Mobile Home Park Mastery: Episode 197

The Limits of Creativity

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Painting and sculpting requires creative thinking. But it doesn’t make any money. Indeed, creative deal making has limitations. In this Mobile Home Park Mastery podcast we’re going to review what you can and can’t accomplish with creative thinking when it comes to successful deals. While coming up with unique ideas can often salvage a property’s shortcomings, it’s not always the solution.

Episode 197: The Limits of Creativity Transcript

In 1987, roughly 34 years ago, Donald Trump released a book called The Art of the Deal. I read that book as many did. It was all about the creativity required to forge really good ideas, and it is true that there is an art to making deals, and that creativity is very, very important. But yet there are limits to creativity. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk about when you can't fix a mobile home park deal using raw creative license.

So let's first start off with what happens in the classic deal where you want to have somebody carry the paper but you're doing this because the deal doesn't make sense economically. So you're really effectively overpaying and you're trying to make that back by having them carry the paper at let's say a really low interest rate. We've constructed some wild ones over time. We've done deals that are 0% interest year one, 1 % year two, 2% year three, et cetera. You can really construct anything you want between a willing buyer and a willing seller. But on that one, that's not going to work unless they carry it all the way to the end. If someone is going to give you, they're going to swap you, paying too much for the property and then you're going to make it back with low monthly payments based on their very constructive mortgage, it doesn't help you unless the mortgage goes to fully amortizing length. So if it's a 25 year amortization, you'll need to go 25 years out. It can't be when they have a balloon after 5 years. Five years you haven't made your money back. Now you've overpaid and the way you were going to get it back with that super attractive financing, that's no more. If you want to try and do creativity with financing then there's nothing wrong with that and we've done that many times. The problem is it's only going to be effective for you if they will in fact carry it all the way until the bitter end when you have the thing paid off in full. Can't have some kind of very temporary short balloon payment.

Also, let's assume that they want to do a deal that's zero down, that's how you're going to creativity pass the deal together. The thing needs a whole lot of work, so hey I'm going to buy this thing with zero down and then I'm going to put my hard earned efforts into turning this thing around, but I'm not going to have any money at stake in the deal. Well, zero down doesn't work if it needs a whole lot of capital in it to solve it. A really good zero down deal is one in which it's mostly just labor or aesthetic issues that make the park unattractive, things you can fix with a paint brush and a lawn mower. What if it has a packaging plant the requires $1 million capital investment to bring it back to life? That's not a zero down deal. Sure, you gave the sellers zero on the front end but then you had to put $1 million into fixing that packaging plant. That doesn't hit the goal whatsoever. So if your plan, your creative mission, is to do a zero down deal, it has to be a  true zero down deal in that it does not need a whole lot of capital outlay to bring that old park back to life.

Number three, let's say you're going to do a wrap note. So the seller's concept… let's go over what a wrap note is. So a wrap note is when the seller already has a mortgage and you're basically going to kind of assume that, not exactly above board, and you're going to give them some money and they're going to take back another second. So it's kind of like assuming their note, slamming a second on top of that. Now typically those things aren't really effectively legal, not for the seller to do. As a buyer typically you're not in any peril on it, but they are sometimes in violation of the bank loan that they have between the seller and their lender. The problem is what do you do when that thing goes bad? What happens when the bank suddenly says wait a minute, you weren't allowed to what is effectively assign the note to this person, we never blessed that. And it blows up. Then what do you do? Also, sometimes a seller will want to do the wrap note, they're going to leave that thing and the title in their name. they have to or it will trigger the mortgage. What happens if they die? How are you going to get title? How is that going to work? So be very, very careful when the wrap note is your creative concept because those wrap notes can be very, very dangers, very volatile.

You can't put a whole lot of money down on a wrap note. If that bank calls that note due and the seller can't afford to pay it off, and you can't afford to pay it off, what in the world will be the end result? You're going to lose the property clearly and you're going to lose whatever money you put into it. So be very careful if the wrap note is your constructive, your art brush, your canvas that you have that thing done in such a manner that you won't be heavily burned. One good idea is to read the sellers note with their bank to see if it disallows the concept of doing the wrap. Shockingly, some of the notes don't have a problem with it if you read the document and it's not excluded. Others specifically say you cannot do that. I think that would be one way to definitely improve your odds of getting in trouble with the creative wrap note construction.

What if the seller wants to guarantee you rent? Let's say that they say well, you know, you can surely fill those lots, I know my number. My sales price isn't really going to work if it's evidenced by the true current occupancy so I'll go ahead and pay you lot rent on some subset of those vacant lots for a certain length of time. Well that's creative and all but that' s not going to work unless they're going to go ahead and pay you on that lot until the 25 amortizing end of the deal. Even then, it still didn't really help you that much. A lot of times the sellers are going to try to bond around immediate problems with short-term money on a long-term solution. If you go ahead and pay them a price and you put 25 year debt on that deal, but they're only going to guarantee five years of income for what you put a 25 year debt on, clearly that puts you upside down from the onset. If the seller wants to guarantee you any amount to try and offset or make sense of his pricing, that guarantee would have to stretch for decades. Don't let them get away with just doing it for just a few little bits of time.

What about if the park is illegal? Can I fix that creatively? No, I can't fix creatively ever a park being illegal. By illegal I'm talking about a certificate of zoning which states that the park isn't legal conforming (which means legal), isn't legal nonconforming (which means grandfathered) but simply is illegal. That means you have no right to operate that park. None. There's no way you can creatively fix that. Even if the seller says, "Well, you know what I'll do a zero down, nonrecourse deal." Do you really want to put your effort into that? You'll never be able to sell it, never be able to finance it. Now if creatively your thought is you're going to go in and try to get this permit fixed while you have your hands on the deal and are operating it, well fine but many times people will buy those things or think they're buying those things with the expectation it will all work out in the end. It doesn't work out in the end. Even if you have zero down and nonrecourse, you're still not really building an asset. You're much better off putting your time into something that's actually legal to exist.

Another item you can't really creatively work around is a failed phase one environmental. It's a toxic issue. If you put your name on that title and anything blows up, they're going to come after you to clean it. Some of those properties to clean can be millions and millions of dollars. So I don't think you can constructively or creatively work around a failed phase one. So that's another thing you really can't fix with creativity.

You also can't fix a terrible location with creativity. Let's assume that you run the test ad and it doesn't pull at all because no one wants to live in that part of town. Well, there's no way you can really creatively work around that. It doesn't work. I knew someone once who bought a property over in Gary, Indianan and Gary has a terrible reputation in real estate circles as an area you don't want to own because traditionally there's not a whole lot of demand. A lot of lenders won't even make loans there. Well his creative gimmick was he would try and come up with another way to express Gary, Indiana without saying the words Gary, Indiana. The problem was it didn't really work. Anyone who looked at the map and saw it was Gary, Indiana. So I'm just not really convinced that I've ever seen someone successfully get around a bad location with creativity. I'm not sure you can do it.

You also can't fix insanely high density that I've ever seen with creativity. I did see someone recently who did. There was somebody who had a park out in California and super high density, and the homes were clearly too close to each other. They violated all of the fire marshal's guidelines on spacing between homes. So what the guy did was he built a fireproof cinderblock wall between each home. The problem is it was insanely expensive to build a correctly designed and built fire blocking wall with concrete blocks. Of course, in Los Angeles you can afford to do that because the value of an occupied lot can easily be $100,000 or $150,000. But that's not going to work over in Illinois or Arkansas, or some other state. Typically when you have insane density the problem is that the lots are too small to hold modern homes. You'll never be able to fill a vacant lot if you have a home burn down or fall down, you can't put another one in its spot. So once again you can't creatively get around it.

Now you can do a little creativity on that one. You can go ahead and take two, three or even four of these tiny lots and make them into one normal sized lot, but just remember look at what has happened to you as far as your total number of lots when you do that. If you had 100 lots that are tiny and you decide to take four tiny to make one normal today, you really only have a 25 space park. So again, there's very much limits on your creativity when you have extremely high density.

Then finally, bad private utilities. When I say bad private utilities I mean failing utilities. So what would that be? Let's say you've got the septic fields not working, it's spongy, you're pumping the tanks constantly. Let's assume that water well is not working, you're trucking in water, giant trucks every week to fill up the old water tanks so your customer's have water. Let's assume that your packing plant is leaking or maybe your lagoon is as well. You can't creatively get around that. You're going to have the EPA on you in no time flat fining you, who knows, $10,000 a day. The capital cost to fix those things is more than you will ever be able to afford. So once again there's not really a creative solution on those. The only solution, which isn't really creative, is to fix it. A lot of times people will think there must be some creative way I can work around this. No, there really isn't. It's going to be capital intensive to fix it. You've got to move quickly. There really is nothing you can do as far as painting around that with your beautiful canvas.

The bottom line to all this is that there is a lot of art to making good deals. Creativity is super important. Many of our best deals were forged using very creative thinking. Here's the reality of what the seller wants, here's the reality of what we want, how can we merge these together? So I can't say enough about the fact that I think creativity is a vital force in mobile home park deal construction, but it doesn't always work. You have to understand that there are definite limitations to creativity. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.