Mobile Home Park Mastery: Episode 297

The Pros And Cons of Heavy Lift Turn-Arounds

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One of the most profitable segments of the mobile home park business is the “heavy lift” turn-around. But it’s definitely not the right choice for every investor and comes with a slate of potential pitfalls. In this Mobile Home Park Mastery podcast we’re going to drill down on the good and bad aspects of bringing nearly dead parks back to life.

Episode 297: The Pros And Cons of Heavy Lift Turn-Arounds Transcript

Every park starts off from the position of being a turnaround. I've never seen a mobile home park you couldn't fix something on either raising rent, filling vacancies, cutting costs, improving its aesthetics, fixing infrastructure. But there's one kind of mobile home park out there that comes with a whole lot more work, a whole lot more risk, a whole lot more danger, and yet a whole lot more reward. And that's called the Heavy Lift Turnaround Mobile Home Park. This is Frank Rolfe for the Mobile Home Park Mastery Podcast. We're gonna be talking all about the pros and the cons of these Heavy Lift Turnarounds. Now, what is a Heavy Lift Turnaround? How is that different from your run-of-the-mill type of turnaround? Well, typically a Heavy Lift Turnaround would have massive major infrastructure problems. It would have severe vacancy issues. It would have rents that are far, far under-market, sometimes less than 50%. It would have all kinds of operational issues, tenants not paying, all kinds of terrible things going on. And these deals traditionally are sourced through cold calling or direct mail or something where you're typically talking directly to the seller, because the property's in such poor condition, that many brokers will not even bother to try and list them.

So what do you do with these things? What are the good and the bad aspects? Why would you even want to touch a mobile home park where you might have half the tenant base not paying, half the park incomplete vacancy? Why would you want that kind of thing? Well, the first positive of the Heavy Lift Turnaround is that you can buy them really cheap. How cheap? We've bought large institutionally-sized mobile home parks. We bought one in Illinois once for a little over $5,000 per space. Now think about that. To build a mobile home park today would cost you probably about $15,000-$20,000 per space in infrastructure plus the land. And here you are paying what is basically a 80%-off sale based on replacement costs. Well, I think we all agree that's really, really cheap. So the first big advantage of the Heavy Lift Turnaround is you could have huge price aberrations in the market. In a market where the typical good park, finished park, stabilized, occupied park sells for $50,000-$60,000 a space, you can still get Heavy Lift Turnaround parks at fractions of those amounts. And what does that mean? It means you have a huge built-in profit source, once you get the thing completed. Now, the next positive of the Heavy Lift Turnaround is you can often get some really, really attractive financing on those deals from moms-and-pops, not from banks.

Banks are terrified of Heavy Lift Turnarounds, but from the seller who's desperate to get it out the door, and they don't really have any other options, and they know you can't get bank debt on it, 'cause it's just too ugly and too screwed up. That's where zero-down deals come from. That's where 30-year fully amortizing, 2% interest rate deals come from. They come from cases where mom-and-pop have let the park completely fall apart, now they wanna sell it, but they can't get debt on it, and so they have to creatively offer debt. We've done 12 zero-down deals over the last nearly 30 years, and in every case, each of those zero-down deals began life, because it was a Heavy Lift Turnaround. So the ability to get into a deal with very, very small amounts down is always one of the clues it's a Heavy Lift Turnaround.

Look at my first park, Glenhaven, definitely a Heavy Lift Turnaround, half occupied, horrible condition, infrastructure failing, no real records. How did that work out? Well, I got that for $400,000 with only $10,000 down, and the seller carried it for 30 years fully amortizing. Is that because the seller wanted to do that? No, the seller knew there was no option. You can't take a park like that to a bank and expect to get a loan. So Heavy Lift Turnarounds not only offer you low, low prices, they can also offer you very attractive built-in seller carrier.

Another pro of the Heavy Lift Turnaround is there's some huge NOI boosting that can be done. If you buy a mobile home park, that's half of market rent, you can surely raise that rent at least $50 a month annually, and you can turn that $250 lot rent into $500 in the span of five years. And at that point, you have basically doubled or more the value of the asset, that's pretty attractive. If I buy a park that's half empty and I fill it, I've doubled the value of the property. That's pretty attractive. If I can find a $5,000 a month water leak and fix it, I've raised the value of that property by somewhere between $600,000 and a million dollars. That's pretty attractive. So the ability to turn these kinds of parks around and do it very, very quickly is another hallmark of the Heavy Lift Turnaround. Going back to Glenhaven, within the first two years I was able to fill it, I doubled the occupancy. That's how poorly managed it was, how much demand there was, and the fact that mom-and-pop were doing nothing to try and get the job done. But that's not to say that all Heavy Lift Turnaround deals have nothing but positive attributes. Let's go over some of the negatives of Heavy Lift Turnarounds.

Number one, they often have zero liquidity, because banks just won't finance them. Banks like to see stabilized occupancy, which is roughly 80%. They obviously like to see the infrastructure working, the water and the sewer flowing, the power working, the roads absent of potholes, that a school bus could fall into. So until you get that park turned around, the problem is you have no ability to really sell it or refinance it. So liquidity is always an issue. If you read up on Sam Zell's book, "Am I Being Too Subtle?" Sam Zell, the largest owner of parks in the US, who passed away just a couple of weeks ago. You'll see he's obsessed with the idea of liquidity. He's also obsessed with the idea that never buy a deal that has high risk, low reward, always buy deals with high risk, low reward. And the ones that are really interesting that require a lot of discussion are high risk, high reward. And that's the category that these Heavy Lift Turnarounds fall into. So liquidity is an issue. Another issue is the CapEx in these parks can often be a fortune. So you have to do very, very good due diligence to make sure that the park you're buying, that you think you're buying for a million dollars, doesn't need an extra million dollars in infrastructure repair.

Some Heavy Lift Turnarounds, it's mostly aesthetic issues or it's just strategy and management issues. It's not infrastructure issues, but there's some out there that need massive amounts of capital to bring them back to life. Replacing water lines, sewer lines, packaging plants, those kinds of things, unless you're prepared for that and have budgeted accordingly, where will you get the money? Because again, these parks are illiquid. You can't go out and get a loan against it, so it's very, very important that you map out where every dollar goes of bringing that Heavy Lift Turnaround back to life, because if you get on the wrong side of that, well it could literally bankrupt you. Another problem with Heavy Lift Turnarounds are they're just an enormous amount of worry, and time and risk, and often frustration, because things never work out like you think. I think it was Eisenhower that said, "No plan survives first impact with the enemy," and that's how turnaround parks are.

You think you have a plan, you'll be on that plan B by day three and plan C by day six, because they don't always go according to plan and they're very, very scary when they're not. All the time things will pop up that you didn't anticipate, and you've gotta have the constitution to handle that kind of shock. You have to go into it with dedication and persistence, and you have to say to yourself, "You know what? I'm gonna bring this park back to life and it's not going to be easy, and I'm going to anticipate only the worst." And as long as you're thinking in worst-case scenario, you'll probably at least be covered. Now, when you're looking at buying a Heavy Lift Turnaround, it's very important that you do a couple things. Number one, you need to think up best case, worst case, realistic case.

You need to say, "What's the best case? What could this park do in the ultimate scenario, that might be getting it full, full-market rent, everything fixed? How much money would it make?" Then look at your worst-case scenario. "Could I survive if I don't hit my targets? I wanna get it to 100% occupancy, but can I survive at 70%? I wanna get the rents to $400, but where am I at if I only get to $300?" Figure out your worst-case scenario using some not worst, worst-case options. Worst-case option, of course, is the park blows up and burns the ground day one, that's not likely, so don't be too unreasonable, but look at, in a worst-case scenario, can you survive? Will you be able to make that mortgage payment? Will everything be okay? And then look at your realistic case, which is somewhere between those two polar extremes, not your best case, not your worst case, kind of in the middle there.

Would you be happy with that? Would you be satisfied? If that's the best you can get it, would you be okay with that? Never do a Heavy Lift Turnaround where you cannot survive the worst case, where it would bankrupt you, where it would ruin you. Never get involved in Heavy Lift Turnaround, where the best case is not spectacular and never get involved with it, where the realistic cases not still make you happy. Because there's all kinds of uncertainty in Heavy Lift Turnarounds, you can never guarantee you're gonna hit the numbers, that you were trying to hit.

Also, make sure you've thought through completely how you bring liquidity back to the deal. Why is it illiquid now? Is it because of occupancy or utilities? Hopefully not location. Location's not something you can fix, so make sure that the turnaround is something that you can turn around, something that is within your control. The bottom line is Heavy Lift Turnarounds are a great investment opportunity for many people. Just make careful sure that you're doing it correctly...

Heavy Lift Turnarounds could be an exceptional investment for many people. They could offer huge reward, they can offer manageable risks, they can offer attractive financing. Just make sure when you get involved in them, you know what you're doing, so you have a good result. This is Frank Rolfe, Mobile Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.