There is no perfect mobile home park. But there is a perfect mobile home park deal. To get there you have to have an item so great that it offsets each deal’s inherent flaws. In this Mobile Home Park Mastery podcast we’re going to explore the great deal points that can offset the negatives.
Episode 446: In Search Of The Big Offset Transcript
About 20 years ago, Dave and I developed what we call the IDEAL valuation system for the mobile home park industry. It stands for infrastructure, density, economics, age of home, and location. It's been widely adopted by the industry. Almost everyone uses that formula today, but sometimes they forget one of the finer points of using it. This is Frank Rolfe with the Mobile Home Park Mastery podcast. We're gonna talk about the fact that to use the IDEAL system correctly, you have to treat it like the scales of justice. And there has to be something big and wonderful to offset fundamental flaws. Now, there are many, many great mobile home park deals out there in America today. There's 44,000 parks total. Only about 4,000 of those are institutionally owned. And all of us have to go through and sort through the remainder, trying to find the deals that offer great value as an investment. But in trying to determine that value, what we have to do is look at all the different factors: the infrastructure, the density, the economics, the age of home, and the location. And we have to decide whether it's good or bad. And at the end of the day, to make it compelling enough to buy, the average has to be on the good side of the equation. And when you have bad things that pop up in a deal, let's say you've got a private utility in poor condition, there has to be something that's great about the deal to offset that fundamental problem. That's the whole concept of the system. So if you load bad things on one side of the scale, we gotta load great things on the other side to make it come back to a balance. So that then begs the question, what are the great things about a mobile home park that would definitely tip the scales in favor of making the purchase? Well, let's go through what those might be. One of the great things in any deal, one of the things that we love to see, one of the reasons I bought my first park and Dave bought his first park, was it came with terrific seller financing. Really good seller financing would be defined as something that's non-recourse at a low interest rate or a low down payment or a long loan term. My first deal, Glenhaven, stemmed from a seller note that was ridiculously attractive. $400,000 for the property.
The seller only wanted $10,000 down and would carry $390,000 non-recourse. Right off the bat, I was sold. I thought that was incredible. Knew nothing back then about due diligence. We hadn't figured out anything of how mobile home parks work, had no simple formulas. But I knew that that note was so amazing, I just had to buy it because all I had at risk to jump into the mobile home park industry was only $10,000. Now, that's attractive. And many of the deals you'll find out there from moms and pops often come with that very, very attractive seller financing. And that can offset a whole lot. Because when you have seller financing, you've got something great. You don't have to go to the banks, there's no pressure to get the loan, don't have to do any of the whole application process. And the loans come with some fundamental items that you just can't get with bank loans. Like on smaller parks, you can't get non-recourse bank loans. You can never get a bank loan with less than, say, 20% down. These are all terrific opportunities for the buyer. So seller carry, okay, that's definitely on the side of great offsets. A deal which has other fundamental flaws could be offset simply by having great seller carry. Another one is low price. That's definitely attracted people to buy parks with flaws. You'd probably buy almost anything if the price was just absurdly low. We took on a very, very difficult turnaround deal once in Illinois.
Simply because the guy only wanted $6,000 a pad for it. That's merely a fraction of construction cost. And it came with enough inherent occupancy on day one to make all the numbers fly. So you look at that and you say, well, gosh, that is really cheap. That's crazy cheap. And that often is another big offset. You can take a park which has issues, turnaround issues, other problems, and you can still inject a lot of time and a lot of capital into it and still make it successful if you're starting off with a very low price. Another one, and this is huge, is when you have a very large spread between the current lot rent and the market rent. Because let's all be honest, one of the key drivers to building the NOI in mobile home parks, besides filling vacant lots and homes and perhaps submetering utilities and billing them back, is raising rent. And when you're buying a mobile home park at a $250 lot rent when the market is $650, you have embedded into that deal the inherent ability to probably raise it by $400 a month, which in that example would nearly triple the net income. So there's probably no greater hot button on a deal than when you see that your current existing lot rent is woefully low, way behind all the other lot rents in that market. Another thing that's a big offset to the positive is when you have a park located in what we call a sexy state. Sexy states are defined as ones that have unusually high levels of buyer and lender interest. States like Colorado and Florida and some parts of Texas, these are all places that inherently get higher valuations and people are willing to buy them from you at lower cap rates. So being in a sexy state is definitely, again, a really nice big offset. Also, if your deal comes with some huge development pending in the area surrounding, right in your market, some giant employer. Let's say that mobile home park is located on 5th Street, and on 7th Street there's a giant Amazon warehouse that's about to go in.
These kinds of sudden big projects can propel markets to new levels that they've never seen before. And when you know there's something like that in the background, that again is a huge offset. We bought a park once in South Carolina and the big offset there was that they were putting in a new giant freeway near the mobile home park. And we all know that when you put in a new freeway, lots of development goes with that. But watch for offsets that are basically based on giant development things occurring in the market. Another big offset can be if you have a very large number of decent conditioned but vacant park-owned homes. These would be park-owned homes, preferably from the '90s to newer, but even from the 1980s, because you can take those homes and you can remodel those fairly inexpensively and you can sell those like crazy, because those older used home models you'll be able to sell at a price point equivalent to a used car. And all those folks in apartments who hate having neighbors knocking on their walls and their ceilings and not parking by their front door and not having a yard, they will line up to buy stuff if they can afford it, and those homes will fly off the rack. And on top of that, you have all these great financing groups today like Performance Equity Partners, PEP out of Chicago, that will be more than happy to underwrite mortgages on those homes. And you may be able to tap a lot of capital you didn't think of just in all that older used home inventory. And then finally, probably one of the biggest offsets there is, the one that would make people buy almost anything, is a deal that is zero down.
Now, to make a zero down deal truly attractive, it has to be non-recourse. But a zero down non-recourse deal is kind of the gold standard, the benchmark of offset, because you can have bad everything else. You can have bad infrastructure, bad density, bad age of homes, bad location. But that one item in the world of economics, zero down non-recourse means you're going to take on that property with no risk at all, effectively. And that gives you time to really explore and dig deep to see whether you can get that property turned. It's very rare that someone will walk a deal that has zero down non-recourse, regardless of what the other issues are from the entire scale of IDEAL. Now, we've bought many parks in the past under this concept of zero down non-recourse. I think our record right now is, I think, between five and seven deals on that basis. And I bought a park once out in San Angelo, Texas. It was the first deal I ever did that was truly zero down non-recourse. I mean, Glenhaven was a low down, but it wasn't zero down, it was two and a half percent down. But my first zero down deal was out there in San Angelo, and the deal looked ridiculous on paper. It only had one occupied lot out of about 200. That alone would scare off most people, and I would understand that. But the way it was presented to me would be zero down non-recourse and no payments due for a year. They gave me plenty of time to figure out how to turn the park around. And it had a large area out front that had formerly been a mobile home dealership.
So my concept was to go to all the other mobile home dealers in San Angelo and see if one of them wanted to rent that now abandoned mobile home sales lot. And bingo, I found just the person whose lease was coming up and got them moved over. Just in time, in fact, because I was able to then sell them the entire mobile home park and never have to make a payment on it. So again, zero down non-recourse is a terrific offset. But sometimes your offsets are the sum of all these items. Maybe you don't have one that's just really big by itself, but instead they're all a little bit favorable. And when you add all those together and you look at the other realities of that whole IDEAL measurement system, you say, "Okay, well, this deal is definitely in the favorable category." But never forget that you must have these offsetting positive offsets on every transaction. When you look at that thing on a sheet of paper and you draw a line down the middle and put the bad things on the left, you must have things on the right that are big and wonderful to offset them. This is Frank Rolfe with the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.