting. So if they're only making $20,000 a year on their profit and loss statement then that is what your lease would be, $20,000 while you set about fixing it.
Again there's a lot of ways to make these kind of deals work. Let's look at the end option, all the options there. Let's say you do a Master Lease with Option for three years and you're coming up, you've got a five year Master Lease with Option, and you're approaching your four. Maybe after all, you don't want to buy it. Maybe you've improved it. You've raised the debt income but you've decided you really don't like that market or something. Well now you're in a great position to sell it. You got a whole year to sell it. Bear in mind that, that closing doesn't have to be you. You can just sign that to anybody. So it really gives you a long list of options.
Another great thing about Master Lease With Option is it allows you to test your theories without risking any money, so how powerful is that? You could raise the rent and if everyone runs off you're not really materially harmed except whatever money you put down. So Master's with options is sometimes the best solution particularly when you have a seller who wants a certain price and they just won't give on it at all. Sometimes that's the magical way to put the deal together, take it over, thank the reigns, fix it up, improve the debt income and then when you're finally, finally ready and you know that you can support that appraisal then go out and get your bank loan or then you go out and sell the property. So we really like that arrangement a lot.
But let's assume none of these work, the seller financing no go. You tried and tried and tried, you tried three times and the seller said, "Nah, I don't want to do it. I don't want to finance you." Then you hit the bank circuit. You hit a whole lot of banks and the banks all said, "No, this thing's so ... So not quite there yet that we don't want to do it." Then you tried friends and family but unfortunately your timing's bad and nobody's got an IRA, or no one has any money to invest, or you're unsuccessful in getting that dream partner put together. And then you don't want to do hard money lending or maybe you do but none of that works out. Master lease with Option, they won't do it. They won't do the Master Lease with Option. So what else? What's the final step? What's the final thing you can do on a half a million dollar and under deal and that is selling an assignment of the deal
Now let's go over what that is for a minute. It's such a strange concept if you're coming from another industry because you don't normally see that. Like you don't see people selling assignments in apartments because there's so many people out there, pretty sophisticated and there's so few apartment owners who are not sophisticated that rarely is there enough money in the deal that you can sell an assignment.
But this is how it works with a mobile home park. Let's assume you're bopping around and you find mom and pop and they want to sell you their park for $300,000. Let's say you know that park is worth $400,000 because they got so much low hanging fruit to fix it's ridiculous and or possibly their numbers themself are just very attractive and they really just don't even know how to price a deal. You can tie that deal up with $300,000 and never finance it, never buy it yourself, but just find another party who would buy an assignment of that. If you propose something like that, if you post, "Hey, deal for assignment even on our forum at MHU.com you'll typically get a whole lot of private DMs and people saying, "Hey, I want to buy it. Call me or email me." It's a very liquid market in leases, I'm sorry in assignments right now. It's not really that hard if you have a good deal to find someone who'll buy an assignment.
Now let's talk a minute what does that means, how's that work? Well typically the going rate on assignments can run anywhere from 3% to 5% and then all the way up to 10% on select deals. It's all really based on how cheap you're buying it. If the thing is worth half a million dollars and you're buying it for $200 on your contract, you could probably market that thing up, even double perhaps. It would still work for the buyer because you're still getting a $500,000 for $400,000.
Obviously, that's not a normal example. Most deals are not quite like that, but lets assume you have a deal where you're tying it up for $300,000 and it's worth $375,000. Well, you could probably mark that up to $350, right? It's still attractive to somebody and that was a good deal for you. It's a great deal for you. That's like a 16% mark up on it. So again, often even if you can't get any form of financing you're ultimate out on that deal is simply selling the assignment. So again what you would do is you would post it on the forum at MHU.com or you might just contact different people you've talked to in the past about mobile home parks and low and behold you'll find someone who says, "Hey, I'll buy that assignment."
So what are the pieces then to selling an assignment? Number one, you have to make sure your contract says and or assigns. So if your name is Tom Smith the contract should say that the buyer is Tom Smith and or assigns because by having that verbiage in there it gives you the flexibility to assign that deal to anyone that you'd like. I think that's a very important item to have in there. Another one on the assignment is you need to not worry too much about what happens at closing. Some people get so obsessed with the idea that the person that's selling you the park personally that they think, "Oh gosh, they'll be so bummed out at me when I don't show up at closing," so they morally feel they can't do the sell over assignment and that's not true. Mom and pop already established if they're not going to carry the paper they're just going to get a check at closing. So it doesn't really matter who gives them the check. It's a whole different deal when someone's got seller financing involved.
So on a seller financing deal, yeah you can kind of see when mom and pop would be a little miffed if the person who ultimately buys it is not you. But if where they're getting cash, it doesn't matter who writes the check. It just doesn't even matter. So don't ever feel like you can't sell on assignment because that's an immoral thing to do. It's not immoral at all. It's very, very rational. It's good business because that way the seller is going to get the money that they wanted. So selling on assignment's really good deal.
Now how do you pick out the person to sell your assignment to? Be very, very careful because the way selling on assignment works is the person whose buying the assignment gives you your earnest money back and pays all third parties reports. So basically you have no skin in the game. You have nothing in the deal at all. If it doesn't work, if they don't show up at closing, you don't make any money but you don't lose any money. However you might have had a really hot deal and you might be really, really mad that this person blew your really hot deal. So be very careful when selling the assignment to vet out who the heck you're selling it to. Is it someone who's bought a mobile home park before? Do they have the cash? These are all things that are very, very important so make sure that you've got a good, good handle on who you're going to sell that assignment to, because if you don't it's going to be a lot of effort for nothing and that's obviously very discouraging.
So again, let's recap these again before we go to the next item which is number one, seller financing, best kind of debt there is. If you can get it, look no further. If you can't get on the front end, try, try, try. Try three times to convince the seller to do it. Do it verbally. Do it on paper. Show them the little report that you write up showing the differential of what would happen if they would seller carry versus taking the money in cash. But don't just give up on the first round if they don't. A lot of times mom and pop say no on the front end because they haven't talked to A.G. Edwards yet or their stockbroker depending on how little they're gong to make. Or B, they just don't really know you well yet, and as they know you better their fear falls off substantially.
Seller financing is fantastic. We love seller financing. That's what launched us into the business to begin with. I remember how excited I was at Glenhaven when he offered to carry the note because I'd never heard at that before. At that point I'd been in business for 15 years and nobody in the billboard industry ever carried paper. I didn't know that existed in America, so it's very powerful.
Small town banks are fantastic if you can find the right small town bank and they want to play ball with you. The biggest thing to watch out for in small town banks is that loan term. I wish, wish, wish they would go longer. Why, oh why can't they go fully advertising like a house? I don't know. I really wish they would do that but they won't. So typically you're going to get a shorter loan term before you get a ballon on it. Make sure if you can to keep that at least out five years and if you can push for it, try to get seven or 10. I'd rather pay a higher interest rate if I could get a seven or 10 year note. Because I know from experience it gets a little scary as you start approaching that balloon. Also you don't know what interest rates will be when that balloon comes up in the future. Not to mention the fact that every time you have to get a new bank you often have to get new third party reports and that's expensive. So really try to get as long of term as you humanly can.
Friends and family probably the sweet spot of that right now is the self-directed IRA. If you're not familiar with it, google it up, talk to companies like Equity Trust about it. Possibly convert your own IRA to a self-directed IRA or if you don't have an IRA you may have friends or family that do have them. Again, it's very patient money. You can't use it immediately so there's a lot of success out there with people who have gone in with people who have large IRAs converted to self-directed IRA kind of as their capital partner.
Don't forget basic partnerships all together. The idea of a capital partner, and a sweat equity partner, they happen all the time in the mobile home park business but really in every sector of real estate. The capital partner being very, very passive. The sweat equity partner being just that, sweat equity very active. Typically the capital partner gets a preferred return of a certain rate of percent of interest and then they get a split of the deal. In a common deal perhaps the preferred rate of return is 7% and then there's a 50-50 split after the capital partner gets their 7% back and other capital. So not really complicated to construct. A lot of park portfolios began with those types of partnerships.
Onto hard money lending. Again, I don't know anything good to say about it. I'm really kind of shocked and embarrassed I can't give you even one example of someone who did the hard money loan on a mobile home park and had a happy ending with it. All I've ever heard from people is, "I did it. It was a nightmare. I survived or I didn't, it was a nightmare and I lost the property." Again what really concerns us with hard money lenders is the fact that's it's all about loan-to-own for many of them. That lack of alignment we find kind of frightening. We want our bank to be on our team. We want them to cheer for us and wave our flag and not hope that we fail or hope that we get in a corner so they can take the property away. We find that very, very disturbing.
Master Lease with Option. Great concept. We've done it many times. Never had one that didn't work out. Be careful on the Master Lease with Option however that you only tackle things that you can fix. You can raise a rent, you can patch up and fill a vacant park owned home. You can rent RV lots with abandon. But you can't change a neighborhood, and you can't change density, and it's really expensive to try and fill a vacant lot, so it's somewhat limited in what you do. Also, never forget with the Master Lease with Option that you have options as you go. If you elect that you don't want to buy it in the end you still have plenty of time to go out there and sell it an assignment of it.
It's typically a really good construction, some of those typically have, sometimes have really magical endings even based on how successful you are in fixing it. There's a lot of rundown mobile homes parks in America that will probably be end up sold under Master Lease with Options and many of those, may be the most profitable deals ever because there's no down time. You fix it before the clock starts with your own ownership. You fix it without having any skin in the game, worry about will it work or will it not work. So again, those are another great concept.
So now those are the basic ways to do a $500,000 and under loan, but what if you're more than $500,00? I can't talk about lending without also expanding our horizons a little here at the end to go over what happens as you go up from there. Well, as you go up from there some magical things happen. When your purchase price gets up to about $750,000, now you can get into the realm of people who will help you get the loan which are also known as loan brokers. They're also now called capital market consultants. Interesting name, it has a whole different vibe, doesn't it? Loan broker sounds a little cheesy, it sounds like the movie, American Hustle. If you remember the movie, American Hustle at the start of the movie the protagonist of the movie is a loan broker who actually never tries to get a loan. He always tells the customer after taking the fee about a week later, he tried. He tried. He tried. He couldn't get a loan and then he keeps the fee.
I'm not talking about that here. I'm talking about actual people, all day long in the trenches out there getting mobile home park loans. How does that work? Well, there's not a whole lot of them out there. There's Bellwether, Security Mortgage Group, those are the two best known. What they do is they wade out into the market place. They go to the banks. They come back to you and say, "Okay, I got four offers. I got two offers." Whatever the case may be. They'll show you what the difference is between the offers and they'll even make a recommendation to you on which offer you should take. They'll also hold your hand through the entire process, all the way to closing. They'll help you if any hiccups happen. They'll help you if you don't know the answer to questions you may get from the bank, very, very, very helpful.
One key thing they bring to the table is they know which banks out there right now are making lots of loans. You don't know that. Who would know that? There's no magazine you can open up and turn to page 12, it gives you the complete list of every mobile home park bank who's hot and heavy right now making those loans. But they know that. They're certain periods and times where you'll have a certain bank or a couple banks in America that are making many, many, many mobile home park loans. They know who those banks are, you do not. So that's a huge item they bring to the table.
Additionally, they often will get you much better terms than you would, why? Because they A, they know what the real terms should be out there. You probably see those websites like cardealers.com that will say this car is priced $800.00 over market. This car is priced $2,000.00 under market. How does car gurus know that stuff? It's because they're very fluid. They see lots and lots of transactions. Same with the loan brokers, they know what's going on in the market place, what you can push for, what the rates could be.
We feel often times that they pay for themselves simply by fixing and getting you better terms. Now another great benefit of the loan brokers is the fact that you also get completely out of having to build the package. They will typically build the package for you, which is very, very important. It's a very good piece of mind to have them build that package for you because they build good packages. They build great packages. You should see some of the packages that they've built. You definitely want to think about using them when you start getting up to $750,000 simply because they are so very effective at getting the loans. We've never had a loan that we used a loan broker or capital market's consultant on that failed to get the loan done. Also, a lot of them will sometimes go out there and put a lot of effort into having a back up plan ready. So that if you don't have the success with the first bank, they'll have a second one in the wings ready to go.
That's again, very reassuring. They don't cost that much, a loan broker typically costs about one point. So one point we think is very reasonable. I mean if you're out there doing a $750,000 loan, that's about $7500.00 bucks. Well that's not bad at all, sometimes the fees more than that but nevertheless they still basically pay for themselves with the job that they do. When you get to $750,000 dollars and up, now you don't have to walk alone. Now you can get a friend out there to help you get the loans.
Now as you go from there you get up to about a million dollars and plus, now you've entered a whole new arena and that's called Conduit Lending or CMBS debt. CMBS debt is very, very attractive stuff for many, many reasons. Let's recap it quickly. Number one, CMBS debt is always non-recourse. We talked about that in seller financing which is also non-recourse. Non-recourse means if you screw up, if you buy the park and you shouldn't or if you buy the park and it's a disaster, you don't lose everything. You lose your down payment but that's all you can possibly lose ,so that's one thing people love about CMBS that is that it's non-recourse. Another thing about it, it's very long term, typically the note term is 10 years. That's a long time. That's a really long time, that's two and half presidential elections. So that gives you a lot of time to spruce the place up, and fill lots, and raise rents.
Typically on a Conduit loan when you get to the end of the 10 years you're now only looking for a replacement loan that's maybe 50% LTV, loan to value, just because you've been raising the rent every year so Conduit loans are very attractive like that. Now there's one feature of Conduit though that we need to discuss. And that's a little animal called defeasance. Now defeasance is a very, very unpleasant thing. What it means ism if you do a Conduit loan and then you want to prepay it because you get a good offer for the park, you can't. Then you can, but there's a wrinkle to it. Because a Conduit loan is not done by a bank. It's originated by a bank but then it's sold on Wall street and they don't have a way to be prepaid because they have no way to go out and make a better loan with the money because the owners of that note are mom and pop investors.
So how's it work? Well you have to buy enough treasuries, T-Bills, to cover the payments to the very end of the note. It means the punishment, the defeasance, can often be 30% of the face value of the note, maybe more based on when you did it. So that's the problem with Conduit. Another issue with Conduit is you can't possibly get it I don't think without a loan broker. It's too complicated to do it. You need that Sherpa to climb up Mount Everest so you've got the have a loan broker in the loop to do Conduit lending.
The good news is Conduits love mobile home parks because we. every year either we tie for the lowest default rate or the next to lowest default rate in the U.S. It seems always neck and neck with storage. Now I'm pretty sure this year we'll win because storage made a boo-boo. There's a lot of storage built over the last 12 months and as a result a lot of markets are suffering right now. So I'm pretty sure that mobile home parks will be number one this year but they always battle it out neck and neck with self-storage. It's a great thing because it's nice to have the lowest default rate of any loan type in America. So that is a big turn on to many Conduit lenders.
Now there's one more type of loan we need to talk about that's even better than Conduit. You have to get a little bigger, you may to get all the way to a two million dollar deal to start hitting this, but this is called Agency Debt. This is basically Fannie Mae, Freddy Mac, yes the United States Government itself or it's subsidiary known as Fannie May, Freddy Mac are now making mobile home park loans. They're doing it pretty aggressively because under the Duty to Serve Act which a lot of people hadn't given much thought to, they've already been required for a long time to help serve the affordable housing sector. So they're picking up the slack now in a big way by doing lots of mobile home park loans.
Their terms are even more attractive than Conduit. They sometimes can go a little longer on the term, but they also allow you to resize the loan. Now when you resize the loan what it means is you look at what the current income is of the deal and you basically are able to pull out money every time you raise the rent or do something that monumentally improves the NOI. I think you're allowed to do it once a year under most Agency loans and so that's very attractive to a lot of park owners. Bear in mind since you can't prepay the Conduit loan typically you sit there stagnant for a decade. You raise rents, you fill lots. You do all kinds of great stuff but you can't tap into the capital, the value you've created until the end of the loan.
However, on the Agency debt you can. You can tap in earlier on, you can get that capital back out. If you like, use that to buy more parks. Really the future of the industry is really steering more towards Agency debt.
Now for Agency debt, we typically use Bellwether a guy named MJ Vukovich. At Bellwether Enterprises you can google up in Minneapolis Minnesota. Bellwether Enterprises if you go right down the link it shows the different people in there, you'll find good ole MJ Vukovich. V-U-K-I-V-O-C-H, I believe and he's great. Because Bellwether actually is not just a broker. Bellwether in fact is an originator of Agency debt. So when you're talking to MJ Vukovich at Bellwether it's like talking to the U.S. government as far as loan origination's which is very reassuring.
As the government gets more into the affordable housing space, I think you'll only see more and more lending in that arena because the government's really happy with those loans. Why would they not be? I don't know of any that default. I mean they typically, the loans are very conservatively put together. Mobile home parks by definitely are extremely stable. We have the lowest default rate because our customers really never leave so as a result it's considered to be grade A stuff. So I think the government will continue to be very happy with the loan programs and continue to want to make loans on that. Speaking of the government Duty-To-Serve also interesting to note that in 2019 the government is going to start through Fannie Mae securitizing and helping out the loans on mobile homes themselves.
So what you have going on right now is kind of a reconnaissance of the government and the mobile home park arena all the way down into mobile homes which we all know would end up in mobile home parks. It's kind of a double edge sword of goodness from the government. Also don't forget the government was what helped build the industry in the first place. If you turn the hands of time back until the 1960's, you'll say that a lot of the best mobile home parks in America were built in the '60's under a HUD loan program. At that time the government was trying to foster the construction of mobile home parks across America and to do that they provided extremely attractive financing to mom and pops who are gutsy enough to try out this new novel sector of real estate.
Those parks are so great because to do the HUD program you had to build the park to HUD specs which typically included a clubhouse and a pool. Now the pool's typically gone by this point in the movie. The clubhouse is typically no longer really actively used. But the other parts they brought to the table which are unique and last forever are the layout. These were all very professionally designed by real architects and planners so they're naturally a cut above any other form of mobile home park construction. They have really, really great roads that were built to much higher specs than any other types of road and then typically curb and gutter, sidewalls, concrete parking pads, so basically they're some of the best built. We consider those things the battleships of the industry. So it's interesting to see how we've come full circle. It was a half a century ago, almost literally a half a century ago that the government was a very, very active supporter of the industry by helping to make loans on parks and here they are again doing it once more. So it's kind of interesting how history has repeated itself.
So again to recap one more time, mobile home park loans, half a million or so and under, all the way down to little loans $80,000, $90,000 loans on maybe that 10 or 15 space park. You have six different options. You have seller financing that's our absolute favorite. You have bank financing which we like a lot, just watch out for the length of the term. That's the big item there, so if you can try to get as long of term as you can. You have friends and family, either through maybe an IRA, maybe your own IRA converted into a self-directed IRA using Equity Trust or a similar provider or some kind of partnership with a capital partner and a sweat equity partner. That's a very traditional long standing form of real estate construction.
You have hard money lending. Now again, I'm not going to condemn the whole industry. I've never used it. But I've talked to many people who did try it. I only got negative reviews, but maybe that's been my life experiences, maybe other people have done well with it. So don't just cross it off your list as being a bad idea, I've never done it and I've not talked to people who've done it well. But it may be that, that's just the fact that I've just not met those people. So maybe that would work. It is definitely a form of financing.
Master Lease with Option we really, really like that construction if you know how to do it right. Only get involved in things you can control. Don't get involved with situations where you import a lot of homes and spend a lot of capital and even most dangerously might end up holding notes on homes in a park you don't own. Also don't feel like you don't have to bound into the deal. If you get into the deal and you improve the park maybe you don't exercise the option itself but you sell that option to somebody else. And what's also neat about Master Lease with Option is the fact that you get to test your theories with no skin in the game. That's very, very important and equally neat is the fact the clock doesn't start on your ownership until you close on it, so basically all that funky period where the park is making no money that didn't happen under your watch. So from day one you're doing well.
Finally, selling in assignment. Always a good idea anytime you have a park that's a good deal where it's definitely worth more than what you're paying. Regardless of the size, don't throw that away. If you can't get the deal done financing or you're just uncomfortable with the financing options presented to you sell in assignment. Go to MHU.com forum. Put that you have a park up on there and you want to do assignment or contact Brandon, maybe Brandon can email blast it out. A lot of options out there but again if you have a good deal and you fail on all those five other financing routes, don't give up, you just throw some into assignment. If you look at the forum, you'll see people put assignments out there all the time and they almost always find a buyer.
Also don't forget as you get a little bit bigger, life it becomes a whole lot easier. When you get up to $750,000 appropriately you can use a loan broker. Now you have someone who will help you get the loan, hold your hand through the entire process and that's fantastic. Also you get two more loan products as you get larger. One is called Conduit or CMBS debt that starts when your purchase price is around a million and up. And then you have Agency debt which is Fanny May and Freddie Mac and that typically starts when you get up around two million and up. All those cases of both Agency and Conduit I would definitely suggest you use a loan broker. It would be very, very hard to do it yourself.
If you do an Agency debt by far the best loan broker we use is Bellwether Enterprises out of Minneapolis Minnesota. We use a guy named MJ Vukovich there who's about a third generation park owner. So he understands the business very, very well. The Conduit arena or the $750,000 dollar loan arena because Bellwether typically won't go that low. loan There's of course Security Mortgage Group who does a great job and we've used for a long time on that.
So again those are the different ways that you can finance a smaller deal. Hopefully we learned a lot, got to discuss some interesting points. Hopefully there's some trivia items you may find of very good value.
Again, this is Frank Rolfe with another MHU.com lecture series event, this one all about financing the small parks. Always if you want more content, look at our past lectures, we've done a lot of great lectures over time, and a lot of fun interviews with people, so always scan the MHU.com website for content, participate in our forum. Lots of great things going on in the industry right now It's really reaching a reconnaissance, there's so much interest in the affordable housing sector now.
It's really all positive. There's so many great megatrends going on right now, it's just amazing. It's hard to believe I'm in the same industry today that I was in 20 years ago when the mere mention of buying a mobile home park would illicit giggles from your friends and family. Now again it's becoming a mainstream sector of real estate and we really welcome that. Again, thanks for being here tonight. Hope you learned a lot and we'll talk to everyone again soon.