Peace and tranquility is not often associated with lending, but the point is to always continue pressing forward towards that goal. In this Mobile Home Park Mastery podcast we’re going to explore methods to reduce stress and worry and mitigate the inherent risk of fickle lending markets.
Episode 421: Finding Note Nirvana Transcript
Stress is not good for you. It can cause all kinds of problems: Lack of sleep, heart malfunctions. I think it's well established in the medical community that we want to eliminate stress from our lives. But how do you eliminate stress or reduce stress regarding your mobile home park lending? This is Frank Rolfe with the Mobile Home Park Mastery Podcast. We're going to talk about some real-life methods to help steer you into a zone in which you can't re-eliminate stress entirely, but you can handle your financing in a more structured and pleasant manner so it doesn't impact in a negative way your life. And let me first start off by saying you cannot eliminate all stress. Some stress is good. Good stress is what comes from taking risks and making major plays to the betterment of you and your family. So if we want to have a productive life, we will have to encourage and encounter stress. But there's another thing called bad stress. And bad stress is where we worry, not because we're trying to get from point A to point B, but because there's things that just concern us with our situation in life.
And it's things that are really bad when they could be avoided, which could be mitigated. So what are those things that are stressful in lending that we can reduce? Well, let's start off with the big one, and that is you will never be happy borrowing money from any lender if you don't feel in control of knowing the date in which that loan ends. So I would encourage everyone to take a sheet of paper or something and put it in a spot that you look at frequently and that you say, "Oh, I'm going to come back and look at this sheet of paper at least once a month." And on that date, put when your loan ends. Because if you forget that date, you will never, ever be free from stress because you will worry, "Wait a minute, does my loan come due this month? Next month?" So, years into your mortgage on your mobile home park, you're probably going to forget the date. Two years in, three years in, you can't remember and suddenly the years all flow together and one day you wake up if you're not paying attention and the loan is coming up within three months and you thought you had a year and three months to go. So you need to figure out a place to post it and then you got to post it. So there's the first thing you have to do.
Number two, you should always, as a part of life, attempt as best you can to achieve non-recourse debt. Non-recourse debt is so much better than recourse debt. No one chooses recourse debt ever over non-recourse debt. Now, why is that? Because recourse debt means if something goes bad on the park, and it happens very rarely. There are very, very few mobile home park loans that ever go into a REO distress situation. But if you were one of the unlucky few and you had that happen, the bank could take the mobile home park from you. But they can't come after you for anything else. So if there's a deficiency, if it ends up that the park leaves a loss on the loan, they cannot come after you for the loss. On non-recourse debt, therefore, you don't have to worry about some of the worst-case scenarios of being a borrower. So you always want non-recourse debt. Number one thing I advise anyone buy a mobile home park. Who can achieve non-recourse debt, that should be your primary goal. Let's get into conduit or Fannie Mae or Freddie Mac.
Seller financing offers non-recourse varieties. But to traditional bank lending, no, you're stuck with only the recourse option and you want to steer away from that. So your goal should be to grow your loan in value to a size and a quality you can obtain non-recourse debt. Another thing you need to know about reducing your stress in your lending is lenders hate risky loans or things that have the appearance of being risky, or even things that are just out of the ordinary. And we call this in the lending world flight to quality. And what it means is that your typical lender looks at a loan and they rank them based on how risky they are. And you want to be in the pool of no, not much risk at all. That's how you get the best rates and everything else. So how do you achieve that? How do you get to flight to quality? Well, just make sure that you only buy mobile home parks that meet the general attributes of what lenders want. The kinds of locations, populations, home values, the entire infrastructure of the property, the density, everything in tandem with what most lenders want to see on that application and that will reduce your stress a lot.
Having a one-off park in a bad location, having a mobile home park in Gary, Indiana, having a mobile home park on a failing lagoon. These are all things that will cause lots and lots of worry on your part because you know most lenders don't want to see it. So another way to eliminate stress is to try and stick with properties. At least check all the boxes of what a lender at a bare minimum wants to see. Also, make sure that you have all the issues that you know lenders going to ask for in the future solved on the front end or you'll always worry about them. If you turned out and you found in your survey that some of the homes are overhanging the neighbor's property, down the road when you try and steer that loan into a non-recourse debt, maybe a conduit loan, you're going to get knocked out because these things will pop up. Could even derail getting the loan closed. So try and solve these issues before the loan comes up. You don't want to go into it worried about, "Will they detect this? Will they find out that?" Because they certainly will. They're going to find every nook and cranny, every mistake ever on this property. So get those things fixed as fast as you can. The sooner those are all fixed, the less worry you're going to have.
Also make sure you do all your cosmetic upgrades. These are low hanging fruit that make properties look much nicer. Because first impression is key in the world of lending. You want that bank and that appraiser to show up at the property and say to themselves, "Oh, this is a nice property." Before they even really pull in. How do you achieve that? A nice looking entry, three rail, white vinyl fencing, feather flags, nice sign out front. These are the things that tell the visitor, "Yes, this is a well run, well thought out, professional quality property." Even though they may go in the park and maybe you're lacking in some other items, maybe your roads aren't the best, maybe your residents don't have the greatest pride of ownership or care of their properties or their lots. As long as you give that positive first impression, it will always increase your odds.
Also, you need to constantly ponder based on the date of when that loan is coming due, when you need to start the entire refinancing process. Because in today's world, in a post COVID America, things just move slow. And on top of that you have an initial part of the loan process if your current lender is not the one you're going to be sticking with, in which you're going to have to go out and search for a new property lender and that can take some time.
So let's just break down the time schedule. Let's say you wanted to start right now. We're in a game show, we're going to start the clock, blow the whistle, we're going to go out and find a loan. It's going to take you probably at least the first month to make the list and find the potential lending targets and build your little book of what you're looking for in a loan and then you're going to go to the banks. Well, the banks are going to ponder this thing for probably at least another month by the time they might go through the loan committee. So now we've already burned two months. If the bank says, "Yeah, okay, I think here's what we can do." And you compare those and perhaps try to renegotiate them or whatever, you know, we're talking probably another month. Now we're like 90 days in and we're finally have got a lender who will do it. Well now we have to get third party reports. You have to get a survey title commitment, maybe a property condition report, phase one environmental. What's that going to take in today's world? It might take you another month or two months. Well heck, now we're five months in. Then you're going to have the legal to do the loan. Maybe now you're like six months in.
So if you don't want to have a lot of worry, if you want to get all of that stress out of your life, give yourself plenty of time on that refi. Don't cut it down to the wire. I hate it when I get calls from people who say, "Hey, my financing is coming up and I'm real worried because I went to the bank and they're not sure they want to make the loan." And I'll say, "When's it come due?" And they'll say, "Oh, in a month. That's never going to work. Also remember, the more time you give yourself if that loan doesn't make, if you can't find a lender, you still have time to get that property on the market and perhaps sell it. So how much time do you need then total to get that loan and perhaps sell it if you can't find a loan? I would say you might want to start the process maybe a year in advance. Or if it's a trickier property in a trickier location, you might give yourself more, year and a half maybe. Don't cut it down to the wire. That's again causing unnecessary stress. And that stress could affect derail the loan. It's nothing worse in the world than having a loan the times out or the time clock ends and you were unable to replace it. Then you lose the property simply because you could not replace the loan. You never want to get yourself in that position.
The bottom line to it is if you just do the things I'm talking about, you're never going to get all your stress eliminated, but you're going to get a lot of your stress eliminated. And stress again, it's bad for you. It's not positive. It's needed in order for us to move forward. Remember the turtle, it only makes progress when it sticks its neck out. But at the same time, whatever we can do along the way to mitigate that risk, that's the smart thing to do. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.