As the second in a three-part series on “the Good, the Bad and the Ugly”, in this week’s Mobile Home Park Mastery podcast series, were going to discuss bad deals – where they come from and how you can mitigate the issues that jeopardize your investment dollars. We’re going to review three deals that we have done that didn’t work out well, and review what went wrong and what we should have done differently. But these are still not the worst deals. That’s reserved for next week’s podcast on “ugly’ deals.
Episode 17: Bad Deals Transcript
Bad deals. They're nasty. Nobody wants to talk about them but yet they do exist. I've had some and I'm here today to tell you about why they went bad, how I could've prevented them from being bad, and it's all part of our good, bad, and ugly series on mobile home parks. Now you'll find all my bad deals begin in my earliest years because I didn't know what I was doing. I had no clue. Additionally, nobody would help me. Nobody would help anyone back in those days so if you turn the clock back to the mid-90s, there were no books on the industry. No one talked about it. Nobody cared. You were completely on your own. All you had to go by was urban legend, stereotypes, bad stigma about mobile home parks. First thing I ever did when I bought my first park, ran out and got a concealed handgun license. That, to me, was what the business was all about. It was all about crime and danger and shootout at the OK Corral. Another great Western. But no, that isn't truly what the business was about. However, I wish I knew more than I did back then because I would not have entered ever into a bad deal because some of them are so stupidly simple to see the problem, you would never do them, right? But I did.
So let's look at the first deal. The first deal I did that was just a terrible deal and I won't give the names because these deals have passed onto other owners now and there's no reason to burden them with people knowing about those deals but the first one I had was in a small town in Louisiana. Out near Shreveport, not in Shreveport, about a 45 minutes away from Shreveport. It was brought to me by a broker who said, "Hey, I see you own some parks in East Texas," which I did. "I've got this great deal in this beautiful little town in Louisiana." So I drove down to look at the mobile home park and I was obsessed with how nice the drive appeal was. I was going by some really expensive homes that looked like something from a movie, like Gone with the Wind. They were on either side of the road down to the mobile home park and I thought, "My gosh. This is the best location I've ever seen." Not thinking that it didn't matter what I thought about single family locations. They were places I would want to be. All that matter was the dynamics of a mobile home park in that location which, back then, I didn't even know what it meant.
So I pull into the mobile home park and what do I see? I see a pool. I see a little clubhouse. I even see a tennis court. I am hooked. I am thinking this is a Del Webb styled luxury community. And there's Mom and Pop and they're just as friendly as can be and, "Oh, it's just the best business ever." But they had no energy to keep it going. No energy to fill vacant homes. No energy to fill vacant lots and I think, "Wow! This is just the best deal ever," right? I'm going to pop in there and I am going to buy this 103 space mobile home park for a very, very low amount of money. Lower than the construction cost to build it new and what a cool way to get here. I drive by all these estates and it's so neat and my gosh, it has a tennis court and it even has the tennis court net on it. I mean, you can't beat this deal. What a horrible, horrible mistake. I had no idea back then that in order to have a mobile home park you kind of have to have this thing called people. You gotta be in a metro area where there's actually people who need housing because that's the one thing this market didn't deliver at all. People.
I've never looked recently on BestPlaces to see what the population's at but I'm going to bet the entire metro area of this property, the number of people could not have exceeded a few thousand and that's really overstating it. This was basically a rural mobile home park. Now I didn't know what a rural mobile home park was back then. I thought all mobile home parks were created equal but they're not. The kind of parks you want to buy are in markets of maybe 100,000 metro and up. You can go under a 100,000, 50,000 metro. In the right park, even 25,000 metro but it can't be 2,000 metro. How do you know what the metro area is? You go to bestplaces.net, you put in the zip code of the park and it's going to tell you and you don't get to choose the metro. The government did that for you. BestPlaces shows you the government's own assertion of what the metro is and you have no ability to customize that at all. It is what it is. Because this park has such a rural location, I was screwed. I could not sell anything. I could not rent anything. I couldn't make the phone ring no matter what I did. I could've dressed in a chicken suit out front and no one would still ever pulled in.
As I realized that there was no market, then I got weak on collections. I was afraid to lose any customer. Customer didn't pay the rent, I'd go to them and say, "Hey, you're not paying the rent. What can we do to get you to pay the rent?" They sometimes would say, "Well, reduce my rent." Or they would say, "I'll try and pay you next month. Or how about I pay you $50 a month until I get my job again." Total train wreck. The only good news about the property, I guess, I sold the thing, fortunately and got my money back out because I'd bought it so cheaply, that I was able to sell it to the next sucker who thought maybe that they could make a go of it and they got a huge luck out. They hit oil and gas under it. I sold the mineral rights with the park, didn't know any better. There weren't any mineral rights back then of any value. Then they invented horizontal drilling and fracking and low and behold, they hit oil, somewhere in the proximity and the oil money was enough to pay off the park. I guess rural areas can, if you're incredibly lucky, be beneficial if there's oil or gas nearby but in most of America, there is not. So rural properties, bad idea, bad business model. Don't even think about it.
Next mobile home park was also in Shreveport, Louisiana. As you'll see here, two of my three stories all revolve around Shreveport, Louisiana. I'm not going to condemn it all together but it's a very, very tough market for mobile home parks to succeed in. This park had bad market dynamics. I didn't know what market dynamics were back then. Who did? Who knew how mobile home parks worked? Nobody. So, it was a mobile home park, down the street from a McDonald's, North side of Shreveport. I didn't know any better. I thought, "Wow, look, you know, there's a McDonald's. That's pretty cool. I can pop in there and get one of my beloved bacon, egg, and cheese biscuits when I go out to visit the park. That's pretty neat." I should've known there was a problem because during my due diligence, I found that the former owner had, in fact, hung herself in the clubhouse when the deal before me fell through. That's a bad ominous sign. When you so hate the property that you hang yourself in the clubhouse because the guy cancels the contract. Not a good sign and that's who I was buying it from was her son. That should've made me think twice but back then, I wouldn't have known any better anyway. I couldn't have thought twice. I didn't know what I was doing.
So what happened to me on this deal? Why was the deal so bad? Well, the problem was single family home prices were very low. Apartment rents were very low. No one needed a mobile park. So who lives in a mobile home park when no one needs one? Yeah, you guessed it. The people who are so bad off that they can't even live in that cheap apartment or that cheap home. I had the dregs of the dregs living in the mobile home park. Then the problem was no one wanted to pay this thing called rent. You know, rent. Rent requires money. Rent's not any fun. So my residence thought, "Well, you know what, there's a lot of things that I would like to do in my life and none of them include paying rent so I guess I won't." Some months I was filing eviction as much as 25% of the park in a given month. Think about that for a moment. This park had about 60 lots and I was filing about 15 evictions a month. That's terrible. Absolutely terrible. But yet, there I was. I was in that Shreveport, Louisiana, eviction's court so frequently, it was insane. I maybe should've rented an apartment across the street. It would've been cheaper than the hotel bills. But, unfortunately, that's the way it worked out.
How could I have done it differently? Well, how about picking a good market with good dynamics. What are good dynamics? Well, median home price of 100,000 and up is a good one. Average apartment rent of $1,000 and up is a good one. Vacant housing rate of under 12%, which is the US average, that would be a good one. This property, sadly, didn't meet any of those criteria. Where can you get those criteria? Bestplaces.net. That's were you get the criteria. It's all very clearly spelled out for you. And hopefully, when you do that, you'll do a better job than I did because back when I did this, there was no BestPlaces and there was no way to tell what was going on. You just basically did it and you prayed it worked and often, it didn't. That was the mobile park business in the mid-90s so thank heavens we're in 2017 today.
My third bad deal is not necessarily a deal itself that's bad. It's a concept that's bad. What happened to me was it was bad due diligence. I had done a terrible job of doing the due diligence because I didn't know what due diligence really was back then and what my rights were as a mobile home park owner or mobile home park buyer. The property's in downtown McKinney, Texas. It's still there and here's how this deal went down. This is why I rank this as a bad deal because it was such a horrible opportunity lost. I was so gullible, so stupid back then. I had this property, Mom and Pop owned, phenomenal location. If you've never been to McKinney, Texas, it's a city in a renaissance and I could've been a part of that renaissance. The mobile home park is right in downtown. Downtown was getting super classy. Boutiques, fancy restaurants, great location. So what happens to me? How could this deal go bad? I have it tied up at a great price. Market dynamics are fantastic in McKinney. I go down to the city and I say, "Hey, I'm just checking in to see what my zoning and my inspection issues are." They tell me, "Oh, oh gosh, no. You can't have that mobile home park. We're going to shut that mobile home park down."
I said, "What do you mean, 'shut the park down'? How can you shut this park down? It's been here for like 50 years." They said, "Well, we don't like it. It's ugly and you know what, it's not really part of our master plan for the city. We envision better things for that property. I mean, what the heck, you're right in the middle of downtown. This isn't good for our downtown. It's not good for our citizens. We just want it to go away." Well, I didn't know any better. I didn't know anything about the laws and mobile home parks or grandfathering or even what grandfathering was so I let this little Mickey Mouse inspector scare me away from buying the property. Would've been one of greatest buys of all time, perhaps, had I bought it. But no! I believe that this inspector really knew what he was talking about. I believed I had no rights at all. I believed the former owner had not rights. I didn't even bother calling an attorney to say, "Hey, do I have any rights here?" Or even telling the owner what the city had told me.
Instead, I sheepishly canceled the contract assuming that I was screwed and I just embarrassingly crawled away from the deal. Now, not too long thereafter what happened, I saw someone had bought the property, they had put up a new sign, a little bit of white vinyl fencing, all the things I would've done. Spruced up the property, put new shingles on the homes that didn't have any shingles on them, and new shutters and items. All just the same stuff I would've done and it looked really, really nice and probably the park today is worth several million dollars more than what I would've paid for it. But, like a complete fool, I was bullied and I did absolutely nothing about it.
So this third bad deal I want to implant in your brain is the idea that don't be bullied. Don't miss opportunities. Sometimes the worst deal are the ones that you missed out on. A good deal that is missed really is a bad deal because you blew it. You didn't get it. It's one thing if you lose out to somebody else in negotiation. That's all about the way America works. We're a capitalist society. We're a free market. People offer prices and you take them or you don't. That goes with the territory. That's simply part of a competitive America. But what about in this case? I'd already done the hard part. I tied up the property at a great price. I'd worked with Mom and Pop. I'd bonded with them. I'd done all the right stuff and here I am in the City of McKinney office, letting this little inspector, he's probably making 12 bucks an hour, scare me away from moving forward and buying the deal. What should I have done instead? Well let me tell you what I would do today if that occurred.
Now that I know what grandfathering is, I would've immediately got myself a good municipal lawyer and I would've called their bluff and had that lawyer call the city's attorney and threaten litigation if they didn't back off their stance. And I guarantee you that attorney would've called that inspector there at City Hall of McKinney, and said, "Hey, I'm sorry. You do not understand the laws. You have got to go ahead and let these folks buy this mobile home park. You have no right to say what you're saying." And if I had to litigate, I guarantee you I would've won. Texas is one of those states that actually has very, very strong rights on grandfathering. So strongly, passed a new law recently that protects the rights of park owners where it abides that the state says you can use your vacant lots pretty much as much as you want. But no, I didn't bother to ask advice. Didn't bother to get a lawyer. Didn't bother to do anything. I just did it my own and that was a horrible, horrible foolish mistake.
I look back at other parks and I had the same thing happen to me in other occasions and I always want to kick myself. Of course, you never know. You always have sour grapes. You say, "Well, I could've bought the park but I don't know, maybe it was on a landfill. Maybe there was something wrong with the sewer lines. Maybe it wasn't that big a missed opportunity but you know I'm lying." Of course, it was a horrible missed opportunity. That's sad. That's why I put that in with my bad deals because that deal could've been good enough to offset those two bad deals that I had there in Shreveport. It was really the missed opportunity that made me so upset and it still makes me upset today. If I went out to that property right now, looked at it, I would've once again think, "I cannot believe I let that little inspector guy scare me off of what could've been an extremely good purchase of that mobile home park right in downtown McKinney." But I did.
Morale of the story is, sometimes bad things are things that you do. Buy a property, don't know what you're doing. Buy a park in a weak rural area. Terrible idea. Never want to do that. Buy a park with horrible market dynamics. Again, terrible idea. You don't want to do that. But sometimes not buying a park at all is your worst deal because it would've been a really good deal for you and you screwed up and you didn't go forward and you didn't do it. That regret will kind of haunt you for a long period of time. I can still very vividly remember everything about that deal in McKinney, even what the inspector looked like, where is office was and everything else. I will always remember that and always think, "Gosh, what a terrible deal. I could've owned that mobile home park and I got scared away from a guy who did not even know what the heck he was talking about and I sadly, did not know my rights as a park owner or park buyer whatsoever."
In our next podcast, we're going to go over really, really ugly deals. These are some of the worst deals I've ever seen. Those bad deals weren't too bad for me. In both of those cases, I got my money back. But these next three I'm going to go over are things that are so unbelievably horrific that you can't even walk away from them. Now, fortunately, they're not deals that I own. These are deals of people I know who own parks or deals I've heard of through urban legend of people that had parks. It will give you an idea of how bad things can really, really be. So join me again for our next Mobile Home Park Mastery Podcast. We're going to be talking about really, really, really ugly deals.