Mobile Home Park Mastery: Episode 171

Financial Options To Buy Homes To Fill Vacant Lots

Subscribe To Mobile Home Park Mastery On iTunes
Subscribe To Mobile Home Park Mastery On Google Play
Subscribe To Mobile Home Park Mastery On Stitcher

One of the key ways to increase the value of any mobile home park is to maximize its occupancy. Filling a vacant lot propels you from zero value to $30,000 to $100,000 of equity based on lot rent. And the only way to fill a vacant lot for most properties is for the park owner to buy the home – new or used – and bring it in themselves to then sell or rent. Because homes are capital intensive, the key driver to this activity is selecting the correct financial options to pay for these homes. In this episode of the Mobile Home Park Mastery podcast, we’re going to review the financial options for paying for homes to fill vacant lots. As you’ll see, there are a litany of possibilities in today’s markets.

Episode 171: Financial Options To Buy Homes To Fill Vacant Lots Transcript

Mobile home parks are income properties. As a result, a vacant lot is worth zero. But if I can just get that lot occupied and the lot rent flowing, suddenly the value of that lot rockets from zero to anywhere from 30,000 to even a hundred thousand dollars per space. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to be talking about the financial options for mobile home park owners to buy, bring in, and sell new and used mobile homes. How do you actually pay the capital required to do that function?

Well, let's first start off with the old standard, using your own cash. That's how we all did it back in the 90s, the early 2000s. And very, very capital intensive project, because each home you bring in might cost you anywhere from 20,000 on the low end for a used home to as much as 40 or $50,000 for a new home. As a result, you'd just be burning through cash. Let's say you had to fill 10 lots. Well, those 10 lots might cost you 200, 250,000, all the way up to half a million dollars in cash. Very, very capital intensive.

And then the other problem would be, if you'd done that, if you'd brought in all those homes and paid cash for them, how do you get them back out the door? If you sell them, you can't carry a mortgage because of the SAFE Act. Few people, if any, are SAFE Act licensed so they can't actually write a mortgage today. So what do you do then? Well, you'd be saddled with renting them and we all know that no one really likes rentals. Lenders don't like them. Future buyers don't like them. So that old style model that we all did back in the old days, it's not very effective these days. Back when we did it, the homes were cheaper. The HUD standards for installation of the homes were lesser and there wasn't the SAFE Act so we could all do the good old rent-to-own mortgages that everyone cherished back in the day.

The next option you can do is you can use your own cash, once again, to buy that new or used mobile home and bring it in. And then you can sell it to a customer looking for affordable housing with that mortgage being provided by someone who is SAFE Act licensed, a group like 21st Mortgage, Performance Equity Partners, also known as PEP, or Triad, and others. If you can find others to do it, that's great too. The more the merrier. Gives your customer more choices as far as who they want to use as the lender. So that's a much, much better option.

Now, in that option, if you did it perfectly, you could use your cash to buy the first home and then you could sell it. And then when you get that check from the mortgage company, you could do it again. So now we have the chance of recycling your cash. The first option you had no recycling of cash. It was out of pocket. And then as long as you had to carry the rental of that home, you never got your cash back except in little monthly increments. Now, with the addition of 21st Mortgage, or PEP, or Triad, or any other lender, at least you could recycle your cash. But is there a way to do it then without having to actually even put the cash down on the homes? The answer to that is yes. The 21st Mortgage CASH program.

This is a program in which they front you all the cost, not only for the home, but the move and the set, even the site preparation. It's all folded into the loan. That's a very, very powerful tool. We're a huge user of the program, as are many people. It's one of a kind. It's the only one there is like it. Very, very successful program for many, many operators. So the CASH program, now you have the ability to get into it for zero dollars out of your own pocket to bring in those new mobile homes onto the lots. And then 21st takes care of the mortgage creation and they're SAFE Act licensed, and you have no problem. So that's obviously a very attractive program.

However, to get into the program, you have to have at least 10 vacant lots. And some park owners don't have 10 vacant lots, so therefore they can't qualify. Also, you have to have a market in which you can bring in new homes and effectively find people with the correct credit and down payment to actually buy them through 21st Mortgage. Not all markets can do that. Now, if your market can't support the cost of the new home, you're back to the other option we talked about earlier of buying it with your own cash and then finding the customer to buy it through 21st, for example, and then getting your money back and recycling it. But the 21st Mortgage CASH program, clearly that option gives you the ability to ramp up enormously. You could fill 10 lots, 50 lots, a hundred lots with no out-of-pocket cash. So that's very, very powerful.

Now, are there any other programs like that, reminiscent of that? Well, Cafco, a manufacturer, has a program called the Revive Program. And Legacy, another manufacturer, has their own similar program. But in those programs are not a hundred percent. So they don't pay a hundred percent. You'll have to be in that home typically around 20 to 30%, based on site preparation, et cetera. And in those programs, traditionally, it doesn't come with a lender. So that's for situations where you're going to kind of go out there and rent it yourself. Now, if you were to go out there and find a buyer who wanted to buy it, if you could get accepted into the 21st Mortgage program, theoretically they could take out your remaining balance on that Cafco Revive Program home, for example. But here's yet another example of a strategy to at least lever and not come out of pocket with all your cash to fill those lots.

What else could you do? Well, you could always raise cash from investors. It's been done before. Put together some kind of a partnership. Typical preferred return on something like that would be eight to 10% a year. Use their money to buy the homes, to fill the lots in your park. Right now, a lot of people are looking for things that have decent returns of dividends and distributions. If you look at the stock market, people are always just all excited about things like Tesla, but they pay no dividend. Virtually all of those high-flying stocks that you read about, they have no dividend. Many people want a dividend. They don't want to have to worry about buying and selling their shares to create an income stream. So as a result, you can find investors right now who would love to get a higher rate of return, and typically 8% or even 10% is definitely high enough to attract their attention. To get that much in a treasury, that would take you eight years, roughly, of a current treasury yields to get that same amount if you paid out 10%.

Now, the problem is if you do that route, you still have to figure out how then to sell the home. So you'll still need to be back on to 21st, or PEP, or Triad, or some other group who's SAFE Act licensed to then sell the home. But this would be a let way to fill your lots without your own capital going in, of leveraging other people's capital to basically get those lots full. Now, another thing you could do is you could go get SAFE Act licensed yourself. Now you could basically become your own mortgage company. The problem with that, of course, is no one wants to be a mortgage company. That's just not a profitable thing for the typical individual to do. So even though you could theoretically become SAFE Act licensed and you therefore could write mortgages correctly if you in fact followed all the steps, the problem is you're still not getting your capital back. Personally, I would think you'd be far better off using the programs of the actual banks, the actual lenders out there, like 21st Mortgage, and have them be the bank.

Who wants to be a bank today? Being a bank has never really been super profitable. And today it's filled with all kinds of risk. To make money as a bank, you have to have a giant scale. You have to lend a huge amount of money, and you need to have the overhead in place to go ahead and make sure that you don't run a foul of the laws. So I'm not really too enthused about the idea of you going out and becoming SAFE Act licensed yourself, and then raising money, buying homes, and acting as your own mortgage company. Among other things, you'd have to be constantly raising more money because it's very capital-intensive. If you don't have a way to then get that capital back, you can't really reuse it. So you'd just be growing and growing and growing in the amount of money that you'd have to raise.

Now, here's some other ideas of ways that you can fill lots without having to come out of pocket with very much cash. One of them is called the organic. Now what is an organic? An organic is when I pay for someone's move from another mobile home park into our park. Let's say there's a customer who's unhappy where they currently sit and they want to move to your park because they like the location better, maybe better school district, better aesthetics. So in this case, you then pay for the price of the move. Not nearly as capital-intensive as bringing in that new or used home, of course, because you're only paying the cost of the move and the set. Typically around $5,000 or so.

If you look at it on paper, it's a great deal for you based on whatever your lot rent is. If your lot rent is typically 300 to $400 a month, it's about a two year payback net of operating cost, and that's pretty darn attractive. And we're talking a very much lower amount of capital. If I can do an organic for $5,000, I can do five organics for the price of that $25,000 I would have to use on that used home to fill that lot. So that's pretty attractive.

Don't get too carried away with organics. It's one thing to passively just have a banner on your fence saying that, "Move your home here for free." Do not get active with other park owners distributing flyers and things because they'll go ahead and fight back and do the same to you. When I talk about organics here, I'm talking about basically just being open to the idea if a customer comes to you, or if you see another park closing down, which happens frequently today in our constant rampant redevelopment world. We ourselves have gone and picked up in some parks as many as 20 or 30 homes when the park announced it was being shut down to be rebuilt into, for example, a Home Depot. So you can then always watch for those opportunities. That can be a very great way to fill lots with not a lot of capital.

One final idea on how to fill lots with zero capital is, of course, to attract RVs, particularly RV long-term occupants. These people will move in and they'll stay there, just like someone in a mobile home, perhaps for their entire life. Now, why are they living in an RV and not a mobile home you might say? A mobile home is larger, right? Yes, it is. But mobile homes come with a stigma. RVs do not. RVs have done a tremendous job of public relations with their Go RVing program. And very few Americans think anything less than very highly of RVs. We see those as a luxury object, whereas the mobile home more as affordable housing.

Some people just don't like the stigma, so they prefer to live in the RV. They find that much more palatable. And then others just simply prefer the RV. If you've ever been in a modern RV, they're built pretty darn well. And as we all know, they're significantly more expensive than a mobile home of the same size. So basically some people just prefer the design and the finish out, and even the efficiency. Most of those are much better insulated and much more able to deliver a good standard of living on very low utility cost.

And again, of course, the RVs cost you nothing. Someone wants to bring in an RV, there's no site preparation required, to my knowledge, in any state in the U.S., and as long as they stay in a long-term basis and put the utilities in their own name, most lenders will view that as the same as a mobile home park occupant. Better yet, if they have pride of ownership and do some degree of improvement to their lot, maybe building a carport, outdoor furniture, there really isn't a whole lot visually or scientifically different between that RV tenant and the mobile home park one. And as a result, it's really a very inexpensive way to make that vacant lot into something of greater value.

This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. Hope you enjoyed this little exposé on the financial options to fill vacant lots. It's a big part of turning around any park. And there're just so many options today, it's really wonderful. Talk to everyone again soon.