Even the best mobile home park will not succeed with bad management in place. In our third of a five-part series on “Lessons Learned from Failed Parks” we’re going to be discussing how a bad manager can destroy your business and give some real-life examples to hammer home the points. We’re also going to review some ways to prevent these catastrophes. If you want to make money with a mobile home park, then choosing or retaining the wrong manager virtually assures you of failure.
Episode 68: Big Management Fails Transcript
Mobile home parks require lower management, but they're not devoid of management. This is Frank Rolfe with the Mobile Home Park Mastery Podcast Series. It's our third installment in a five-part series on lessons learned from failed parks. We're going to be talking about management fails, the things that you can do to destroy your property utilizing bad management.
Let's start off with collections. As we all know, most mobile home parks, not all but most are in the affordable housing sector. This means the customers do not have a lot of money. As a result, if you don't stay on them, you won't get paid. In the industry we call the best type of management system for collections, no pay, no stay. What this means is simply if you don't pay your rent, you get evicted. It's not complicated. It's not rocket science. Basically, there are certain steps you follow.
The rent is due on the first. It's late after the fifth, and the late fee is assessed. Then you give the customer a demand letter, which is prescribed by each individual state. Following the demand letter, you file the eviction. Once winning the eviction and the appeal period has ended, you file for what's called the writ of possession or writ of execution. In this case, the constable goes and physically throws the customer out of their home if they have not chosen at that point to go ahead and run off.
What happens when you don't do no pay, no stay? Well, terrible things happen to your property. Absolutely, epic fails occur if you don't collect the money. We have bought mobile home parks of mom-and-pops that had up to 30% of the tenant base not paying the rent, and I don't mean recently, I mean sometimes for years. It is not uncommon in some mom-and-pop parks to see $7,000 or even $10,000 balances owed on a $300 monthly lot rent because the customer hasn't literally paid in years.
You cannot run your property in this manner. If you do not have revenue coming in, you clearly cannot cover any of your expenses and/or your debt payment. On top of that, you're not going to hit any of your requirements with the lender when you made the loan to begin with. You will look like a complete idiot. So, what does it mean? It means you have to no pay, no stay. No other system works.
If you are doing partial payments, forget it. If you are trying to let people pay on their own, on an honor system, it's never going to happen. The only system regardless of the location where your property is, style of operation or tenant bases, you must toe a strict line that they've got to pay, or they simply cannot stay. Another big management fail is when they don't abide by the rules, and we call this no play, no stay. If you don't play by the rules, once again, you can't stay in the mobile home park.
Even though people own their own homes, they're still subject to that lot lease agreement to keep the home on our property. If they elect not to keep the property in good condition, if they let their home go down the drain. The skirting fall off, junk in the yards, a couple pit bulls on chains in the yards, the park owner always has a prerogative of not renewing their lease. Most leases in the industry are month-to-month so it's not that difficult, and we call this process no play, no stay.
We don't want to lose any customers. We want to keep all of our customers. It makes no economic sense to throw a customer out. However, sometimes, certain customers drag the entire community down. They refuse to follow the rules, and it damages the quality of life of everyone in the mobile home park. As a result, you've got to, in the worst case basis, utilize no play, no stay.
Now, you're way better off going to the residence in advance of that situation and trying to work with them amiably to resolve it. But we've had residents tell us, "Get off my lawn. I don't care what you say. I'll do whatever I want." That attitude will not work in a community. It doesn't work in the city itself. That kind of resident needs to move way out in the county where there's no one around for miles.
When you have neighbors in very close proximity, yet you refuse to do anything that most people would know you have to do in a modern society, then that customer simply cannot remain. On that note, "no play, no stay" also damages obviously your property condition, which ruins the way things look, which is going to negatively affect you when the bank does their annual inspection, or when you go to sell the property or refinance the property or get it appraised.
So that falls into another additional management fail, which is property condition. Now, most mobile home parks don't have a lot of property to take responsibility for. The other common areas, which can sometimes be a clubhouse and a pool and your entry, and then of course you'll also have your vacant lots. But sometimes the worst thing we see in the mobile home park are the common areas.
How many parks have you driven into where the clubhouse has a broken window with a board over it? How many of you see where the pool is green with slime? How many of you see where the playground equipment has fallen off? The swings have fallen right off the poles. All you can do with the thing that holds the swing up is do a chin-up if you wanted. That's not good for business. So that's another epic management fail is when the common areas themselves look terrible.
No property should ever exist of a situation where the common areas are not leading the way. Those should set the example to the whole mobile home park tenant base that we care. We want to have a nice property. If you let your common areas go down the drain, it's only a matter of time before the rest of the park goes down the drain too.
Next is no sense of urgency on occupancy. This is another epic management fail. What happens is the owner of the property lets the manager, who doesn't much care anyway because it's not their money, run wild when it comes to having vacant units or vacant lots. Here they have a 1990s home that needs only $1,000 of work. The demand is off the grids. You can easily get a customer in a few days with a simple ad in the newspaper. Yet the home sits empty sometimes for months, even years.
We've gotten into mobile home parks that we purchased where there can sometimes be 10 homes or more stacked up, ready to rent, ready to sell. The only reason there's nobody in them is that the manager refused to answer the phone or make any showings. That does not work. Once again, think of what you promised your bank. You're trying to hit at least stabilized occupancy of 80% or maybe even higher if the park was higher when you bought it. You can't let it go down the drain.
It's not going to work for anyone. It's not even really good for the nation, which has such a huge demand right now for affordable housing. You've got to make sure your manager is at all times has a high sense of urgency. So how do you do that? Really only two ways. One, give a really impressive commission structure to your manager to get all homes out the door. Number two, always stay on top of the manager, constantly bugging them and reminding them how are we doing on getting that home out the door.
And don't forget to look instead of the macro picture, at the micro. Are the ads being run? Is the home properly cleaned out? Is the yard presentable? These are the things to get the home out the door. Don't just keep saying to the manager, "Hey manager, did you get that home occupied yet?" Instead, say, "Hey manager, send me a smartphone photo of the banner at the front. Send me a smartphone photo of the signs and the window and the yard saying the home is for sale or rent. Show me a smartphone picture of the newspaper ad. Show me that you're on Craigslist."
Then on top of that, start mystery shopping. It doesn't hurt to call your park all the time pretending to be a customer to see, "Does the manager answer the phone? What do they say when they do answer the phone?" These are the type of things that you have to do, the basic building blocks of getting homes filled. Yet, so many managers out there are not doing them, and yet so many owners are letting them run wild.
Final one is following the budget. One of the epic management fails, if not the most important one is when the park owner fails to even be concerned about that very basic item called meeting their budget. When you bought that mobile home park, you gave that Bank a budget, a P&L, a road map of what you were going to do, and you gave one to yourself even if there's no bank, even if you own it free and clear. You owe to yourself to follow that road map, that GPS system that says, "Here are the steps I have to take to get to where I want to go."
You've got to stay all over that budget to make sure that you do it. You should go ahead and every month set aside a certain day, a certain time and have a meeting with yourself or with your other partners where you show the performance for the prior month. You look at the revenue. You look at the expenses. You look at your budget. You look at your actual and what really occurred and the difference.
Any item that's better than you planned? Well, that's great. Don't worry about it. List the items that didn't stack up to what you thought that you have to really be concerned about. You need to look at each one and brainstorm. "What happened here? How was I so wrong? How can I get better in the future going forward?" And then equally important, enact those steps.
It's the old saying, "Think like a man of action; act like a man of thought." Don't just think about it. Take the action necessary to make it happen. A budget is really, again, like a GPS system, and if you don't do what the GPS tells you to do where do you end up. I don't know where you end up, but you never end up where you were supposed to be. That's for sure.
With the demand for affordable housing so high right now, anybody who's not hitting or beating budgets has done something terribly wrong. The number one management fail we see on hitting budgets typically revolves around water and sewer. That's why so many park owners are retrofitting to water meters right now. Several reasons. Number one, it makes the tenants accountable for their own use, fosters conservation, which is good from an ecological standpoint. Additionally, gets you out of the worrying game on their water and sewer use.
It's very hard for you to stay on budget when you don't control the steps to stay on budget. By making them pay their own water sewer, it gets you out of the water sewer game in part. But it still doesn't solve issues such as mainline leaks. Every time you get a water bill, you need to look at the water bill, look at the same month, the prior year, and then the month before as well and say, "Is this bill on track? Do I possibly have a leak?" We have bought parks where water leaks were as much as 60,000 a year that at 10 cap, that's $600,000 of value that was erased because of the epic management fail of not staying on top of water and sewer. That simply is not going to work.
Final epic management fail is when you let the manager embezzle. I've seen some amazing embezzlements over the years. One property that I purchased in Oklahoma, the manager had embezzled roughly $1 million over the former decade. How did they do it? Well, this park didn't even take cash. What the manager did is they set aside a second. They opened a second bank account in the name of the park with himself as the only signing entity. They would deposit some portion of all checks into that account and then draw it down.
Now, how did this occur in a modern world? Well, it's easy. In the old days, what mom-and-pop owners sometimes did is they gave the manager the checkbook. Told them to go out and bring in all the revenue, pay out all the bills, and send them a check for the difference. In this case, it was an elderly mom-and-pop out of California. They'd own the park in Oklahoma for a long time, but they had lots of other assets, and they really weren't paying attention to it. They never visited it.
So the manager saw the opportunity and started embezzling huge amounts of money. We're talking about a $100,000 a year for a decade. Now, mom-and-pop had no debt, so it didn't cause him any problem paying their bills. It was simply the money that if they'd only properly manage, the park would have been in their pocket and not that of the managers.
So how do you stop embezzlement? Well, number one, never take cash, but number two, always be aware that you can still be embezzled even if you don't take cash. Let me give you two other examples of things that managers do. One thing a manager can sometimes do is tell you that you need to get a bunch of tools or supplies. Then when you get them, they turn right around to sell them on eBay. That's a pretty terrible one.
But then this next one's even worse. They'll get in collusion with a plumber typically, and they'll tell you that, "There's a broken sewer main, and it needs to be fixed immediately. It's going to cost $5,000." The problem is there's no broken sewer main. The plumber does no work, sends you a bill for $5,000, which you call the manager to see if it was successfully completed.
Of course, they say, "Yes, it was." Then the plumbing company gives the manager $2,500 basically splitting the illegal proceeds. What can it do to your park? Well, many things. Those kinds of epic management fails can even cause the seller to sell the park off in distress. They can't keep the water and sewer alive. But all of these definitely damage the overall value of the property, so that when you go to sell it, you do not hit your goals at all on value. It was a shame because the value was always there. You simply lost it through your epic management fail.
Now, next week, we're going to go over great financing fails in mobile home parks. And again, this is Frank Rolfe with the Mobile Home Park Mastery Podcast Series. Thanks for being here. Talk to you again soon.