Mobile Home Park Mastery: Episode 258

Don’t Get Too Creative

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Creativity is defined as “the use of imagination or original ideas” – and that’s a great tool in forging some mobile home park deals. But there are limits on what you can do with creativity. In this Mobile Home Park Mastery podcast we’re going to review what you can and cannot fix with your inner Picasso, and some tips on staying out of trouble with your custom creation.

Episode 258: Don’t Get Too Creative Transcript

Webster's defines creativity is the use of the imagination or original ideas. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. I'm all for creativity in making mobile home park deals. I frequently tell people to think like a deal maker, not a deal killer. Anyone can look at any deal and strike it down for any number of reasons, but there's no money in that. The money is when you see the potential, the raw material, and you try to find a way to sculpt something amazing from those pieces. But unfortunately, there are some limitations to your creativity, I want you to be aware of. Let's go over the first one. If I overpay for a mobile home park and my creative solution is the structure below market debt, low interest rate, lower terms, that's all fine and dandy, but they'll have to carry that debt for a very long period of time or it does me no good. Think about it for a minute. If a property is worth $700,000 and I elect to pay a million dollars for it, 'cause mom and pop says, "I won't sell it for less than a million."

And I say, "Okay, mom and pop, but here's the deal, the bank will never give me or appraise it at a million, so you'll have to carry the paper. And I can't even make the payments of the million and have any money left over, unless you do it at a very, very low interest rate. Maybe at 0% in year one, and then 1% in year two, and then 2% year three and 3% year four, and so on, until you reach a limit. But if I do that structure, bear in mind, if I have to go out and refinance that property at any point in the near term, I'm upside down. I paid a million dollars and it's worth 700 grand. How is that going to work? I can force-feed those monthly payments to equate to the same as a regular bank note at $700,000, but that doesn't make that that money is going away, and the only way I'm gonna make that deal work is by rapidly pushing rents and filling lots and cutting costs so that someday when I get another note, a real bank note, the thing is now worth far more than a million dollars, but don't let mom and pop on that creative financing scheme try and force you down to a short-term...

It will not work. How long do you need... You'll need at least 10 years. Most parks need 10 years to fully mature without putting yourself in a horrible stressful mode. A lot of times when you have deals like that, you're willing to pay more for it, because there's so much potential to fix it, but yet you can't pay the amount mom and pop want and get a conventional bank loan. Don't let them box you into the corner where you have no liquidity at all, where you can't get a conventional loan, because that hasn't accomplished anything at all, you have then creatively put yourself in a very bad position. Also if mom and pop in that same example, choose instead to make the deal in two different notes, two different closings, one for the land proper, let's say for $700,000. Well, that works out, that matches all up to what the bank will do and the appraiser, that's great.

But then the other $300,000 is based on a bunch of park good homes they have, so they say, "Well, I've got 30 park good homes, and you should be able to get $10,000 a piece of value out of those. So I'll carry the $300,000 and the bank can go ahead and do the $700,000." Word of caution on that creative structure, how are you gonna get those homes released? Remember that all park owners today, all smart park owners for the most part, they don't wanna own the homes, they just wanna own the land. If mom and pop have those homes as collateral in their collateral pool, then you have no right to sell those things.

If you're stuck in the rental business forever, until such time as you could ever get the home in a manner in which mom and pop will release it from collateral, so you can go ahead and sell it to the customer. So how much would you have to have as a release price? Well, it depends on the home and the age, if those homes are 1990s and newer, and your location is good, then you can get a credit facility at something like 21st Mortgage Cash program, then it's possible you could go ahead and have $10,000 a home and actually hit that release price, because if they had a customer that qualified, they could get him a mortgage, let's say for $10,000 at home, and that's what my mom pop needs to pay down towards that $300,000 note. But if you can't get there, if these are 1970s homes worth $1000, or if they're 1990s homes and newer, but you can't get a credit facility, no customer is ever gonna have the $10,000 to ever release those, so you'll just be stuck renting homes forever, which is not a very good creative solution.

Next, let's assume you have a deal and you creatively try and solve that deal, because it needs a lot of work by doing a zero-down construction. In a zero-down, what happens is you buy the mobile home park, but instead of putting any money down on it, you use that money to make capital repairs. It's a construction we've used many times, we've done 12 zero-down deals over the last 25 years, but here's the fill around that, make sure that it doesn't need a ton of capital, because it is not really zero down, right? 

So if you find a deal that you can buy for zero down, which needs only basically cosmetic improvements, better mowing, painting, things like that, well, then that's a great construction. But if you need a zero-down deal, because the roads need $400,000 of work, it's not zero down, because you've gotta come out of pocket to make those repairs. Be very careful, you don't get... You get conned into doing a deal simply because it has the appearance of zero down. And, of course, everyone loves zero down, that means you have effectively no skin in the game and you return on equity is infinite, but the problem is, in many cases, the person is lying to themselves, and it's not zero down or it's not as a low amount down like 5% or 10%, it's actually 20% or 30% when you factor in all those capital repairs that are needed.

If your construction mode is to do a wrap note, make sure that you have very, very little in it, because what could happen on a wrap note is that it might come due. In a wrap-note construction, what you have is, let's say, you're buying a park for a million dollars and mom and pop have an underlying mortgage on that park for, let's say, $700,000, and they're gonna go ahead and let you put some money down.

Let's say you put down $100,000 and they're gonna carry $200,000, so the way it works is you put down $100,000 and the banks got $700,000 and they've got $200,000. What are you gonna do if the bank calls that note? That's just an underlying risk that's out there. If you read the mom and pop's loan covenants, they can't do that in most cases, sometimes they can, sometimes there's no clause prohibiting it, but most of the time there is. Most of the time, there's a due-on-sale clause, and yes the note could be called. What do you do if they call the note? Mom and pop doesn't have the 700 grand to pay it off, neither do you, you can very well lose your $100,000 and the property. So if you're gonna do a wrap-note, you gotta make sure you have as little skin in the game as possible, it would really, really help you if you can see mom and pop's note to make sure that they have the right to do what they're doing. And try and stick with properties in a worst case scenario, you think you could get another loan on it, at least enough to replace the underlying loan with the bank, and then mom and pop could continue to carry it. Next, don't let the seller try and do the old game, where they're going to guarantee your income for some period of time, that...

Construction just isn't very good. Here's how it works. Mom and pop have terrible occupancy. They're only at 50% occupancy, they know they need to be 70% to 80% for the park to be considered stabilize, and you can't even get a bank loan the way it's working, and yet they have a price in mind that they just gotta have, they won't go a penny under the certain set price in their minds. So they then throw out this creative idea to you, they'll go ahead and they'll go ahead and guarantee and pay you the differential between 50% and 70% or 80% occupancy monthly. So they're just gonna master lease those lots from you from some period of time until you have the ability to fill them up more. That doesn't work. When mom and pop make this pitch to you, they'll tell you that all you need is some time on your hands, and you can surely find sufficient customers to fill them, and we all know that's not true. We all know that to fill a mobile home lot today will require you going out and buying a new mobile home or a used home and renovating it, and running ads and showing the home and selling it to a customer, and that's a huge amount of work and trouble and risk and capital involved.

It's not like your phone's gonna ring and customers are gonna call and say, "Yeah, I wanna bring my home to your vacant lot, you got any available?" Yeah, that happens a little in the industry, like one one-hundred-millionth of a percent of the time, that that kind of little. So when mom and pop want you to do something like that, you have two issues, number one, they're gonna have to do the suppose of mastering of these lots with this regular payment for a very long period of time, maybe a decade or whatever you think, worst case scenario would take you to fill all of those lots. And secondly, you have to figure out how you can guarantee that they're going to abide by that. Make sure the attorney understands and will give you 100% certainty that those checks will roll in so that after closing, and you put your money in, their checks don't stop. Never forget that on every deal that's creative, there are some things you can solve and some things you cannot. You can summon your inner Picasso, you can summon your inner Art of the Deal, and you can forge some really amazing things from a lot of what appear to be broken pieces in bringing parks back to life. However, there are some things you can't solve creatively.

Here's a short list. Number one, parks that are illegal with no operating permit, there's no creative solution. A failed phase one, because of environmental pollution? No, again, nothing really creative, you can do, it's either polluted or it's not, and if it's polluted, you're gonna have to clean it. A terrible location, again, not a lot you can do. By terrible location, I don't mean that it's not easy to find or to see, you can solve that with the big old American flag and some signage. I'm talking about an area that no one wants to live, a blighted area of town, a poor school district, an area that people feel dangerous or even one where they just not sufficient population or even worse, any demand for affordable housing, 'cause home prices are already so low.

You cannot creatively fix insane density. I'm talking densities that are preferably 20 units per acre, the only creative solution to that would be to get rid of every other lot and reduce down how many occupied lots you can have to give yourself a normal density. But unless you're buying that for a very, very low cost, it's hard to imagine that any seller is gonna go ahead and go along with that. And then finally, really terrible private utility situations, a lagoon that's failing in an area where they don't allow any new lagoons. Situations like that, places where basically, there's no way that you can actually, given the capital, the constraints of the market, that you can actually bring that park back to life in an economic manner.

Creativity is fantastic. I can't say anything wrong with it, some of the best deals, that we've ever done have been based on looking at what we have to work with and figuring out how to best make it happen and put it all together. But yet creativity does have its boundaries, this is Frank Rolfe, the Mobile Home Park Mastery podcast. I hope you enjoyed this, I'll talk to you again soon.