Mobile Home Park Mastery: Episode 120

Is The Glass Half Full or Half Empty with 50% Occupancy?

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Due to mismanagement and lack of vision, many American mobile home parks suffer from extreme vacancy. But is there opportunity with 50% occupied parks? In this edition of the Mobile Home Park Mastery podcast series, we’re going to explore the issue of parks with huge vacancy challenges and decide whether the glass is half empty or half full – or both.

Episode Transcript

@longetrIs the glass half full or half empty? That's a question that's been used in philosophy classes in American colleges probably for the last 50 years, but how does that relate to mobile home parks? This is Frank Rolfe, from Mobile Home Park Mastery Podcast series. We're going to be exploring vacancy, the good and the bad, and we'll try and decide whether the glass is truly half full when you have a lot of vacancy or half empty. Let's start off with half full. The good things.

Well, the first best thing about having a lot of vacancy in your mobile home park would certainly be, it gives you lots of upside. Upside in filling the lots. Now, we all know that in America the demand for affordable housing is insanely high. The demand component is there in almost every mobile home park in a larger metro area. There are people who want to move in, and when you have a mobile home park with empty lots, all you have to do to put someone in that lot paying lot rent is find a way to get a home on the lot.

Now, there's a lot of creative ways to do that today. Our good friends over there at 21st Mortgage to the CASH Program, and other manufacturers as well, have programs that allow the park owner to bring in homes that can then be sold to the customers, and to do so with very little capital outlay. If you have vacant lots, it makes complete sense you should be able to budget bringing homes in, and then filling those homes, which then triggers getting the lot rent, which is the goal of all mobile home park owners. Another reason the glass may be half full is that you basically have the ability to hit current market rents faster when you've got vacant lots, because every home you bring in on that vacant lot you can set to the actual market lot rent. As I've talked about many times, our lot rents in America are woefully low, insanely low. You can't make any sense of them low in many markets.

Market lot rents can be $500 a month, yet mom-and-pops are only charging $200 in that very market. Now, it's really hard on the customers who are living there at 200 a month, even though it's insanely low. Trying to raise it up to market rapidly, that can put a lot of hardship on them. But new people coming in, who are looking for a real deal on affordable housing, and realize that that's the market rent, and it's still an incredible bargain, they're all lined up for that. Basically, when you have vacant lots, those go day one into the full market rent. There's another reason that vacant lots can be half full, is because they allow you to tap into full market rents on day one.

Another issue is, you have less difficulty with issues with residents and the changing sometimes of the park residents themselves when your park has a lot of vacancy. When you have a lot of occupied lots, and then with older homes, and you're trying to bring in newer homes, it can sometimes cause problems. People say, "I don't want to live in this brand new mobile home next to a home from 1950s or 1960s." Often when you're trying to take an older mobile home park and bring it back to life, the job can sometimes be easier when you have vacant lots because now I can rebuild that park however I want. I can position the homes in, the sizes, the colors, the designs, in any manner I like for maximum aesthetic effect.

I may put double-wide at the entry, and double-wide at the big curve in the road, and then my lesser expensive single-wides in different positions. But it's more like a chessboard. I'm starting from a clean slate, and I can design and organize that mobile home park any which way I want. Finally, it's just sometimes more aesthetically pleasing because your end result is that you have a park that has a lot more new homes in it, and even though the old homes are fully functional there's no question that the new homes typically look nicer. So sometimes when a park is half empty, it gives you the chance to create a more aesthetically pleasing product than if you didn't have so many vacant lots to begin with.

Now, let's now turn to half empty. Well, the biggest reason a mobile home park with vacancy is half empty is because of lending. Lending, as we all know, is a key component to the mobile home park industry. Nobody buys mobile home parks for cash. At least they try not to. They do sometimes at auctions, but then they try and refinance and put debt back on it again. Basically we're all a nation of borrowers and everyone who owns commercial real estate, whether it's a retail center, an office building, or a mobile home park, they're counting on lending. Typically, at the rate of about 70 to 80% LTV, which means loan to value, which means that when you buy a mobile home park you're typically only putting 20 or 30% of the purchase price down.

However, that's hindered when you have lots of vacancy because banks don't like mobile home parks with lots of vacancy. They can tolerate about 20% vacancy or 80% occupancy. They call that threshold "stabilized occupancy," and that's treated at a premium. But when you have less occupancy, and certainly when you're at 50% occupancy, you're far, far from stabilized. That scares banks. They typically don't like making loans on parks that are not at least 80% occupied. If you ask a banker why that is, they'll tell you, "Well, we want proof that the demand is there. That people like living there enough that it's 80% occupied." So it's really just a judgment that they chose. I don't even know why they picked 80%. Why not 70%, 75%? Nobody actually knows, but that's just become the standard. So when you don't have at least 80% occupancy, getting a loan can be very hard, if not impossible.

The next reason the glass would be half empty when you have lots of vacancy is, you have complete lack of liquidity as the owner of the mobile home park. When you have a park that not a stabilized occupancy, which makes getting a loan very, very hard, that in fact makes it then very hard for you to ever sell it. If you buy the park that's half occupied, you will probably not be able to sell that park until you get much closer to stabilized occupancy because the person who would buy it from you will not be able to get a loan. That lack of liquidity can be very scary. Imagine if you had a health issue, or some other turnabout in your finances, and wanted to sell the mobile home park quickly. Well, you'd be stuck, right, because you're not at stabilized occupancy, and therefore the pool of buyers who can pay cash would be very, very, very small.

Another issue in which a park with lots of vacancy might be half empty, is the one that most people don't think about. That's the fact that some of your infrastructure will not work unless you have enough lots occupied. My very first part, Glenhaven, I was having a problem with the sewer. I was calling the Roto-Rooter guy out all the time. Now, at that time Glen Haven was 50% vacant, but I knew nothing about sewer at all. One day the guy's out there with the Roto-Rooter machine, and I come over. Just to make conversation I say, "Wow. I wish these pipes in Glenhaven were way bigger. I wouldn't have to call you so much." The guy looked at me and said, "You have no knowledge of plumbing at all, do you?"

I said, "Well, I don't know. I'm just an average American. I don't know that much." He goes, "Well, look. This is how plumbing works. When you have a sewer line, to make that sewer line work, that needs to have liquids in it about 50% up the sides all the time, because that's how everything that people flush down the toilet or put down their sink, that's how it floats out to the city's main line." But at Glenhaven, what was happening is, since I was only half occupied, I never had enough water flowing through the line to push things to the very end of the line. They would basically just fall in the line as solids, and sit there. There was never enough water pressure to dislodge them. That's why I was having Roto-Rooter come out all the time.

The reason I'm telling you this story is, when you have a park that's only half occupied, you clearly will not have enough water in the line as it was originally designed. That means the sewage will not flow efficiently, and you will have lots more repair calls. So there's another reason why your glass would be potentially half empty if you have a park with lots of vacancy. Finally, just simply the capital risk required, and all the other things that can pop up when you're trying to fill a park that has heavy vacancy. A lot of things just happen, and we can't always plan for them into the future.

When you take a park that's half empty and you start filling it, there's many variables at play. Some that may not break your way. It's possible that the residents who come in, although they want to live there, they can't meet the guidelines on credit or down payment to buy the home, or possibly the city gets irate at some point in the move-in, and tries to block you from using those vacant lots even though under grandfather law they can't. They still throw down the gauntlet and say, "No. You can't do it," and you may have to get in some kind of expensive, protracted legal situation to dislodge them from that thought.

Basically, if you look at Sam Zell, the number one investor in the mobile home park sector, he has written an entire book called Am I Being too Subtle?, which analyzes risk versus reward, and the simple fact that you should never invest in something unless the reward far outweighs the risk. When you buy a park that's half occupied, there's a lot of risk there. That means you'll have to have a huge amount of reward. Sometimes the reward just doesn't justify the purchase. So if you're looking at buying a park that's half empty, you've got to make a lot of money with that, or otherwise you probably should not find that deal compelling enough to close.

Now in the half full and the half empty debate, is there a right or wrong answer? No. Every park is completely different. Mobile home parks are all like people. They have their own distinct personalities, so you can't just put it in a box. You can't simply say that every mobile home park that's 50% or less occupancy should be thrown in the trashcan, and that no one should ever buy those deals, because that's simply not true. Some of our most profitable deals began as parks that were half empty. There's definitely reason you would want to look into those parks, but at the same time you have to understand the risks. The last thing you want to do, ever, is to buy a mobile home park that you can't sell or refinance when you need to. If that means you don't hit stabilized occupancy over time, you're basically stuck. It's your mobile home park forever, or at least until such time as you default on the mortgage on it. So what am I saying?

You have to be very, very careful in your selection. Really in the answer to the question, "Is a half empty park, half full or half empty," is totally reliant on the park itself. On those magic determiners like infrastructure, and location, and density. Are all these things in the right order? Are the right ingredients there to bake a really tasty cake, or are they not? You can go tell that in philosophy class when they ask you if the glass is half full or half empty. Perhaps it's whatever kind of beverage is in the glass, whether you like it or not. There's some mobile home parks that are good deals. The glass is always half full on those parks even though the park has much vacancy with it. There's others that no one should touch ever, perhaps at any price, that have lots of vacancy because there simply is not the raw material there to make that mobile home park a success. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. We'll be back again next week.