When you’re unable to attain the necessary occupancy to succeed, the result is failure. In this week’s Mobile Home Park Mastery Podcast Series we’re on the second part of our five-part series on Lessons Learned from Failed Parks, and we’re focusing on occupancy disasters and what can be garnered from these setbacks. As any business is contingent upon hitting revenue targets, mobile home parks are no different, but there are also complications, such as lender requirements, that can turn even small occupancy fails into bigger problems. As history offers a glimpse into the future, it’s important to understand the risk of occupancy fails to stay clear of them going forward.
Episode 67: Occupancy Fails Transcript
Failure, it can be depressing but it can also be enlightening. This is Frank Rolfe with the Mobile Home Park mastery podcast series. Here in our second of our five part series on lessons learned from failed parks, trying to harness the realities of history and put it to good use so you don't repeat those same mistakes. We're gonna be talking today about occupancy fails.
Now what's an occupancy fail? It's where you are unable to obtain or maintain the goal you have for how many occupied lots or occupied homes in your mobile home park. There are basically four different types of fails that I wanted to review with you, the first one is a demand fail. In a demand fail what happens is the buyer did not use enough due diligence to make sure that people really wanted to live in the mobile home park. They buy the mobile home park, they have a dream, a vision of filling lots or filling homes, they put up a few ads, they put up a for sale sign in the yard or in the window, and nothing happens.
Now in most of America the demand for affordable housing is extremely high but you can't leave that up to random chance. The way to not have an occupancy fail, which is what the buyer should have done, is you always want to run a test ad. Now a test ad is an ad that you run as though you already own the park but you actually do not. You run it always on Craigslist and the largest metropolitan newspaper classified section under mobile homes for rent. It basically starts off with the name of where the park is located, the school district or the name of the city, then it has two and three bedroom mobile homes for sale or rent from whatever the price point is, includes lot rent, and your phone number, but that's not your real phone number, that does not go to your cellphone. What that does is it goes to either a grasshopper or a Google disposable number. When the person calls it then the call is transcribed, you run the ads for 10 days and in 10 days you take out any repeat calls and you see how many calls you got.
Good mobile home park in those test ads will pull at least 20 to 30 calls in a 10 day run. We've had some that have pulled over a hundred, but you would never want to buy a park that only pulls two or three. Simply not enough demand in that scenario to ever get any kind of real traction going on filling homes or lots. That's how you guard against the demand fail because in the absence of demand there's no way the park will ever even work so that's a really gigantic fail.
The next fail is if you don't plan properly on the options of what could happen as far as the people who call or come in the door as far as how much money they have for a down payment and also their credit. Now you can get a little glimpse, a little glimmer of hope as to your customer base when you look at the cars when you tour the park. If the park attracts people who have cars that are newer or newish that means they have suitable credit and money to obtain loans to buy those cars, that's a really good sign. If you go into a mobile home park for example and all the cars in all the driveways are only two or three years old then that means your customers really have what it takes to be a homeowner.
If however you go in and every car in there is an old jalopy, really old, beat up, broken window with a Hefty trash bag taped with duct tape across it then it's very likely those customers will not have the necessary money for a down payment or the credit that you need to pass muster. What that means is if you don't have that you've gotta have a plan B and a plan C to fill those lots. You can't say to yourself well I'll just tap into the 21st Mortgage program and as a result I will magically fill up all of my lots, you've gotta have more plans than just that.
That brings me to item number three in occupancy fails is not having enough capital to get the job done. For many people out there who buy parks they always think well I'll do the 21st Mortgage program. That program of course is the one where 21st Mortgage, which is part of Clayton Homes, they bring you a home, they set it up, they skirt it, they put stairs on it, and it doesn't cost you anything out of pocket. All you have to do is show the home, run the ads, and when a customer says, "I'll take it," you get them in contact with 21st Mortgage who underwrites the loan and magically everyone's happy, it's a win-win. 21st gets a new mortgage to service, Clayton gets a home sold, your tenant gets a new home which is fantastic and way better than the apartment they were living in, and you get an occupied lot but it doesn't always work that way.
Sometimes, as we just mentioned, the customer does not have usable cash or credit to pull that off. Then what do you do? Well plan B for most people is a little more capital intensive. You go out and find a good repo home for example from a repo list that maybe you find MH Bay or MH Village and that home might cost you $10,000 as a repo. You bring it into your mobile home park which costs you another five, now you're at $15,000, and you renovate it for another five and now you're at $20,000. The problem is unlike the 21st Mortgage this came out of your pocket, you've got 20,000 of your hard earned dollars in that mobile home.
Now here's how plan B works if you can pull it off, 21st Mortgage also has a used home finance program but it doesn't work like the cash program. You have to put the money into the home and then when you find the customer who'll take it and they meet 21st standards then what's gonna happen is they're gonna write you a check for everything you have in the home and now you can take that money and go out and do it again and again. What if you don't have enough capital in the bank to do that first home? Then you can't get that perpetual motion machine in action and that's a disaster for you so you've got to make sure you have the capital.
You also have to make sure you have the capital to get the lots ready and some states now, we fall under the HUD installation guidelines. These things are absolutely insane, they make no sense, everyone's admitted they make no sense, the person who invented them got fired from HUD, but they haven't been repealed yet. In some states you have to pour a concrete slab under the mobile home or a concrete piers or concrete runners and these things can cost anywhere from a few thousand to probably $7,000 in lot preparation costs. You also have to make sure your water and sewer lines and power lines are working. Again you don't want to be capital constrained. You're never gonna hit your occupancy numbers if you cannot afford to get the lots ready. You'll also never hit your numbers if you cannot afford to bring in a home that's suitable that you can get it sold or rented so you have to make sure at all times that you have preplanned in your deal the money to make that happen.
Now the fourth fail is the worst, it the byproduct of the earlier fails we talked about. What happens in this case is there's a thing in the industry that is called stabilization and when a bank says, "Are you at the stabilization rate?" That means you have an occupancy of at least 80% or greater. Now I don't know why they picked that number, I don't know why 80% is magical, why couldn't it be 75% and why couldn't it be 83% I have no idea. I also am not totally sure why banks think that that's such a magical thing anyway, hitting some certain number of occupancy but for whatever reason many banks look at parks in different ways. If you have 80% or better occupancy you're considered stabilized and a safe and strong asset and if you have less than 80% you're considered a flawed asset and one that's not really that desirable or credit worthy.
What happens a lot of times is people buy mobile home parks at less than 80% occupancy and then race the clock to get up to at least 80% occupancy before their loan comes due. For example you buy a mobile home park from mom and pop, they seller financed you for five years, the park is at 60% occupancy. You know the minute you close in that deal you have to race to get to 80% because when the note comes due in five years you've got to get it refinanced and the bank is gonna say are you stabilized or not and you don't want to say I'm not because you may not get the loan.
What can often happen is if you're unable to hit stabilization rate it's the worst fail of all because ultimately your park would go into foreclosure. There's an item where even you can make your payments every month and still go into default if you have what's called a term default, that means your unable to get the home out the door and hit the required stabilization rate and everything else in a manner that you can get a new loan to replace the loan that you have. It's the worst of all worlds because you've made your payments like you are supposed to every month and you think you get credit for that and nevertheless your loan ultimately comes due in a balloon and you can't replace it and refi and give the guy the money and continue on making monthly payments because you didn't hit the stabilization rate which again is roughly 80%.
Now here's a tip that someone once taught me, if you can't hit your stabilization rate which I thought was absolutely genius, I did this in a park in Oklahoma at the banks request. They had this idea and I thought it was very, very smart. Since the bank is only underwriting the actual net income from the park the fact that you're at stabilization or not at stabilization's kind of subjective so what the bank suggested that I do because I had so many vacant lots and the park yet had such a good location and strong financials we basically took those lots and we broke them and put them into other uses. We designated banks of vacant lots as common areas, overflow parking, parkland areas.
Another tactic people will do is they will take the vacant lots and rent them to the person in the occupied lot for $20 or $30 a month. It takes that no longer as a vacant lot on your rent roll but now it's an occupied lot and additionally gets the person who's renting it to mow it so you no longer have to mow or maintain the vacant lot. It's really a win-win all the way around. That's one insider secret that can get you to stabilization rate when you didn't quite have it.
The bottom line is whenever you're buying a mobile home park you have to take every possible effort to make sure that you are not going to have an occupancy fail. I've seen it happen so many times to people, they do it because they go into the purchase of the park with way too much optimize and not enough realism. A fail to have a plan A and a plan B and a plan C to get those homes occupied, they're unrealistic in their ability to replace the loan that they have because they don't have the basic essentials to get up to stabilization rate and as a result they often end up in term default.
The bottom line is all the occupancy fails I have just mentioned can all be solved. You can do these through good due diligence, you can do it through a good test ad, you can do it through writing a playbook of plan A, plan B, plan C. By moving quickly and swiftly when you see that your initial plan isn't going to work go into the variant and you can also be very, very astute on when the note is going to come due on your park and the fact that you must meet stabilization rate regardless of how you do it even if it's one of the secret tricks I just mentioned of some of your vacant lots and renting those to other people with homes already on them so they end up with double lots it takes away the mowing from you, it makes them happy, it makes the bank happy and a happy bank is definitely a precursor to happy mobile home park owning experience.
Now in next week's issue we're gonna go over some management fails we've seen in the past, some terrible things the park owners have done that have cost them their property and lost their investment. Once again we do think it's very important if you're going to look at investing the mobile home park sector to fully understand the history not only of things that work but things that fail. There's much to be learned from failures, not something to be feared, something to be embraced, something to take that knowledge and harness that so that you don't have failure but success.
This is Frank Rolfe with the Mobile Home Park mastery podcast series, I'll talk to you again soon.