Mobile Home Park Mastery: Episode 18

Ugly Deals

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We’re not talking your average run-of-the-mill ugly deals here, but more like “what the heck were you even thinking” ugly deals. Fortunately, these are not deals that we did, but deals we know of first-hand that make you wonder exactly what the buyer was thinking – or if they were at all. If you think that a bad deal would be one that you took a loss on, try these deals out, where the owner lost everything and then some (including their self-respect). You’ll quickly see the moral to the story. This completes our three-part series on the Good the Bad and the Ugly mobile home park deals.

Episode Transcript

We've worked our way down to the final in this three-part series on Good, Bad and Ugly Deals. We've worked our way down to ugly. I'm talking really ugly. These are some of the dumbest, worst, most horrific deals I've ever heard of in the world of mobile home parks. The good news is, these are none that I purchased. These are things that I know first-hand because I was contacted by the folks who either bought these properties or at some point talked to the people who owned these properties.

The Good Deal segment showed you the things that make mobile home parks succeed, The Bad Deal, the things that make mobile home parks fail. These are just based on downright stupidity. Hold on to your hat and let's go over three unbelievably ugly mobile home park deals.

This first one still boggles my mind. I've never really understood how this would occur. I am not going to give out any names on any of these three, but this was a person that you would not think would be this gullible. This was a doctor and you just don't think of doctors as making strange decisions, but they did. Here's what happens: I get a call one day from someone who wants to talk to me about a mobile home park problem. I'm always, as everyone knows, very open to talking to people. I see mobile home park owners kind of as a giant fraternity. There's not many people who really do this, so it's fun talking to other owners and exchanging ideas. I own an old Mustang and if you own an old Mustang, other Mustang owners all help each other out, give you ideas and give you parts and whatever. It's kind of how I see mobile home parks.

This person calls me up and says, "Hey, I got a problem with this mobile home park." I said, "Okay, well, let's start off with the basics. Where is the mobile home park?" They said, "I don't know." That makes no sense. How can you not know where your mobile home park is? I said, "I don't follow you. How can you not know where the park is?" "I don't know the address."

I thought, well, they have a bad memory, they don't know the address. Doesn't really matter anyway. It's always a good starting spot to ask somebody, tell me about the park, but they don't know that. I said, "Can you tell me then what you paid for the park?" They said, "I don't know exactly." This is getting really strange. How can you not know what you paid? I said, "I don't understand. You don't know the address or what was paid, so what are we talking about here?" They said, "Well, I kind of found this person online and they said, 'I'm looking for people who want to put in capital into buying a mobile home park.' I called them up and they said, 'Yeah, wire me $100,000 and you'll own 50 percent or so of the mobile home park and we'll make tons of money together.'"

This person just wired $100,000 to this unknown person that they had only heard of online. I then said, "What did they say? Where is your park? What's going on?" They said, "They don't respond." "Do you have their number?" "No." "All you have is what? Their email address?" "Correct." "You know what their name is?" "No." "You don't know their name, you don't know where the park is located at, you don't know what was truly paid, you don't know anything. Just tell me this, how much were you supposed to get back?" He said, "It was never really decided exactly."

Obviously, the problem now is, they've wired $100,000 to somebody, who has absolutely no idea or has never given any credible evidence of if a park was even purchased. On top of that, they're not really bound to return any capital because they never even really discussed that. The money is basically lost. It's gone. I guess the take-away from that is how can you be that crazy? How can you wire money to someone, you don't know their name, don't know where the park is, don't have any of the facts of how this will even work, no partnership agreement, nothing. Just on a handshake, not even a handshake, we're talking online. Just on an online handshake. Maybe some emoji of a handshake. You send in the money. Absolutely insane.

Who would imagine a doctor would do that? That's the part of this story that really, really blew my mind. How did it turn out? I don't know, I never heard again. I assume the money was lost. Maybe they called the police. Do the police even work on something like that? That's a civil case. Since there was never even an agreement drawn, it's a difficult civil case. That's a really ugly deal there, I think we would all agree. Putting out your capital and having nothing to show for it, that's pretty painful. People do that in Las Vegas all the time, but you're trained not to do that when you invest in real estate.

This next deal, maybe even uglier, because it has even more liability. It includes not only losing all of your money, but then having liability on top of that. In this case, again, I get a call from somebody who has an existing mobile home park. They tell me they've got a problem with it and I say, "Fine, tell me your problem." They said, "I've got this mobile home park and the septic is not working." Okay, septic is not working. I know what can cause septic not to work. We have septic in our portfolio.

Two things can make septic not work. One, the septic tanks, two, the leach fields. It's a very simple system. The sewage goes into the tank and it leaches into the soil. The soil has to absorb the liquids or the tank backs up. Solids fill the tank. If you don't pump the solids out periodically, the solids can also clog the tank. It was one of two, not easy fixes, but manageable problems.

I said, "What's wrong? Is it the tank or the leach fields?" They said, "Oh, it's the tank." "Okay, great. Then why don't you fix the tank?" "We can't fix the tank." "Why is that?" "Because the city says the tank is a commercial tank and they won't let us put one like it back. We have to build a whole new system of individual tanks. We cannot have one big tank." I said, "Okay, then have you cost out what it would cost to put in individual septics and get rid of the big commercial tank?" They said, "No, but it wouldn't matter because we have no money at all anyway."

I then said, "Did you do any diligence on this park whatsoever?", to which they said, "No, absolutely none. We didn't even know we were on septic until this came up. We thought we were on city sewer." "Great. Anything else you want to throw out?" They said, "Yeah, we've got a little problem with the EPA, because this giant septic tank is overflowing sewage every day and they're fining us $10,000 a day." "How long has that been going on?" "Oh, we're about three months in now."

They had $900,000 of fines through the EPA, a septic tank that you can't replace because it's illegal, no sewage for the residents, and they cannot even afford to fix the septic, not to mention that $10,000-a-day fine. What a horrific, ugly mess. How did this happen? Clearly, they did no diligence. How could you not even know how your sewage functions? That blows my mind. Wouldn't you have asked at some point, even if you knew nothing about mobile home parks, am I on city water and city sewer and kind of where the lines go, or at least, what does it cost per month? I would have thought they would have caught the fact they were on septic when they simply looked at the old water-sewer bills and found there was no sewer bill. Apparently, they did truly zero diligence, and that's just not going to work for you and work for them.

This third deal is a really, really, really strange one. I got a call one day from a bank. The bank says, "We will pay you $1,000 if you will drop everything and immediately fly to Orlando, let us pick you up at the airport, show you a mobile home park, and give us a decision, your idea of the value of the mobile home park." That is a very odd request. I am not an appraiser, so I said to them, "Hey, I'm not an appraiser. You called the wrong number. I'm just a mobile home park owner." They said, "That's exactly what we want. We already have the appraisal, we want to make sure the appraiser isn't crazy."

I thought it sounded pretty exciting. I dropped everything, booked a ticket on Southwest. They paid for the ticket, I flew down to Orlando. They picked me up in a car. On the way out to the mobile home park, the banker tells me, "Here's the deal. When we get there, if we see anyone riding towards us on a bicycle, we run for it." I said, "I don't understand." They said, "This mobile home park is so hard scrabble, so poor, that they have constant ride-by shootings on bicycles. They're too poor to even own cars. Instead of drive-by shootings, they have ride-by shootings."

I know I'm going to a really choice property based on that description. What we do? We go out to the property, we walk around it, there's no one on a bicycle, it's all good. Get in the car, guy says, "Okay, what's it worth?" I said, "Here's what I think. What's the land worth? Did the appraiser give you an idea on his appraisal what the land value is?" He goes, "Yeah, the land value is $400,000." "If the land value is $400,000, then I would suggest the following: You put a chain link fence around the entire property, you evict everyone, you demolish every home, you cart it all away to destroy all the evidence. You sell it for $400,000 and pray no one sues you that lives there now."

The guy said, "Why do you say that?" I said, "Look, those homes are not installed properly, they're not tied down. I saw leaking water and sewage on almost every lot. Your power is completely shot, as evidenced by the extension cords that every home is being powered by. Your residents are a complete catastrophe. Your location is awful. There's no reason to believe that could remain as a mobile home park, and the cost to bring it back into compliance with the law is more than you could ever pay."

The guy said, "Gosh darn it. That's what the appraiser said, too. He said it's only worth about $400,000 because that's the land value." I said, "Then let me ask you this, what do you have in it?" The banker says, "We've got a loan on this thing of $4 million." Mind-boggling. I said, "What did the guy pay for it?" He said, "He paid $5 million and he put $1 million down on it."

How is that possible? How could you have just spent $5 million? This park had only been purchased a year earlier, one year earlier. It's gone into default in only one year. The guy bought it for $5 million, put $1 million down and he got a $4 million note. It's really only worth about $400,000. When you take into account the cost to fence it and clear out the debris, basically, the bank is going to be losing the entire $4 million on this deal.

They told me, the bank tells me, that the guy that bought it, he didn't do any diligence at all. He never even saw it. He bought it from a broker. The broker sent him a few pictures, which, obviously, he took just the one decent home. I couldn't find a decent home in there, but he must have found one and shot pictures of the park from three different directions at that one decent home.

The guy bought it like that, sight unseen, no due diligence, didn't ask any questions. Kind of smacks of the same stupidity as the septic tank buyer, but maybe in an even bigger way. I think the septic tank buyer at least probably went out to the park once and walked around. This guy never even bothered to fly down and look at the property. In so doing, he lost the million bucks. I don't know if he had recourse on the debt or not, on the $4 million that had to be written off.

Clearly, I think we would all agree, an incredibly ugly deal. What did all three of these horribly ugly deals have in common? Complete lack of due diligence. Benjamin Franklin said that due diligence is the mother of good luck. Man, was he right. My bad deals all lacked due diligence and proper judgment on my part. I didn't know any better. These ugly deals, though, defied imagination as far as bad due diligence.

How can you buy a property and not even look at it? How can you buy a property and not even know where the sewage goes? How is that even possible? How can you wire money without even knowing where it's going, where the park is or anything like that? The difference, I guess, between bad deals and unbelievably bad deals, truly ugly deals, falls in a complete lack of attention to detail, a complete lack of the very basic discipline of due diligence.

I think it's true on anything in life. It's one thing to probably buy a car that's a lemon. You thought you did a good job but, lo and behold, you didn't really know exactly what you were doing. You drove the car and some of the lights on the dash were flashing, but you didn't bother to check it out, or the salesman said, "Oh, don't worry about those flashing lights. They're just fine. It will all be good." That's a bad deal, that's buying a lemon.

How do you explain buying a car that doesn't even run, and paying full price and not even looking at it? That's obviously a very, very hard thing to sleep at night, knowing it was completely your fault. Of all the park deals that Dave and I have done over the last 20-something years, our failure parks still were fine. We at least got our money out of all but two. The two that we didn't get our money out were very small amounts.

In this case, you're talking writing off the entire amount, the entire amount that was invested in that mobile home park, and that's really a crisis. That's a terrible, terrible thing to have happen. Nevertheless, that's what happens when you do not put out the effort to uncover every stone, to look at every base. It doesn't work that way in life. You cannot do that. You cannot buy parks simply because a broker says, "Hey, it's a great park. Here's a flyer." No, you've got to put boots on the ground, go out, look at the property, check it out, do your diligence. That's how you stay away from ugly deals.

Can you get rid of bad deals? Yes, you can definitely mitigate your risk. You can definitely check out the market, you can check out the general area, the metro population. Yeah, you can do some things to fix those bad deals and maybe not ever have a bad deal. Bad deals can happen from a lot of different reasons. Maybe an employer shuts down or there's some issue, like Hurricane Harvey recently, but there's no excuse for really ugly deals.

Ugly deals always are the realm of those who put forth no effort at all in having any idea what they were doing, or even seeking help on how to figure out what they don't know what they're doing. They simply throw their money out there, either through a wire or just a purchase, with no clue of what's going to happen. They literally would be better off probably going to Vegas and putting it all on the roulette wheel, on red or black. They would have a better chance of winning than buying a mobile home park in the complete absence of due diligence or effort.

Again, this is Frank Rolfe with Mobile Home Park Mastery. I hope you've enjoyed this three-part podcast on The Good, The Bad and The Ugly. If you haven't seen the movie, it's a great thing to see as well. Might check it out on Netflix. Until then, we'll see you all next week.