With the Christmas season around the corner (which accounts for 30% of annual retail sales), we thought we would devote this edition of our Mobile Home Park Mastery podcast series to fine-tuning sales – the sales of mobile home parks. We’re going to go over three action steps to maximizing the value and speed in which you can find a buyer, as well as the importance of timing in each step. You can’t buy a mobile home park without wondering how to sell it down the road, and that’s what this podcast is all about.
The Christmas season is upon us. Retailers across America are doing their best to sell their goods to as many consumers as they humanly can at the highest price they can humanly get. It saves retail each year. The Christmas season really is the backbone of our retail industry in America, and the ability to sell things to people in the proper format has been the worthy note of study of many retailers for decades now. Today on Mobile Home Park Mastery we're going to talk about selling mobile home parks, something you're not going to find at Macy's or Gump's, but nevertheless is a very, very important skill if you're going to be a mobile home park owner, so we're going to review the three action steps to selling a mobile home park, basically ideas to make that property more desirable, worth more money, and have the capability of selling it even faster.
The first action step is let's push the revenues. That is the key starting spot in any mobile home park that you're considering selling at some point. Definitely before you'd ever wanted to get it on the market, you want to make sure, given that one moment in history, that you've pushed the revenues as far as you humanly can, so how do you do that? Well, the first thing you do is you want to raise the rent. As I've talked about and written about for years now, mobile home park lot rents are insanely low. I don't say that as the evil landlord like might be construed in a National Geographic episode recently where I was portrayed kind of as Marie Antoinette with, "Let the people eat cake." The simple fact is that mobile home park residents have been getting an unbelievable bargain for a long time simple because Mom & Pop didn't know how to price their product, so why is that? Well, Mom & Pop just never kept rents up with inflation.
I noticed recently in an article about a mobile home park dated from the 60s that the lot rent in that park was $60 a month, and if you look at the value of $60 back in the 60s today, the lot rent in today's dollars would be more like $500. However, that park's lot rent is only about $300, so why the breakdown? What happened? Mom & Pop never kept up with inflation. Inflation would go up 6% one year, they wouldn't even raise their rent; 5% the next year, they might raise it 1%, so as a park owner, you've got to catch up with sometimes decades of deferred rent raises in the form of just keeping the rents in line with inflation, so raising rents is definitely something you should do. I'm not saying gouge the rents. I've never been a supporter of gouging them. I can tell you what will happen if you gouge them.
If you gouge them, if you go higher than the market or what the market can afford, all your customers are going to move in to other mobile home parks with those park owners happily paying for the move, so you can't go crazy. You can't charge $700 a month when your market rent is just 300, but a lot of parks that we look at, a lot of the parks I'm sure that you look at, and certainly a lot of the parks that many people own, they've been holding back the rents because they just didn't feel right in raising them. This is the time. If you're going to sell the park, you definitely want to raise the rents before you take it to market. The new buyer is already going to estimate he will be raising the rents anyway, but then he'll get the money and you will not, so make sure that your rent level is accurate for the market that you're in.
Number two, fill all your vacant homes. If you have any vacant park owned homes in your park, don't let them sit there vacant. You should have no vacant homes at the time you take that park to market, so make sure that you don't have nothing siting there that you can humanly fill. If you can't fill it, if it's not capable of being renovated, you're better off destroying it and taking it out because it's just going to scare the buyer who will go in the home and say, "Gosh, this home needs 15,000 of work. It's going to cost me 2,000 to remove it." Your money ahead just to take it to the scrapyard yourself, and that will make them feel a little more comfortable with the purchase, but if you have any homes in there that can be rehabbed, whether they need $1,000 or 2,000 or 4,000, your money ahead if you'll rehab those early on. That way you'll increase the value of the park because now what was a vacant lot is now occupied.
Number three, if you've been considering submetering, water and sewer, now is your time. You want to do that well head of putting the park on the market. The norm in America today is to submeter water sewer, and why wouldn't you? It fosters conservation. It's completely fair. When people are not accountable for what they spend on water sewer, what do they do? They spend as much as they humanly can because they don't care. It's your problem, not theirs. You've got to make them accountable for their own use, so you definitely want to get that done early on. The impact of that can be huge. Water sewer is the largest expense item in any mobile home park. If you look at moving that largest line item of expense back to the residence, the impact is gigantic.
Next, fill vacant lots. If you've been wanting to buy some homes and bring them in, do it. If you've been wanting to bring in some RVs, do it. Do whatever you've got to do because every lot you fill increases the value of that park enormously. Don't leave that to the next guy to do. Go ahead and start the process now. If you're going to sell the park, try and fill whatever you can, particularly whatever low-hanging fruit there is out there. If there are just some RVs you could pick up by doing nothing more than putting, "With RVs" on your sign, then you buy all means should do that.
Next, next action step, cut those costs. There's a very famous guy, a corporate turnaround rater called "Chainsaw" Al Dunlap. He's now deceased, but his motto in life was, "Sell, sell, sell and cut, cut, cut." Sell, sell, sell means push the revenues. Cut, cut, cut means cut your costs. So how can you effectively cut the costs of a typical mobile home park? Number one, focus. Drill down as hard as you can on your water sewer cost. Where is it going? If your water sewer is costing you more than $30 or $40 per month per lot, you have leaks or you have abuse, and you've got to get it solved. If you have leaks in your main line, those will not do you any good to submeter the park. The leaks will still be there and they won't be captured by the submeters because they happened before the meter.
What do we do? American Leak Detection, a phenomenal company franchised across America. Let them come out, and do an analysis of your water system and find those leaks for you. It typically costs us about $750 in our markets. It is money amazingly well spent. That's about a one week payback based on the size of your leaks, so you definitely want to get a handle and make sure you have no water line leaks in your park. Anything you can do to lower that water sewer cost is great because that is your single biggest line item as a park owner.
Number two, renegotiate your trash. Trash rates are not set in stone. In some markets yes, but in most markets no. You have freedom of competition. You can bid it around. You can play people off against each other. Go in there and see what you can do. Call your trash provider and say, "Hey, you know what? I've really enjoyed this polycart situation we've been sharing together for years now, but I'm looking out maybe changing the dumpsters or maybe even a different polycart provider. What's the best price you can do?" If you can drive that polycart price down just by $1 or $2, the impact is still very large. A 100 space that saves $2 a month on its polycarts is netting $2,400 extra per year, which is a 10 cap as $2,400, so definitely you want to renegotiate trash. We have found that trash is one item most people do not think is negotiable, but in fact it is and you can sometimes get pretty good savings on there.
This third item is really huge. This is one that is maybe in some cases the biggest of all three items to cut. That is your manager. Do really need the manager at the price you're currently paying or are you only paying that because you didn't know who else to get to be the manager, and you inherited the last owner's manager and you just didn't want to upset the applecart? If you have a manager and you're paying that manager $50,000 a year, which we see all the time in many parks, and you could replace that manager with a manager for, say, 30,000 a year, that $20,000 at a 10 cap is $200,000 of park value.
So really drill down deep on what you're doing as far as management costs because we find all the time the manager was probably appropriately paid when the park was purchased, but their wages and the other items, the bonuses and the healthcare, that's all been going up every year a little bit until it's now grown to the level that the manager is horribly, horribly overpriced for what you're getting. If you can replace a manager with somebody at a much lower cost, why would you not do that, particularly right before you sell? That would be the optimal time so you can harvest the rewards of cutting that cost.
Now on both, pushing revenues and cutting costs, you probably heard the same thing pop up over and over. That's the impact of the multiplier. I used a 10 cap just as an example because it's easy to do talking to you here in midair. It's not really appropriate. Many parks today are being sold in the seven caps and the eight cap variety, but what it means, a 10 cap, which would be probably your worst case in most parks, every dollar you save in cutting costs, every dollar you garner in pushing revenues, you pick up $10 for each dollar. That's the multiplier effect of the cap, so what it means is that I can save $1,000 in costs. That little $1,000 savings at $83 a month of savings will net me $10,000 extra on my sale proceeds. If I can go in there and rent five park owned homes that are sitting vacant and the lot rent is $200 a month, that's going to give me $12,000 per year more of revenue, which is also going to get me $120,000 more in value at a 10 cap. Again, that's why it's so important, before you sell, that you push the revenues and cut the costs because it's really big money. You may not think about it at the time. You may think, "Why should I bother changing the manager just to save $5,000." Oh, well, for $5,000 maybe you wouldn't, but wouldn't you for $50,000? I think most people would answer yes.
Now, what is the third action step to selling your mobile home park? That is you've got to upgrade the appearance. Now we're going for the mathematical objective to more of the subjective. Nevertheless, it has huge impact on those numbers. If you make that park look really nice, you will get a higher appraised value. You will get more buyers who are interested in buying it. You will get more bankers interested in making a loan on it. You'll get more city governments that will give you a positive review when the buyer goes in to ask what they think of your park, so how do upgrade that appearance?
Number one, the entry. That's where all first impressions are formed. If you have a lousy looking entry to your mobile home park, you are shooting yourself in the foot because everyone who enters will already have a preconceived idea that your park is nasty. Then if the park is nice, they'll think, "Well, it's kind of a nice nasty park." If you have a nice looking entry, they'll think, "Oh, this is a nice park." Then if your park isn't that great on the inside, they'll think, "I guess it's not quite as good of a nice park as I thought it was," but you're already in the category of either nasty or nice. You want to be in the nice category.
How do you do it? Well, number one, obviously the sign. You have a professional looking sign. It doesn't have to be hugely expensive. You can get it from Fast Signs, but anywhere you get it, you want to have a sign that is a winner. Number two, white vinyl fencing if you can. White vinyl fencing is the greatest product ever invented for mobile home park entries. You don't have to paint it. It looks very professional. It's very clean looking, and the great part is it ties in very well with a product that as kind of a rural feel to it. Now next, streets. Work on your streets. The only time we ever work on our streets is right before we sell a mobile home park, so what do I mean by work on your streets?
Number one, eradicate all potholes, but then go one extra level beyond that. Seal coat your roads. Go in there and spray emulsion on it, make them jet black, and stripe them. Of course it's not going to last, yes. I know that. It's going to start wearing off the minute after you do it, but the impact is going to be huge. Also, in some cases you may need to overlay the streets to get them to one nice flat black surface. This is your time to do that. This is where you don't hold back on the paving. Right before you sell, you want to do the best to make that park look as good as you can do it.
The third area is mowing. Maybe throughout the summer you didn't mow it that good. Why? You wanted to save money. This is not that time. You want to go in there and mow it completely perfectly. You want to edge it. You want to round up all of those concrete paths and the roads and the curbs, and make everything look just like Town & Country Magazine. It's going to greatly impact your value. It's definitely worth the extra effort, to get your mowing perfect. Final item, lot by lot improvement. Go through each lot and say to yourself, "What can I do to make this lot look better?" Then do it. Make an action step list. "This home needs some extra TLC on its skirting. This home needs to have one little thing painted. This home needs to have this little bit of debris out of the yard." Make that list and then enact the list. By cleaning that park up lot by lot, you're going to generally improve the overall image, you're going to then get a higher value, and it's not expensive to fix these items. This is not like multifamily or single-family where doing significant changes in appearance costs hundreds of thousands of dollars. This is a situation where you can fix up the entire park virtually over a weekend, so why in the world would you not do that?
Now there's also a timing element I wanted you just to consider from all three things I just said. Remember that most people want to see numbers that have been seasoned, so what does it mean? It means if you're going to sell something in June of next year, you want to make these changes now and let those season for six or seven months. Don't do things right before you go to sell the park because it's going to scare the lender. It's going to scare the appraiser that you've just raised the rent. You just fixed the water. They'll wonder, "Well, is this just a one-time little bit of a fad or is this a permanent reality?" Do it early on. Let the numbers season so these issues do not come up, people do not question, "Hey, they raised the rent, but will the customers leave? Hey, they fixed the water, but is it going to pop back and start leaking again?" Do it and give yourself plenty of time to season because that's what the appraisers in the banks and the buyers all want to see.
At the same time, remember that the same thing that helps you on the numbers of seasoning hurts you on your upgrading program. As those streets go on in time, that jet black emulsion will start turning gray, that striping will start coming off, that overlay will start developing potholes, that fence may have a couple of slats knocked out by a kid, that grass that you did all that beautiful weeding on will start growing back, so you kind of have a battle here. You have a battle of the seasoning on the numbers versus the fact that your cleanup items will start deteriorating, so what does it mean? It means you want to do those number items now if you're going to sell middle of next year, but then you don't want to do those upgrade items as far as the appearance until right before you put it on the market. Those items don't need to be seasoned. Those can be enormously fresh, and in fact, if they are enormously fresh, it's even better for you.
Again, this is Frank Rolfe with Mobile Home Park Mastery. We've talked about buying parks. We've talked about running parks a little bit. I wanted to let people know we also know how to sell parks. We've sold a lot of parks over the last 20 plus years. Those are some three action steps to get you going. We'll be back next week with some new ideas.