The Fake Occupancy Trap Most investors think that there are only two classifications for any lot: vacant or occupied. But there’s also a third category that few talk about and we call “fake occupancy”. In this Mobile Home Park Mastery podcast we’re going to explore the meaning behind this term and how you can prevent your mobile home park from falling into this trap.
Episode 434: The Fake Occupancy Trap Transcript
There's a dark secret in the mobile home park industry that few people talk about but all park owners know exists, and that's a trap that's called fake occupancy. This is Frank Rolfe with the Mobile Home Park Mastery podcast. We're gonna explore what fake occupancy really is and how to avoid that in your mobile home park. Now, we all know that there's basically two types of occupancy. You either have a lot with a mobile home on it and somebody in it paying rent, that's occupied, or you have a lot that either doesn't have a mobile home or has a mobile home but nobody is in it, and that's a vacant lot. But there's one other type of occupancy which you always want to avoid, and that's called fake occupancy.
Now, what is fake occupancy? That's an occupancy, which sounds good on paper but doesn't actually yield any income. Now, why is there such a thing as fake occupancy? Well, to traditionally fill a vacant mobile home lot, you have to buy a new or used mobile home, put it on the lot, set it up, skirt it, put stairs on it, and go out and sell it to the end user. But sometimes what happens when people are trying to do those steps, they fail to be able to sell the mobile home, and in a fallback position, they decide to rent it. And the problem isn't so much that renting a mobile home is an impossible task, but the issue is, are you making any money with it? Because if you're not making any money with it, it's not really occupancy. It doesn't really fall to the bottom line.
And here are some reasons why rental mobile homes often do not have any net income generation. Well, the first one is people are very, very lax in really being honest about what the repair and maintenance is on a used mobile home. When you rent a mobile home, you need to allocate at least $200 to $300 a month in the line item for repair and maintenance. That's a huge number, mammoth number. If you look at the typical lot in a mobile home park and you use an allocation, the one that most people use on repair and maintenance for that lot, it's typically ranging between $100 and $200 per year. But in a mobile home rental, you're spending almost the entire allocation of lot repair in a single month. That is a huge difference.
It's one more reason that you want to be certainly in the mobile home parking lot business model and not be renting mobile homes. But if you do have to rent mobile homes, you've got to be honest on this simple fact. I've heard other people give even speeches on this at industry events. If you talk to anyone who's got rentals and you say, "Okay, well, what's your repair and maintenance running?" It's like $200 to $300 a month. And worse, mobile homes are not really built to be rented. I think that's why that number is so high. Mobile homes are perfectly fine as long as you treat them with respect and dignity. But when you start renting mobile homes, what happens are the customers have no ownership in the home, and they're very rough with the home.
It's like taking a fine porcelain china and throwing it in a dishwasher day after day. Things are going to break. And one big reason why the rentals don't work is that rents are simply too low. Even those who have learned the fact that the repair and maintenance is so high, they, for whatever reason, refuse to set their rents at a level in which they can create net income. Let's assume that you've got a lot rent of $500 a month, and you throw in $300 a month of repair, and then you have tax and then you have insurance. Where are you at? Well, you're already at about $900 a month of cost. So that mobile home will have to be rented for what, $1,000, $1,100, $1,200 a month? Yet you'll find that the owner of that mobile home park, that mom-and-pop, is renting that home for maybe $700 a month. That's less than the cost of operations.
Now, you may say, "Now, wait a minute now, Frank, that $500 lot rent, you can't count that." Well, yeah, you can, because I could simply give that home away and suddenly I'm making $500 a month. So it's not fair not to do some form of punishment or allocation on what you could do if you simply gave the home away or sold it for a dollar. The bottom line is that the rentals in most of these mobile home parks are way too low to be profitable. And even worse, when you're renting mobile homes for less than the actual cost of operation, it's nearly impossible to sell mobile homes because we've found, to sell a mobile home, it has to be $100 a month less to own it than to rent it. Otherwise, why would anyone buy it?
And everything I'm telling you here are absolute facts. Everyone knows all this. So it then begs the question, why do people continue to rent mobile homes for less than the actual cost that they have? Why do people embrace the concept of fake occupancy? Well, one of the worst perpetrators of this fake occupancy, in my opinion, are a lot of the larger players, a lot of the REITs, people like that. And what's going on often is they simply can't sell their homes, and therefore they rent them to kind of buy time. The other reason, I think, is that some of these larger players have convinced America's stock analysts sometimes that renting the home creates more revenue and therefore it's more profitable than the old parking lot model.
If you didn't know any better and you're just a young analyst looking at different stocks on the stock exchange and you see one mobile home operator who's renting their lot, that lot gets 500 a month in lot rent. And here's somebody else renting the lot and the home for 900 a month. They don't know any better. They'd say, "Oh, that guy over there, he's smarter, he's better. He's getting $900 a month for that lot, and this guy's an idiot. He's only getting $500." So I think that has a lot to do with it. And another problem is that new mobile homes have just risen so high in price, they've nearly doubled since the advent of COVID, that what often happens is you just can't make the numbers tie.
There's a lot of mobile home parks out there that the only way they should be filling lots is with used homes. But sometimes the REITs and others will bring brand new homes into those lots when the prices are impossible for any customer to qualify for. And then as their fallback position, they simply rent them. And that's basically the nature of fake occupancy. But how can you not have that happen in your park? How can you be in the business of making money and not losing money and not allowing people to live in things that their rents don't even pay for? Well, the first thing you have to do is simply take a new stance, which is you don't rent. Because the number one culprit in the concept of fake occupancy is often the park manager.
The park managers love renting homes because it's a lot easier. All you have to do is run an ad and you can rent a home, any home in America, lickety-split. They often don't do any vetting. They don't really know what people earn, but they simply say, "Oh, you want to rent the home? Yeah, here, here you go." And on top of that, typically a lot of owners compensate the manager where they pay them a bonus for every rental, and they know the rentals won't last more than a few months before they run off. So they'll go in there and rent the same thing over and over, each time garnering that commission. And to them, that seems a whole lot better than selling them.
Also, in many parks, you have to give up on the concept of buying new homes. Used homes are, in some mobile home parks, the only thing that will work. Remember that your tenant has to earn roughly three times the total of the lot rent and the home payment to qualify, and they have limitations. In some mobile home parks, if you really look at the cost of the new home and the lot rent, that customer will have to earn 70,000 a year, something like that, to qualify for the mortgage. Is that really attainable in your market? If the answer is no, then you can't do that. Also, you gotta make sure that the rentals are at least $100 a month more than the ownership.
If you don't do that, you will put your park in a terrible position in which not only you're renting and sometimes engaging in fake occupancy, but you can't get rid of this thing you've created because nobody is going to buy it if it's cheaper simply to rent it. If you feel you must rent the home, and there are occasions when renting a home may seem sensible, maybe the customer is fully qualified but simply has never lived in a mobile home, is somewhat afraid of it because they have a negative stigma. Only rent to people that actually can buy, that you have vetted that they have the correct income to actually qualify for purchase down the road.
And if you can't accomplish this, if it's impossible with whatever park you have to get out of the fake occupancy business, you simply are unable to find anyone who can qualify for the ownership of a home, and at the same time, there's no way you can fill these vacant lots with a home that they can actually qualify for, then you need to really think about what you're doing. Because in those cases, it may be better for you to simply sell that park than to keep beating your head against the wall of fake occupancy. Now, I will tell you from experience, we've turned around hundreds of mobile home parks. This is typically an issue that can be solved.
Most mobile home parks, you can go in and take the rentals and sell them off and run correct advertising. You will get customers in who can qualify, and the problem is cured. But it's something that any park owner, park buyer needs to really think seriously about because you only want to have two forms of occupancy: occupied and not occupied. And you never want to get involved in fake occupancy. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.