Firing people is never fun – but it can certainly be profitable! In this second of a five-“part series on Easy Mobile Home Park Turnarounds”, we’re going to examine the role of cost-cutting in turning around mobile home parks, with a specific focus on personnel and utility issues. You’re also going to hear the story of a park we own in Illinois that went from losing around $40,000 per year to a positive $270,000 in one year, mostly as a result of cost cutting. Benjamin Franklin once said “a penny saved is a penny earned” and must have been talking about trailer parks.
Episode 45: More Easy Turnarounds Transcript
Big savings on aisle three, or maybe it's big savings through the entire mobile home park. This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. We're going to be going over the second of a five part installment on easy turnarounds. We did hard turnarounds and all the difficulties you can engage in, and the profitability of doing some really, really tough trailer park turnarounds, but now we're talking about easy ones. Last time we did raising revenue. That's one of our favorites, but this is another one which is similar but completely different. It's all about cutting costs. Benjamin Franklin never owned a mobile home park to our knowledge, but he did say a penny saved is a penny earned, and he must've been talking about many of the mobile home parks that we've been buying. So I'm going to break this up into two different categories of cutting costs in a mobile home park, which are all part of an easy turnaround scheme.
The first one is eliminating crazy overhead. There's two things we find in mobile home parks frequently that we buy. Number one, there's way too many people on the payroll, and number two, there's often way too high salaries being paid. Let's talk first about having too many people. How many people do you really need? That's a good question. Well, the answer is as many as you can get by with. Many parks deliberately overstaff, and then typically how that happens is they hire a manager and then the manager keeps hitting the owner with the concept of adding an assistant manager, and then other people who may be friends in the park or family members, and pretty soon that staff just balloons up. So if you've got a 250 space park, you can often get by with that with no problem with just one single manager, and at the most, maybe a manager and a very part-time person who also serves as your eyes and ears in the park when the manager is not there, and possibly you need a maintenance man. Let's talk about that for a moment.
What could a maintenance man do? Well, if you've got some park-owned homes, they could rehab those or clean those, if there's not too many of them. Possibly they mow. Mowing is an important function in any mobile home park, so there's another thing they can do. They can pick up litter, and they can do different odds and ends for the park, but you definitely wouldn't need more than one. Right? So even if you had a 250 space mobile home park, you typically can get by with just a manager and possibly just a maintenance man. Smaller parks, really no need for the maintenance man, because at a certain level, having somebody full-time on the staff is not correct when you can go in and hire the mowing to be done by a private contractor for less money. And also don't forget, the mowing is only good for six months of the year, not the entire year. So, when you look at that mobile home park payroll, you may find that you've got way, way too many people on the payroll. So that's the f irst problem you find with crazy overhead.
And the second problem is people just earning way too much. I'll give you a couple of examples. We bought a park in Kansas, and the manager was making $110,000 a year. We bought another park over in Illinois and there the manager's making $103,000 a year. If you're thinking, "Gosh, I did not know that it was that high paying a career," well, you're right. That's just far too much for the manager. The one making $110,000, that park only has 93 lots, and it wasn't even full. So you might say, "How in the world did that park owner make any sense of paying the manager $110,000 on that little 93 space park?" Well here's kind of how it went down, if you looked back through the records and talk to mom and pop. When they hired the manager, they originally hired at about $24,000 a year, but they gave them annual raises and then at some point they paid for their healthcare, and that alone adds about a $10,000 on.
So if you just compound it up, let's compound it together. If you'll compound something 10% a year, in seven years it doubles. So if they started at 25 and then you go 10 years out, now you're at 50, and in the healthcare you're at 60. Go another 5 to 10 years out, and lo and behold, you're over $100,000. So that's how it happens. It just kind of creeps up. But the fact of the matter is, in most mobile home parks, the correct payroll is roughly $10 per lot per month plus free housing.
So typically in a hundred space mobile home park, the manager would be making about a thousand dollars a month cash plus free housing. It's very much inline with the salaries that they use at public storage. Self storage and a mobile home park share, in many ways, many similarities, and one of them is the payroll and the payroll cost. But it's far, far cry from $110,000 or $120,000. I mean, I don't know how much the highest paid mobile home park manager in America is earning, but based on some of the things I've seen from some moms and pops, it would have to be very substantial. They're probably are lurking about somewhere, managers making $200,000 a year on hundred space parks, probably somewhere in California or Florida or somewhere where the parks are very old, and the parks have done very well as far as revenue and mom and pop just kind of lost control of it all.
So those are crazy overhead items on people there. Now, how do you resolve those? Of course, you replace the expensive overpaid people with lesser expensive but correctly compensated managers, and then additionally, you just reduce down the number of people on staff. You take the staff of five, and you reduce that down to a staff of two. So crazy overhead is one way to cut costs. And of course, when you cut that cost, when you replace the manager as we did in Kansas from $110,000 variety down to the $30,000 variety all in, that $80,000 differential, that falls right to the bottom line. So that's no different than raising the rents $80,000 a year cumulatively. So, it's cutting cost. Again, very, very easy turnaround. Just as easy as raising rent, maybe even easier. You don't have to send out 100 letters, you only have to send out one letter and a confirming call that you're replacing the manager.
Now, what else can you do though? What other costs cutting ideas are out there for as far as easy turnarounds on mobile home parks? Well, the first one is such a big deal, we're going to do a whole installment on it in our next show, but that is getting a control of your water sewer costs. So, it's basically fixing leaks. It's billing back water sewer. So we're going to leave that one off the table until next week.
The next one is interesting, though. It's clubhouses. Clubhouses and all buildings in the mobile home park are huge money losers, and many mobile home park owners have never done the analysis to realize this. If you've got a standard clubhouse in any old mobile home park, typically the cost of heat and air and water on that building will average about $10,000 a year. At a 10 cap, that means that clubhouse is punishing you about $100,000 per year in value. Then however, you look at, what is the actual plus of the clubhouse? Well, in some of the parks that we own, the clubhouse gets no use at all. Of course, it's very much dependent on the customer's, demographics, ages, things like that. Some people are heavy users of clubhouses and some people don't use them at all.
If you've got the variety that no one's using it, clearly the best thing you could do is to mothball that clubhouse. Don't destroy it, don't tear it down, but simply seal it up for right now. Put a little sign on the door saying, "Out on property," with the phone number to your manager's cell. Turn off the power, turn off the gas, turn off the water sewer, winterize the building, and basically just like the Navy does with the mothball fleet, you'll leave it around in inventory for a later date. Maybe you'll want it someday. Maybe you want to reopen the clubhouse. Maybe a future owner will want to reopen the clubhouse. But the bottom line is, you do want to keep the utility draw dead on that building because it's substantial, so that's a very easy turnaround item.
Another one is taking control of crazy cable TV and other contracts. In my very first park, Glenhaven, my turn around in that park ... And it wasn't the whole turnaround, but I was able to take the part from losing $2,000 a month to at least breaking even by canceling a ridiculous cable contract that mom and pop had entered into, where they were providing cable to all of the lots, even the vacant ones. It made absolutely no sense. Without even getting a commercial discount. They were paying the full monthly retail cable bill on every lot in the park. It made absolutely no sense. Often parks will have crazy agreements like that, and when you find them, they're very, very simple to extinguish, if in fact you have the ability to cancel.
Next one are mowing costs. We've bought mobile home parks where mom and pop were spending a thousand dollars per cut, per cut, to mow the yard in the park. All the common areas, all the vacant lots. And through simple bidding, we knocked it immediately down to $500 a cut. Let's examine the impact of that. If they're paying a thousand dollars a week to mow the mobile home parks, common areas and vacant lots, and you can change that to $500 a week, that's going to save you $2,000 a month over a six month mowing season, $12,000 a year. At a 10 cap, again, that's $120,000 of value creation. So often mowing is another good way to focus. Another area you can really do some tricks on, some financial intelligence, and resolve those costs, and again, that's a very, very easy turnaround.
Another one is when parks have homes, but they're not really equipped to handle homes. There's some mobile home parks where they only have two or three park-owned homes, possibly rentals, but they have a full-time person who just manages those homes, or worse yet, they hemorrhage repair and maintenance costs in them because those living in the homes have realized that mom and pop are easy to shake down by calling constantly with repair calls and then offering to trade that repair labor for the rent. So they'll call up mom and pop and say, "Hey, my shower is leaking, but you know what? I won't pay rent this month and I'll fix it myself," not realizing that there actually is no leak. Often the best thing you can do if you have just a few park-owned homes is just get them out the door. You might be able to sell them, for some a price of cash, or you may in some states be able to gift them to the resident.
The reason I say gift them, because in some states if you gift them, you do not fall under being an actual mobile home dealer, so you don't have to have a dealer's license, you don't have to provide title or make any warranties of any type. You just give them away. So check that out with your state. Talk to your State MHA and see if you can in fact gift them, but even if you can't, often if you just want to sell them for cash, which is fully compliant with the SAFE Act, you just get them out the door for whatever you can get, you're way money ahead. You might say, "Well, gosh, I think that home's worth $4,000. Why would I sell it for a thousand?" Well, look. If it's burning $300 a month in repairs and other costs, of course, you're money well spent giving the home away. It's a one year payback. So getting rid of homes is another great way to cut costs.
The final item is property tax appeals. We bought a park once and it was appraised at $4,000,000 when we bought it, and we were able to get it knocked down to being valued at only $2,000,000, because yes, in fact, we'd only paid $2,000,000 for it because we had bought it as a foreclosure. The bottom line is there's many, many parks out there that are in fact overvalued. The majority of parks are not. The majority are undervalued, but a lot of hot real estate markets, it's not uncommon to find that there are parks out there that are valued sometimes two or even three times more than they should be. And when you have that, obviously what you need to do is you need to go to the tax assessor and you need to file an appeal, and you need to show, through your purchase contract, what the real value should be.
If you don't want to go that hardcore, there's another way that you can reduce property tax appraisals that's very simple, very low risk, and that's to ask for an informal meeting with the tax assessor's office. In most tax assessor municipalities, you can have this informal meeting really anytime you want, and what you'll do is you will go in and show them photos of all the bad things in the park, and yes, everyone knows the game, and you take pictures of the worst thing you find. But you'd be shocked that most of these assessors, if you have that personal meeting, will, during the meeting, knock the value down to some degree.
Now, it's not going to be huge. You're not going to get someone drop the value of a park from $4,000,000 to $2,000,000 in a meeting like that. However, you might get someone to drop the value $50,000 or $100,000 or $200,000 even, potentially, and that's really good savings. It depends on what state you're in of course, but $200,000 evaluation in Texas will save you $5,000 a year. Now Missouri, it'll save you about half that. So a lot of it depends on your tax rate. And if you're in Chicago, it might save you five times that. So the bottom line is, going back to the tax assessor is always a good thing.
However, I would caution you on that one. Don't go back if you paid more than what is it is currently assessed at. That's typically a bad idea. Do not open the Pandora's Box of putting the big spotlight on focus on the value when you in fact paid more than what the assessors shows, because it can go both ways. Particularly if you go to trial with the assessor on valuation, they may rule not only not in favor of what you propose, but may in fact up the value. That's a very dangerous set of affairs.
So again, cutting costs is a great and easy turnaround method. What it requires is the intelligence to be able to identify what is a current cost from that which is not, which may often, again, revolve around getting multiple bids, certainly, and then enacting your findings. No one likes to fire people. Nobody likes to cancel contracts. It's always unpleasant. It's never a good thing. But to be a really good landlord, to be a good businessperson, often that's the position that you are in, and it is a very easy turnaround method. Maybe it doesn't make you feel happy on the front end making that call, firing that person, but in the long haul, it's definitely a good thing to do and it's the fair thing to do. If you're paying a mower a thousand dollars per cut and you can get it done for $500, you would be stupid to stick with the higher priced mower in doing that. So, it's not a bad thing to do. It's a moral thing to do. It's the fair thing to do. It's to correct thing to do. And again, cutting costs, very, very easy turnaround strategy.
Now, next week we're going to go over another easy turnaround, and that is basically getting control of water and sewer. You'd be amazed at all of the water and sewer things you can do when you really focus on that, and that of course is the highest cost factor in a mobile home park. So next week we're on water and sewer. I will give you one final example of easy turnaround, and that is a park that we bought in Illinois. Now, this park had the craziest overhead ever. The bottom line is, the park showed negative $38,000 when we bought it as far as NOI. At the end of the first year, we were at 270,000 of positive. Now, the way we got there was by laying off the staff. They were paying about $250,000 a year in staffing costs, which we were label to reduce down to about 40,000, and that was the big benefit, and that was one of the easiest turnarounds ever. It did not even impact the residents. We didn't raise the rent or do anything. All we had to do was correct the overhead.< /p>
So that's the kind of easy turnarounds that are out there when it comes to cost cutting, but next week we're going to talk about the easy turnarounds from focusing on water and sewer. I think you'll find it very interesting how many mobile home parks are so poorly equipped to meet the needs of the residents to ascertain how much water and sewer they use. They're just all messed up, and there's big money involved. So we'll be back next week with that third installment on easy turnarounds. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. Thanks for being here. I'll talk to you next week.