Being a successful park buyer requires discipline. You can’t let your desire to make a deal get in the way of the underlying premise of making money. So how can you guard against acquisitions that are the opposite of portfolio-builders? That’s the topic of this Mobile Home Park Mastery podcast.
Episode 266: Sometimes The Best Deals Are The Ones You Don’t Do Transcript
Over the last 25 deals, we've done hundreds of mobile home park transactions, but some of the best deals that we did were the ones that we chose not to do. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're gonna talk about the fact you shouldn't do every deal. There's some mobile home parks you should avoid, you should run away, because if you buy that mobile home park, you can get in lots of trouble. And having the discipline to avoid that is a very important part of being a successful park owner.
Now there is a lot of discipline required when you're out buying parks, because you gotta fend off the bad deals that can ruin your career, as well as find the good ones that can help you. And bad deals can be found all around you. So how can you stay away from these bad deals? Well, first, we have to understand and accept what makes deals bad? Let's start off with a location. Two factors to location, number one: What are the stats on the metro you're looking at buying into? Is it healthy for owning housing, does it have a large population? Typically a metro population of 100,000 and up is preferred. Are the single family home prices high enough, at least 100,000 to home? Are the apartment rents high enough, hopefully at least $1000 a month or more on the three-bedroom rental?
So the first question is: What's going on in your metro market? And then the next question is: Where do you fit into that metro market? Is your park in a nice safe area? Is it in a preferred suburb? Or is it in a place that nobody would like to live? Next, does it have city water and sewer, or does it have private water and sewer? Because many bad deals originate with private utilities that are failing. We've looked at many deals over the years that might have a packaging plant, a private sewer disposal facility that's in very poor conditions, it's very old, it's failing miserably. It might cost half a million to a million to replace it. What happens to your economics if that thing fails under your watch? How are you gonna pay that half a million to a million? How is that gonna impact your cap rates?
So you gotta make sure that you avoid all failing private utilities. Also, you have to make sure that your metro area has diversified employment, that is not all about one employer and particularly not one private sector employer. We prefer those things that are what we call recession-resistant, such as government jobs, education jobs, healthcare related jobs, because no matter how bad the economy is, you can't shut the hospitals down, people will still send their kids to college even in bad times. And you know the federal government will never lay off a person ever. Also, who owns the homes in the park? If you're looking at mobile home park, that one person owns more than 5% of the homes is a very dangerous situation. Because if they pull their homes out, what happens to you and your investment? Many of your lenders will have a little box you have to tick on the application if anyone owns 5% or greater.
There's a reason for that. The lenders know from experience when you have too big a concentration in the hands of one single resident, they have too much hold over you, and if you lost them, it would really, really punish the business. Next, are your permits and licenses correct? Are they issued? Are they up-to-date? You would never wanna buy a mobile home park that's illegal, it has no right to operate. Yet too many people don't know about this issue, and each year buy mobile home parks where they have licensing or permitting problems. Also, do you have any surveying problems? We've seen mobile home parks with giant easements that run all the way across them, rendering the park basically worthless. Yet unsuspecting buyers don't know any better and they buy them anyway. Same with title problems. Same with environmental problems.
And then of course, you have a mobile home parks with bad occupancy problems. Can you really fill them? Single-family homes are high and mobile home prices and now also high, sometimes too high. So high that no one in the market can afford to buy the home. How will you deal with that? What if you have a low test ad demand? We always advocate that everyone in buying a mobile home park runs test ads to gauge what the demand is. We all know the three calls equals a showing and three showings typically make it as an application. Nine calls you need for one application. If the home is expensive and the credit quality of your customers is very poor, you may have to do a lot of applications to get one home out the door. If you can't hit those kinds of volume, if the phone does not ring enough during the test ad to get your sufficient applications, you can't get any home sold.
Finally, what about the just unhealthy risk versus reward dynamics? Because a lot of mobile home parks out there have them. When I say that, what I'm talking about is the thing so well described by Sam Zell in his book Am I Being Too Subtle? Where he has a simple formula, if something has low risk and high reward, you should always do it. If something has high risk and low reward, you should never do it. And then you debate the ones that are high risk and high reward. Every deal falls into that category of one of those three components; either you should definitely do it, you should never do it, or you gotta think really hard about it. Yet I get calls frequently from people who have selected the wrong one, the high level of risk, low reward. They bought a park that's stabilized, not much room to increase rents or occupancy at a low, low cap rate, not counting in some big capital hit that they had, such as fixing a private water or sewer system. They should have never bought that deal. And every deal, look at it and say to yourself, "Okay, what is the risk involved here? What is the reward here?" Make sure it is a healthy relationship.
But even good parks can still be bad deals in the wrong circumstances. So, even if a park meets everything I just described perfectly, the market is great, the park is great, everything just looks A-okay, it can still have problems that render it being a bad deal that you should avoid. The first one is basically just in the area of price. You cannot make money paying too much for a mobile home park. Does your park have the appropriate cap rate, cash on cash return, and cash flow, or are you gonna have to feed it every month? That gets pretty old quickly, I don't care how much money you have. Any asset that you have to write a check to own monthly, you're gonna get tired of that pretty fast. So, even a deal that's perfect, even a park that has everything going forward is still a bad buy for you if it's priced too high.
And then you have the issue with financing. Now, we're in very unsettling times right now as far as financing, 'cause we have interest rates that are all over the map, and no one knows where anything is going. The country has just gone down the drain so quick, I've never seen anything quite like it. And I was an adult during the Carter and Reagan era when we had the same kind of an issue, and I know it's frightening. So as a result, you have to be very, very cautious and careful on the loans that you seek for mobile home parks. Because if you buy a park and the financing is wrong, it can get you into real trouble. Now, how can financing get you into trouble? Well, number one, if the term is too short. Now, what is the term? The term is how long you have from when the loan begins to when you have to pay it off in a balloon and refinance it.
Now, a lot of your institutional debt, Conduit, Fanny Mae, Freddie Mac, that stuff is typically 10-12 years in length. That's plenty long, and it gives you a chance to do a lot of improvements to the park, raise rents, fill lots, and go out and refinance it and have a good safety cushion on top of that. But there are some banks out there, and some sellers, that want you to try to accept a term of only a few years. If a Mom and Pop tells you, "I'll carry the paper, but I'm only gonna carry it for three years," you gotta run away from that deal or renegotiate it, 'cause you cannot survive on a three-year note. A three-year note means you only have a year or so to make all the improvements, then another year to season it, and then another year to get the loan. That's not much time. Particularly, if you have a heavy lift turnaround, you'll never get it done in that period of time.
So, make sure your term is reasonable. What's the shortest you can go? Well, I guess five years is about the shortest you should go, but even then, I would try and get something longer. Seven years is much safer than five, and again, 10 is the best you can get, but three or two is clearly too short. Also, too high an interest rate. So, if Mom and Pop are going to sell or carry, that's great and everything, but you can't pay them 10%. And if you're gonna go out there and try to get a hard money loan, again at some high, high rate, can the park really survive that? Did you really factor that into your numbers when you started, or are you gonna say, "Well, okay, I'll start off with that higher rate when I start this turnaround process, but then I'll refund it to a lower rate." Well, what if you can't get a lower rate in the end? What if interest rates have climbed to the point you can't that moment get the longer term on a loan at a lower rate?
Make sure you've accounted for that. Also, if you have too fast an amortization. Sometimes, Mom and Pop will say, "Well, I'll carry the debt, but only on a 10-year amortization." Well, a 10-year amortization will never work. The typical mobile home park amortization is 25-30 years. On a 10-year, you'll be paying principal down so quickly, you'll probably have horrible negative cash flow. So, sometimes, financing can make a good deal bad. And then another item is capital needs, where the capital needs exceed your budgeted liquidity. If you're buying a property and you know it needs work, it needs to have the roads redone, who's gonna pay for that? Do you have the capital to do that? People often are all onboard with being completely sensible on their down payment, but they lie to themselves on how they will pay for capital needs.
For example, if you have 20 park-owned homes in that mobile home park and you're unable to sell those to the existing residents and yet you wanna sell them, or even rent them, you'll have to pour a lot of money in those to get them ready. Even if you had to put in $5,000 a home, that's $100,000 of capital needs. Do you have that at the ready? So sometimes, good deals should be avoided, simply because it's not the right deal for you. It doesn't fit with your budget and with your needs. So, it doesn't mean anything bad about the park itself, it just means it's not the right match, not the right fit. So when you see a deal that does not work for you, you have to have the discipline to say no and walk away from it, because any idiot can buy a mobile home park, but the real trick is, can you make good profits with it? This is Frank Rolfe, the Mobile Home Park Mastery Podcast. I hope you enjoyed this. Talk to you again soon.