While most mobile home parks are purchased from long-standing mom and pop owners, sometimes parks come on the market that have only been owned by the sellers for a matter of months or a few years. And this can cause a level of concern with the buyer – and rightfully so. In this Mobile Home Park Mastery podcast we’re going to examine why the length of time the seller has owned the property can be a concern and how to mitigate those reservations.
Episode 255: Short-Term Owners Create Long-Term Suspicions Transcript
Typically, we are buying mobile home parks from long-standing moms and pops who have a long track record of ownership of that particular property, but sometimes, the seller fits a different profile, the seller who's only owned the property for a very, very short period of time, and that raises suspicions. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're gonna be talking all about the fact that short-term owners can cause long-term suspicions.
Whenever you buy a mobile home park from someone who has not owned it for very long, there are some things you have to worry about and think about. Now, the first thing we know when we buy from a mobile home park owner who has owned it for only a very brief while is that they probably can't carry the paper, and that's because they have recently bought it, and unless they bought it for all cash, which hardly anyone ever does, they've got a loan on it. And because they have the loan on it, I can't buy it and structure it with seller financing, and that's not good because we love seller financing, it's our favorite type of financing. And that means that option is no longer on the table. So that's the first bad thing about the short-term owner, is they just don't have the ability to carry paper. So there's one problem.
And another problem is that they paid something for the property recently and their profit will only be the differential between what they paid for it and what they sell it for, and that makes them much less negotiable. Moms and pops who have owned properties for long, long periods of times, now they truly can negotiate a bargain because they have effectively, at this point, no debt still remaining on it, and you know they have hardly anything in it because they build it from scratch back in the day when lot rents were 50 bucks a month, and they didn't spend that much on it. So that's another problem, is the short-term seller can't be as negotiable.
But the real problem you have with the short-term seller is why, why are they selling? What is hidden from you as the buyer that is leading them, who is much more knowledgeable than you are, to wanna unload that property? Now, typically, when we see sellers that wanna sell properties after only owning them for a short period of time, there's some kind of important structural problem they've encountered. A very typical one are the park-owned homes. They bought a mobile home park that had a whole bunch of park-owned homes, typically older ones from the '60s and the '70s, but maybe the '80s in very, very poor condition, and they're just eating them alive.
Those homes are constantly breaking. They're either renting them out and the rents are just eaten up with all the repairs, or they're trying to sell them but there are just such lousy homes with such bad floor plans and such a poor condition that the people just keep defaulting and then walking off and then they have to pour $4000 or $5000 back in to patch it up enough to sell to the next customer. So lots of park-owned homes is one reason you'll see the short-term seller.
Another problem is that the market itself is just bad. There just isn't enough demand to make the park work. People, in fact, can't keep enough employment and money coming in to even pay the rent. You see this in areas that are predominantly small areas with kind of dying economies or one-horse town areas in which that one employer that everyone is so needing is laying off or even potentially shutting and moving. So that's another short-term reason is that the markets itself just doesn't work.
A third reason is the utilities. Sometimes someone buys a mobile home park and sadly doesn't know anything about them or how to do due diligence, and then after closing and they come to find out they've got some kind of private utility that's not working well at all. Over the last 25 years, I've received some of the craziest calls from people who find my name and phone number online. I'm easy to find, fairly dominant on any search of the industry on Google, and they call me up, and they tell me these stories like, "Yeah, my sewage isn't really working well on my mobile home park," and I'll say, "Well, what kind of sewage do you have?" "Well, I didn't know it at the time, but apparently, I'm on this thing called a septic, and the sewage, it's not flowing out of the tanks, and so nothing is working," and I say, "Well, did you do any diligence on it?" "No, no, I didn't. I didn't even know I was on septic, and I wouldn't even know how to do the diligence," and I'll say, "Well, you should have done a park test, it would have told you how much the land can still absorb or if you were becoming saturated, and you're obviously saturated, and that's gonna be very, very expensive to fix." And many of these situations, of course, they get solved the same way the US car dealer does, by pouring sawdust into the engine block just enough to patch it up enough to get it out the door.
So oftentimes, when you see the short-term seller, what's happened is they bought the mobile home park without really knowing what they were doing and now their private utilities are totally falling apart on them. And the problem is with all three of those scenarios, you really don't want to be buying into that mess. So if you've got a seller who has got a horrible, horrible problem on their hands, and they've only in a very short period of time, one good way to spot that is simply the lack of tenure, they just haven't been there very long. And the bigger issue is why would someone wanna buy something then immediately sell it? Now, we're all for people who buy something cheap and sell it at a bigger price, and there's the old adage, "No one ever went broke taking a profit." But by and large, most people when they buy mobile home parks, they hold them for, I'm gonna say, at least five to seven years or maybe more, but when someone's only owned it for one year or even two years, what's really transpiring there? What is their real motive? What is their real goal? And the truth to the story is, typically, they got in over their heads and they didn't know what they were doing, and now the world is crashing down around them and they have to ditch the thing. And that's why it's such a short-term hold.
So now, what can you do as a buyer when you see the person who's owned it for a short period of time, how can you protect yourself? Well, the answer, of course, is really good due diligence. Start from scratch, start from a blank sheet of paper. Don't listen to what anything that the seller tells you, and rebuild all of the financials of that park from the ground up. And then additionally, go out and do a fantastic and thorough job of checking everything on that park, the permit, the utilities, everything, because it should be a tip to you and since they've only owned it for a very brief period, there's probably extra risk in those things. So just make sure that you aren't stepping into somebody else's catastrophe, because that's certainly not a good way to make money. Also remember there are certain scams out there that happen on a very short-term basis.
One of my all-time classic favorites is what's called the Gypsy Traveler. This is typically an RV park scheme. What you do is you buy a mobile home park. There's a lot of lots, they're almost all vacant, typically in a blinded part of town. You have all your friends bring in their RVs and park them on those lots and then start paying your rent with cash or checks or money orders, doesn't really matter. And then people advertise they've got this mobile home/RV park for sale at this incredibly low price. No sooner they find the buyer for the deal, then after closing, they just pull all the RVs out, and the person just bought a big empty piece of land. So you rarely see scams like that with someone who's owned something for the long-term. For the long-term, typically, they have to have an actual business. But on a short-term basis where someone's owned it only for a matter of months, you don't really know what they have concocted. Also, don't forget that lenders are also spooked by situations where someone has owned a piece of property for a very short span. Lenders know that's certainly a reason for suspicion and for worry.
They like long-term moms and pops as long for moms and pops mean to them that that property has a track record of success over a long period of time. And when people have only owned things for very short periods of time, then it's obviously much more scary. Now, that's not to say you can't successfully buy mobile home parks from people who have owned them for brief periods of time. Because what is causing them grief, that very problem may be your opportunity. So if they're struggling with all those park-owned homes, you may say, "Well, I can solve that. I'll just buy it and sell them all off. I'll just buy it and give all those homes away." If the private utilities are not working, well, you may say, "Well, I'll fix them. I can make that happen."
Now, location, typically, that's something you can't truly fix. So those properties that are failing because of location, well, you can't change location. You can't go buy a big Sikorsky helicopter, pick up the park, and transport it to a better state or market. However, there are things you can fix. And sometimes when you have the short-term seller, they're really desperate 'cause things are not working out and you can get a really good deal on it. So it's not always a reason to walk from a deal when someone has owned it for a very short period of time, but it is definitely cause for suspicion, definitely cause for greater levels of due diligence because their problem may be fixable, but you have to identify what the problem is, and then if you can truly fix it. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.