When doing due diligence on a mobile home park there are some things that you can’t leave to chance and others that you can tactically let slide. So when do you need permission and when do you ask forgiveness? That’s the topic of this Mobile Home Park Mastery podcast. As you’ll find out, there’s a definite strategy to it all.
Episode 309: Permission Vs. Forgiveness Transcript
We've all heard the old saying, "Permission versus Forgiveness". Permission, you ask someone before you do something to make sure it's completely acceptable to do it. And then forgiveness, you're asking someone after the fact, to forgive you for your actions. But how does that relate to items in due diligence on a Mobile Home Park? This is Frank Rolfe, from Mobile Home Park Mastery podcast. We're gonna talk about due diligence items that you must get permission on, versus those which instead, you can wait and strategically try and get forgiveness.
So let's start off with a big one, which is your certificate of zoning. Now, what is the Certificate of zoning? This is the item that lets you know, for all eternity, that your park falls into one of three categories: Legal conforming, which means you could build it again today if you wanted to; Legal non-conforming, which means it was built legally, but you could no longer put it back, also known as grandfathered; And illegal.
Now, if you fall into legal conforming or legal non-conforming, which is grandfathered, then you're typically fine. But if you fall into illegal, the park has no right to exist. And the problem is across America, there's many Mobile Home Parks out there, some large, that have no legal basis to be there.
I learned that in my very first park, Glen Haven, when I started scouting out the other parks around me, and I found just down the street from me was a Mobile Home Park, that was twice the legal size it was approved for. I could not believe the city let that exist, but yet they did. And later, I had parks tied up under contract and in due diligence and found other parks in the Dallas-Fort Worth Metroplex, that had no right to be there. It was kind of shocking the cities had never taken any action to shut them down.
One told me they were gonna wait around until the next owner bought it, because the old guy that owned it, they liked. He was well ingrained into the community, so they decided instead they would just wait till someone else bought it and then shut it down. The problem is, if you have no legal right, then your investment is completely annihilated. So you have to get permission. You have to, on the front end, make sure that what you're buying is a 100% legal to operate.
Next, you have to make sure you have permission to bring in new homes, or used homes, to fill vacant lots. Now, it's very rare that you buy a Mobile Home Park, that day one, is at a 100% occupancy. Most parks you buy out there from moms and pops, probably average about 80%, which means part of your turnaround strategy would be to fill those remaining vacant lots. And you have to make sure the city will allow you to do so. You can't go buying a $40,000, single-wide, bringing it into a lot only to have them tell you, "Oh, you can't put a single-wide in this lot. We won't allow you to put any kind of new home on this lot." So again, this is something in due diligence, which falls back to permission. You must not buy the Mobile Home Park, till you know, iron-clad fact, that you can bring in homes to fill the vacant lots.
Then you have your Phase I Environmental. This is the environmental survey that tells you that that park is free from pollution. Now, roughly around 1% of all US Mobile Home Parks fail that Phase I Environmental survey. And what that means is, if you're one of the unlucky person to buy that 1% that fail, and you didn't do the test, your investment will be lost and maybe even worse, because you're now personally liable for the cost to clean it. You simply have to get a Phase I Environmental in America today.
You might say, "Well but gosh, my Mobile Home Park is in a residential neighborhood." That doesn't mean anything. A lot of the environmental problems with Mobile Home Parks stem from prior owners and their own actions. A common one is that mom and pop, at some point, decided to tear down some of the old Mobile Homes and bury them on the property, which then triggered it, becoming a landfill. So again, you must get permission, you must ask and get that Phase I Environmental done and it must pass.
Next you have survey issues. You'd be shocked at all the survey issues we've seen over the past 30 years, some, they're just mind-blowing. We had a Mobile Home Park once under contract, and it turned out that there was an easement for a street that went right diagonally through the entire property, from one end to the other. No one knew about it, looking at it. But yet, the city was adamant they would not abandon the easement, that they did intend to build a road through it at some point. And of course, when they did that, it would completely destroy the value of the Mobile Home Park. You would lose, probably, half of all of the lots, not to mention the fact the park would be fractured. Half the park would be on one side of the street and half on the other. It would be a total mess. So you must get permission. You must make sure that that survey contains no flaws or changes like that at all.
And the same on the title. If your title is messed up, then you don't really own that Mobile Home Park. So you have to make sure that you use the proper title company, that any issues the title company has with the title, must be corrected before closing. It doesn't matter how long it takes. We once had a deal that took one year for the owner to clear up his title problems. So again, these are all issues you must ask permission for, and you cannot move forward, not an inch. You cannot buy that Mobile Home Park, until all these things are cleared up in advance.
But then, what about asking the forgiveness? What kind of things can you strategically, tactically, let slide, hoping that you may get away with it? And even if you can't get away with it, that you're then still okay?
The first one is going to be property tax. So here's a situation: Most Mobile Home Parks in the US are probably assessed to lower value. That's because most people do not understand Mobile Home Parks, they have a stigma against Mobile Home Parks. So as a result, many of the Mobile Home Parks owned by moms and pops, when you look at buying them, we'll be in a rate far lower than what you're going to have to pay to buy it. The problem is that the tax assessor could, following the purchase, raise the property tax to meet what you paid. So you're gonna go ahead and assign a value in your budget to buy the Mobile Home Park, based on a formula of the amount that your're paying, assuming that's the assessed value, and then applying to that the tax rate that you would pay to something at that cost.
But what happens if after buying it, they don't raise the tax that high? Just because there's a trigger that says a property has been sold, you have two kinds of states, disclosure and non-disclosure. Louisiana is a disclosure state, you have to tell them what you pay. But in Texas, just across the border, you do not. They send you a request and you can throw it in the trash. And then what happens? Well, then they just kind of choose a number, and they often choose low. Now, there's no damage to you, as long as you put in your budget, the larger number, if they go with a lower number than what you paid... And you're certainly not going to ever tell them that. So that's an issue where you can just kind of let it slide. You don't have to get involved, but you do have to budget appropriately.
Another one is when Mobile Homes overhang the neighbor's property. And you see this a lot of times in many Mobile Home Parks, when you look at the survey. And this is one reason why if you could, have your survey drawn that shows where each of the homes is located because you'll find in a typical 50 space, Mobile Home Park, there's probably one or two you that overhang the neighbor. Now, that's not really an issue or something you need to clarify as long as you have a plan to fix it.
Now, how do you fix it? Well, in some cases, you could pull the home forward to get it off of the neighbor, that's a potential fix. Or in some states, you have the simple law of real estate that if you overhang someone and they do not notify you in writing within so many years, then it becomes yours, that's called the right of adverse possession. Or possibly, you could go to them, despite the adverse possession claim, and simply pay them some money to either rent that overhang to you or let you buy that little additional bit of property. But as long as you have a plan to fix it, you don't really wanna poke the stick to say, "Hey, I'm over hanging you", because it may never come to light. So as long as you have the ability to fix it, again, you could ask forgiveness when it comes up, if it ever comes up. Because typically, it normally does not.
Another item is if when getting your certificate of zoning, the city gives you a number of lots which exceeds the number that you actually have. We've had that happen many times. So in the certificate of zoning, it not only typically tells you if you're legal conforming, legal non-conforming or illegal, it also tells you how many lots that you're allowed to have. And let's assume you think the park only has 85 lots and they come back saying you have 89. Well, that's their official opinion, is 89. Which means you can theoretically add a couple more homes in that property and still be within 100% of what the law allows. So again, you would not go back to them if there's a discrepancy and argue about it, or ask, "Why? Why do I have this?" You'd just go forward and bring a couple more homes in.
Now of course, if it was the other way around, you would certainly... You'd be back into an, "asking permission phase", because you can't buy a Mobile Home Park that has 80 lots, with the certificate of zoning saying you only have 77. But if the roles are reversed, then of course you would not talk about it. You would strategically hang back and wait and see what happens.
The bottom line is, in due diligence there are those items that you must get complete clarity on the front-end, that you must ask permission because it's absolutely essential. And then there's other items that you may just for your own tactical advantage, let them ride and just see where you end up, and simply ask forgiveness if in fact it doesn't go your way.
This is Frank Rolfe from Mobile Home Park Mastery podcast. I hope you enjoyed this. Talk to you again soon.