After over a decade-long absence, I am starting to see two of the greatest park buyer scams return to the marketplace: the “gypsy traveler” and the “rent guarantee”. In this Mobile Home Park Mastery podcast we’re going to expose how these two classic cons work and how you, as a buyers, can protect yourself from being taken advantage of.
Episode 237: The Return of The Gypsy Traveler and Rent Guarantee Scams Transcript
We live in a society today of different and progressive versions. Version 1, Version 2.0, Version 3.0. Often, the newer versions are superior to the early, but in the case of mobile home park scams, the new ones are just as lousy. This is Frank Rolfe for the Mobile Home Park Mastery podcast. We're gonna be talking about two of the classic scams that you will find in the mobile home park industry, what they are, how they operate, and how to protect yourself from them. Now, I hadn't seen these in a long time, but recently I saw both of these scams back in full operation. And I thought, "I wonder how many people out there have been in the business long enough to remember these two from the old days?"
The first one is called The Gypsy Traveler. Now, here's how the Gypsy Traveler works. A guy finds a mobile home park typically, or sometimes an RV park, but it's always in the worst possible location, it's in the side of town that is completely gone down the skids for decades, and as a result, they can buy that park and typically got concrete pads, got wiring, it's got water and sewer in it, maybe, who knows if it's even working. And it's maybe got one or two to dilapidated trailers in it, so it's held its permit. And so they buy that property for nothing, it might be a 40 space thing, and they buy that for 100 grand from somebody 'cause it doesn't make or have any money at all.
And then what they do is they go to all their friends and neighbors who own RVs and they said, "Hey, bring your RV out and put it on the lot." And lo and behold, they all do, they all bring out those RVs, they plop them on the lots, "Heck, why not?" They had them over in an RV storage yard anyway. And then what they do is, once they get it filled up with all those RVs, travel trailers, fifth wheels, then they go on an advertising campaign, they put out everywhere that they've got a mobile home/ RV park for sale at an insanely high cap rate, typically around 20% is where they start. So what happens? Well, investors are always looking for high-yielding options, so they get calls from people and the people say, "Hey, I was calling about the mobile home/RV park thing you got at a 20% cap rate, can you give me more information?" They say, "Yeah, it's a 40 lot thing here in the city of blank, and I don't know a lot about it, but gosh, it looks like a good opportunity."
And so the sucker goes out, looks at it, and then asks for all the financial information. They say, "Oh gosh, we don't have any. I don't really have any information on it. You can see it all yourself, you can see how many lots have something on them. So if you're really interested, we really wanna get this thing out the door. How much cash do you have?" Well, the person says, "I've got $250,000." And they say, "Well, you know what, I shouldn't do this 'cause it's worth far more than that. But I'll go ahead and sell it to you for 250 grand, just 'cause you seem like a nice person and we're under time urgency."
Person is very excited and says, "Wow, what a deal. This is even better. This is even better than the 20% cap I hoped for." So they put it all together. Buyer buys it. And what do you think happens? Well within about a week, all of those RVs, travel trailers, mudrooms, they all pull out and they all go home, and all they're left with are the two original old dilapidated mobile homes.
That's called The Gypsy Traveler. Now, the sad part is they are experts at this, so the buyer was unable to make any kind of fraud claim, they know exactly what they can say and not say, so they never actually created a fraud. They never said anything about how long those units had been there, they never said anything about anything, they didn't provide any financial information, any rent roll, any P and Ls, nothing whatsoever. All they did is they just had title to the property and they passed on the title at the agreed to price. So the person ends up with a tract of land that's worth nothing, and the seller ends up with that person's money.
It's a pretty, pretty heinous scheme. How do you protect against that one? Well, obviously, due diligence was never done. Those things prey on those who have no idea how mobile home parks work at all. So had someone followed just the basics of due diligence, going to the city, reviewing the permit, checking the utility bills, typically those units are not even hooked up to utilities. You would know immediately that that's false occupancy since there were no utility bills for any of those lots. But it preys on those who don't understand the business, don't understand how to do proper due diligence.
Now, the other scheme, and this one's more dangerous because sometimes this even suckers in people who have some degree of common sense, and that's called the Rent Guarantee Scam. So how's a Rent Guarantee Scam work? Well, it works pretty easily, here's the deal. Let's say someone has a 50 space mobile home park and they've only got 20 of those units occupied. So they tell the buyer, "Here's the deal, we'll go ahead and price this at full occupancy because I'm gonna go ahead and I'm going to rent those vacant lots from you at full lot rent.
"Oh, what an interesting scheme, what an interesting idea." So basically, the person will run the numbers, if the lot rent is 300 a month, they'll run it 50 times 300 times 12, and that's what they assume the revenue to be. But of course, of that 50 units at 300, real customers only occupy, say, 20 of those, and the person has given you a guarantee on the other 30. Here's the problem with that idea. You're then gonna go out and try to get a mortgage on that property, probably the 25 or 30 year amortization. Do you really think that guy is gonna be making you those payments for 25 or 30 years?
Typically, the agreements that they draft only shows them paying that amount for a short period of time, two years, three years, maybe five years. How can you swap 25 or 30 year debt for only a guarantee of three to five years? Clearly, that's a bad trade. On top of that, there's no teeth to the fact that the person even pays you. Post-closing, they're gonna disappear on you, those checks are gonna stop coming in, and you won't have any money to pay your mortgage or your utilities, and certainly not to make any profit at all.
Now how can you guard against the Rent Guarantee Scam? Well, don't do it. When you buy a mobile home park and it's got 30 actual paying customers that you can verify, you can actually walk up and touch those trailers, then that's all the revenue you have. The vacant lots are valued at zero because they're vacant. The fact that someone says, "Oh well, no, they're worth something, I'll go ahead and guarantee the rent on those." That simply does not work. If they wanna bring in a mobile home, if they wanna go out and spend 20, 30, 40, 50,000 or more to prep that lot and bring in the home and connect the utilities, okay, now you can count that lot rent. But you can't do it just on some kind of paper guarantee. That's as bogus as if on a regular park, they suddenly say, "Oh, on that final vacant lot, a guy came in and rented it this morning, but he can't bring in the home for a while, but here's the paper, here's the lease, let's put some value on that."
The key to the businesses is you can only put value on things you can tangibly see, and if you can't tangibly see a customer there, you can't count that supposed guaranteed income.
You know what's sad is that there's so many different ways to make money in the mobile home park business. You can raise rents, you can fill lots, you can cut costs. The stories are infinite of people who've made a lot of money. You don't have to cheat people to make money. Many of these guys who do these scams put so much effort into orchestrating them, if they'd only put that effort into something legitimate, they would have probably had as or more successful an ending. But what's really tragic is when people who don't understand the mobile home park space, try and enter the industry using just things they might have learned in multi-family or some other sector, and the problem is, a lot of that knowledge does not overlay onto the trailer park business.
And when people suspect that you don't know what you're doing, that's when the bad people come out, and that's where these different types of scams begin. The key to it all is it's just buyer beware, use good common sense, understand what you're doing, apply successful due diligence strategies, and you can stay far far away of those erroneous scams that are simply designed almost like a trap, like someone digging a six-foot deep hole and covering it with leaves that they're hoping to sucker you into walking towards and then later falling in.
This is Frank Rolfe of the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.