Real estate is all about “location, location, location”. So a bad mobile home park location is a disaster for any buyer. In this fifth and final episode in our series on “Lessons Learned from Failed Parks” we’re going to discuss the worst markets for mobile home park success and how to identify and avoid them. We have many stories of bad markets – both observations on others as well as our own – and we think that any buyer who avoids the “location” issue is just asking for trouble.
Don't you get sick and tired of every real estate book and article and show saying real estate is all about location, location, location? Yet, here I am doing the same thing. This is Frank Rolfe, the Mobile Home Park Mastery podcast series. It's our final fifth in our five part series on lessons learned from failed parks. We're gonna be talking about just that, location. We're gonna call this market fails, but it's the same thing. It's location, location, location when it comes to mobile home parks and the sad news is you can't succeed if you have a bad location, so let's talk about what makes locations bad and then contrast that, which makes locations good.
The first thing, if you ask many lenders what you hate about certain mobile home park locations is very simple for them to answer. That is, that they hate rural areas. You hear that over and over again. If you talk to 10 banks, what do you hate the most about any mobile home park that you don't do the loan on, they always say, "Well, it was too rural." What does rural mean exactly? We can look it up on Wikipedia and we find out it means having low population in the surrounding area, typically tied to farmland or agriculture, but that's not always necessarily what the bank is saying. They just don't like areas that don't have that many people around. It could even be an area just outside of a city, which looks kind of not like farmland, but still they consider it too rural.
How do you resolve being rural or not? You go to bestplaces.net, you put in the zip code of the mobile home park and up will pop the population. Underneath that, though you'll see a thing that says metro: and you hope there's a word on that, because then you click on the metro and you get an even bigger amount of population, but sometimes there's markets that have very small populations to begin with; in the hundreds, maybe in the low thousands and then there's no metro, so here's what I think most banks mean. They're very, very concerned about areas that have less than 50,000, perhaps in population in the metro and then they're probably not going to do the loan when you get down below (with some banks) 25,000 or under. Some banks will go much lower.
There's some states they should be going lower in like Colorado, where you can do really well on tiny populations because the cost of housing is so high, but in most parts of America, most banks are gonna start freaking out when your metro population is 25,000 or less. Now, we prefer 100,000 and up. That's our favorite population, but you're not truly rural, typically if you're in a town of 50,000 or 40,000, but at some point you do become too small. When you become too small, lots of bad things happen. Your phone doesn't ring much for new customers. You don't have a very diverse employment market, but most importantly in deal killing, you just can't get a loan on it. Having a rural park is one of the first and most basic epic market fails.
The next one is that the market itself is just not desirable. Here's your mobile home park. Looks okay on paper. You look on Google street view. You look on Google aerial view. Hey, it's a mobile home park. What the heck? Then, you come to find out that, that school district is not somewhere that most people want to live or that area of town is considered blighted and no one wants to go there. How do you figure this out? A test ad. You put a test ad in your largest metro newspaper in Craigslist and you see how many calls you get over a 10 day run. A decent park will pull 20, 30 call. A fantastic park will pull 100 calls, but a terrible park will only pull two or three, so you've got to stay away from not desirable markets. If people don't want to live there, then you're never gonna be able to fill your homes or fill your lots. Don't ever buy that. That's, again, a very basic market fail.
A third one is when single family and apartment prices are just too low. Well, what's too low mean? Well, let's talk about that for a moment. We like single family home prices to be roughly $100,000 and up. Why is that? Because most of our customers will never be able to swing buying a $100,000 stick build home. They don't have the down payment to do it and they don't have the credit to do it and it's unlikely in many cases they ever will. On the apartment side, we like our three bedroom apartment rents to be $1,000 and up. Why is that? Well, in most mobile home parks, the mobile homes are three bedroom, not two bedroom, so when you compare your mobile home parks (your two bedroom rents) it's not really fair because three bedroom apartments are much more rare and much more costly. We like those three bedroom apartment rents to be roughly $1,000 and up.
If your three bedroom apartment rents; however, were $400 a month, which I've seen in Louisiana, that will never work because you have to have demand for affordable housing via contrast with expensive housing. If all housing is cheap, who needs a mobile home park? If you go to some areas of America where single family home and apartment rents are so very cheap, like some areas of southern Illinois, the problem is the parks can't function because the mortgage on the $40,000 is probably less than the lot rent in the mobile home park and the few people you would have in the mobile home park like that are very hard scrabble misfits who are unable to get those inexpensive single family homes or those inexpensive apartment units. If you do not have expensive stick build housing costs, homes and apartments, then your park is in a epic market fail situation.
Fourth, the impact of the climate. Let's not forget, whether you believe in global warming or not, things seem to be changing in the weather and not for the good for certain park locations. First, let's look at flooding. Haven't we seen just amazing flooding over the last few years? It's just incredible from coast to coast. Every major river, stream, lake, everything has been going up in height. As a result, a lot of parks that never had flooding issues were virtually wiped out. Look at hurricane Harvey. Look at the damage from hurricane Harvey. You had five feet of rain down in the Houston area. It washed out things in Houston, in Austin and many, many things that were downstream in that rainfall. No one could even model five feet of rain. Five feet of rain just doesn't even exist in the real world, but yet, there it was. Will it come again? Probably.
We're currently being warned by nearly everybody. A government study that just came out a day ago, that we're going to have increasingly strong weather events, so when you're looking at a mobile home park location that has flooding attached to it, if it's very high water levels already, which is called the BFE (Base Flood plane Elevation) then you gotta be worried. Bear in mind mobile homes and water do not get along well together. They have a very acrimonious relationship, so you gotta make sure that your homes are well above, the floor of the home has to be well above that base flood plane elevation called the BFE. The BFE in your park, despite the fact the flood plane is only a foot high, well then you've probably got two feet to spare, so you'll be okay, but if you're looking at a mobile home park where the BFE is already five feet off the ground potentially, that would destroy every home in the park.
With the way flooding is going, it could happen at any moment. Look at hurricanes in America. We're getting more of them. They're bigger. They're more damaging. We seem to have a killer one almost every year. If you're looking at a mobile home park that's coastal, right in the path of those hurricanes and there's storm surge, be very, very concerned. We own some mobile home parks in hurricane areas, but they're far inland. If you're 30 miles inland, you'll be it with a lot of wind effect, but traditionally not a lot of water effect. The good news is winds are typically insured. Water, in most cases typically not insured. Look at hurricane Harvey for a minute. Two hundred billion of damage. Only twenty billion of that insured. One hundred eighty billion of it not insured. There's nobody coming in. There's no Daddy Warbucks to come in, now and give people money to fix it. That's why those issues are very, very bad.
If you're in the southwest and even south parts of American, you need to watch out for the drought. Not because your park will necessarily run out of water, although it could, because it may change the entire specter of agricultural jobs. We've known of mobile home parks that have been ruined because the key employer had to move because they, for example, were a meat processing plant and they could not feed the cows because of drought, so just be very wary of the impact of climate on your location and make sure to stay away from areas that might turn into epic market fails, simply because the way the weather is changing.
This next one is big and that's one horse towns. We've written many, many articles. I've done many, many speeches on the fact that it's very, very risky for any mobile home park owner to look at buying a park that has one main employer. That lack of diversity can be hugely damaging to your investment dollars. Look at Bartlesville, Oklahoma for example. The home of Phillips Petroleum, or at least it was. It's an entire town with high rise buildings all predicated on the fact that Phillips was going to keep their employment strong and pay those bills and then one day Phillips pulled out. I haven't been to Bartlesville since Phillips pulled out, but it's gotta be a blood bath there economically because when I was there when Phillips was doing well, every single job in the town related to Phillips and even the jobs at Dairy Queen really related to Phillips because without Phillips there, there was no one there to buy those strawberry sundaes. What does it mean? You've got to have a place with economic diversity.
The three best forms of economic diversity in employment in our opinion are education, healthcare and government jobs. Those are the three key ones. We don't like having one large private sector employer. Now, we're okay with one large education healthcare or government employer. If you're looking at a park in a college town with a big college, like Urbana, Illinois where they have the University of Illinois there and it has 50,000 people in the college and it's by far number one, that's okay because colleges don't ever shut down. They don't ever lay off. The same as if you had a giant regional hospital, like the Mayo Clinic or if you had a giant army base, which falls under government.
Those situations are okay to invest in because that's really a pretty dependable source of jobs, but if you've got a town built around one private sector employer, let's say Snapper Mowers, I would never want to bank on that. What if Snapper moves their production to Mexico? What if Snapper falls on hard times because there's a new mower company and their mower is no longer the best? In many cases of those one horse towns, you're really better off buying stock in that main employer. It's just about the same level of risk. We try and avoid that because we find that a lot of markets who become so concentrated on one employer can lead to epic market fails when something happens to that employer and they either pull out or they decline in their economic fortunes.
Finally on epic market fails, stay away from redline states. Redlined activities. By that, I mean by redline, things the banks just won't lend on simply because of the stereotype in their mind that it's too risky. Two states that immediately come to mind: Louisiana and Mississippi. There's a lot of lenders out there that don't do those two states. They don't do Louisiana because it's on Napoleonic law, which I don't even fully understand what that means, but it means enough that a lot of banks don't want to know how to do it or how to write the documents and they won't make loans there. Mississippi, the problem is that it's just considered the economy there to be very, very weak. As a result, a lot of banks say, "Well, we don't get many loan applications in Mississippi anyway, so let's just not make any loans there."
I will never forget when years ago, about a decade ago, I went to get a loan on a park in Oklahoma because that time Oklahoma was a redline state, but I didn't even know it. I was approved for the loan, I got into position of closing and literally the day before it closed, I get a call from the loan officer saying he has some bad news. The bank president has just announced they will not make anymore loans in Oklahoma and therefore will not close on my loan the next day. I had to jump on a plane and fly out to the bank. I met with the head of the bank and convinced him to go ahead and do my loan, that I'd never bring him another one and he agreed if I put even more amounts down. Could have been a complete disaster.
Again, there's some states, there's some cities out there that lenders have redlined, whether it's hidden or not and you don't want to be having to battle areas that they don't like making loans in. Another one would be, for example, oil and gas areas. Some of these Shell regions. Particularly now that gas prices are going down, you'll find even more pushback from lenders on certain areas of oil and gas production. Stay away from those areas because if you can't get a loan, then A, you won't be able to renew your loan or get a loan to begin with and B, no one will be able to buy from you later on.
Now, the biggest example of market fail, market decline used to be Detroit, but Detroit has now seemingly it bottom. I guess things couldn't get much worse. They're actually now starting to have positive job formation and there's some stats on Detroit that are becoming okay, but the bottom line is don't get caught in these cycles of locations that are on the decline, because there's no worse market fail than a market that's so bad that it's redlined and no one will even make a loan there. Again, this is Frank Rolfe, the Mobile Home Park Mastery podcast series. I hope you've enjoyed this five part series on lessons learned from failed parks. We'll be back again soon.