There are many styles of turn-arounds, but one of the riskiest and most complex is buying a property that has extremely low occupancy. In this Mobile Home Park Mastery podcast we’re going to review the key elements to the successful purchase and turn-around of mobile home parks with high levels of vacancy.
Episode 406: The Science Behind Successfully Buying High-Vacancy Properties Transcript
Most mobile home park deals that have come across your desk are at maybe 80% occupancy. Some are higher, some might be 70%, but typically they're usually at least two-thirds or more occupied. But then there's a whole other strata of parks that will sometimes come across your radar screen that have enormous vacancy. Those parks only have 10% or 20% occupancy. Should you buy them? Well, there's a whole bunch of considerations you need to know.
This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk about the science of trying to buy parks that have a lot of vacancy. Let me first tell you, we are no stranger to this concept because we have bought over the past 30 years lots of properties that had very few people living in them on day one, but we ultimately were able to fill them. And there's more to it than just rough luck. It's not really a gambling expedition. So let's go over this roadmap to success with parks that have very, very high vacancy. The first thing you have to figure out in due diligence with a high vacancy park is can you actually fill the lots? Is the demand there? And that's where the test ad is so very important. You've got to run a test ad, a good one, classified section of the newspaper, Facebook marketplace, anywhere you want. And you're going to need to see over maybe a 10 day run, that's what a classified ad is, how much demand that market has. Now a good mobile home park will get over a 10 day period, typically 20 or 30 calls.
And the general rule is three calls equals one showing and three showings equals one application. So if I had 30 calls in a certain period of time, that would give me probably five applications. But if you're looking at a park with extreme amount of vacancy, that may still not be enough. If you're trying to fill a hundred lots, for example, think how many applications you'll have to get to fill a hundred lots. Because a lot of people who want to buy a mobile home in that mobile home park, well, they may not have the necessary amount for the down payment or they may not earn enough to qualify. So you may burn a whole lot of applications to get one home out the door. We've had properties that required 25 or 30 applications to get one sold. So you have to have screamingly high demand if you're buying a park that has a massive amount of vacant lots. Now we've owned mobile home parks and we've been able to fill 100 lots in a given year, roughly two a week. But when you go around trying to sell two homes a week, you have to have white hot demand.
Your phone has to be ringing off the hook. You've got to have people stopping their cars at your office, walk-ins on a daily basis to get enough bodies in the door to have any prayer of getting enough applications to get the homes out the door. So make sure you've got plenty and plenty of demand. You also have to make sure that you can bring in homes that will meet the criteria of your customers. Because not all parks can handle brand new homes. A brand new mobile home today you're probably looking in a park, set up, skirt, utility hookup, air conditioning, $70,000 or $80,000. In a lot of parts of America, a $70,000 or $80,000 mobile home isn't going to work. People can't afford to make it happen. A used home, on the other hand, is about half that amount. If you're going to go with the used homes, though, the question is can you find enough used homes? So for that, in diligence, you'd want to check your repo lists of people like 21st Mortgage, Vanderbilt, talk to some home wholesalers and see what's out there available in your area, in that state, regarding used homes. Another item you have to do is you have to figure out will the city allow you to fill those vacant lots?
Because some cities, many cities, perhaps most cities, they don't like mobile home parks and mobile home park residents. They do not view them as a positive for the city. And they're going to be irritated if you want to start bringing mobile homes and mobile home park people into that mobile home park. So make sure the city is not going to fight you. When you ask the city how does it work to bring in a mobile home, you want them to tell you, ah, well, here's the procedure. You fill out this application. You bring in the home. We inspect it. We green tag it, and you hook up your utilities. But if instead they say, well, I don't think you could have new mobile homes on those lots. If they start giving you this vibe, the negativity, you've got to resolve that before you buy the property.
You're going to have to go to mom-and-pop who own it and say, look, mom-and-pop, I'm Going to have to bring in a lot of homes to fill this thing, and the city does not apparently like this whole concept, and I can't buy it until you can get them to say, yeah, we can do this. And in many cases, mom-and-pop may have to get a lawyer and go down to city hall to get it resolved. But you can't buy a mobile home park if the city is going to fight you every step of the way, because without their green tags, without their permitting, you're stopped cold dead in the water.
Another thing is, can the utility systems handle greater occupancy? And I'm not talking about city water and city sewer here. Of course they can. I'm talking about mobile home parks that have master metered electric or master metered gas or private sewage, because some of those, if you imagine a park that's on septic that has a whole lot of vacancy, when you start putting homes on those septic tanks, you may outstrip the leach fields because they're not used to seeing that much sewage at one time. So you've got to think through the bigger picture on a park with lots of vacancy as far as can you handle it. And again, if you have city water and city sewer, well, yeah, sure, the city can handle it. But if you have private stuff, the question is, can you do it? One of the biggest parts of looking at a park with high vacancy is can you get financing? This is what kills most of those deals. Because you can't typically go to a bank and say, I want you to make a loan on this park.
Yeah, it's about, you know, it's about 80% vacant. They're going to already hang up on you at that point Not going to be able to get a Fannie Mae or Freddie Mac loan. Not going to get a conduit loan. Not get most bank lending. So typically in a high vacancy park, the only way that thing is going to work is with seller financing. And the seller should be excited he's found a buyer who's going to go through
The effort to do this exercise. So he shouldn't give you a lot of pushback. And if he does give you pushback, if he says, oh, no, I don't like seller financing, you can just tell him, look, nobody can buy this unless you carry the paper. Because I've been to 10 banks and had the door slammed in my face on all of them. It's not going to happen. And you really don't have an alternative besides seller carry. Because you can't do a master lease with option construction because the one thing you cannot do under that construction is fill vacant lots. It's impossible. No floor plan lender is going to work with you until you are, in fact, the title holder of the property. So you've got to get seller financing in order.
Now I've seen a lot of creative seller financing over 30 years with high vacancy deals. I've seen things like zero down under the argument you need your money to help buy homes. And interest only, 0% interest year one, 1% year two, 2% year three, 3% year four, 4% year five and after. The seller is going to have to bend over backwards to construct a financing. You're not going to want to buy something if you're negative every month from the day you start. They are going to have to take a lot of the weight off your shoulders because they're the ones who screwed up and made it so vacant. And don't let mom-and-pop ever tell you, oh, I have a waiting list of people who want this park. No, they do not. There is nobody. Very few people will ever tackle those high vacancy parks. So you are a saint to help them out in this endeavor. Now, high vacancy parks can be very, very profitable. If you buy a park that's 25% occupied at a price that works, you're basically buying one park and getting three free, right? It's very easy to see the benefit, both in cash flow and future sale value.
But you've got to be able to get all these pieces put together in proper order to pull it off. And the most important item to also take away is if you're going to go through this much effort, if you're going to have to do everything I just said, and go out and buy homes, bring them in, run the ads, answer the phones, do the showings, and get the thing sold, there has to be a huge payday at the end. Nobody buys high vacancy parks with any less than a spectacular rate of return. How good? Well, most people in the industry, they want a 20% return, cash on cash or IRR, based on an average deal. This is not an average deal. This is a very, very difficult deal. This is a level of play at the highest, highest, most advanced level. And as a result, you've got to get a big amount of money. So when a guy wants to sell you a high vacancy park, don't buy these deals where you have to fill the park to get it worth what you're paying. No. All the money should go to you, not the seller. If the seller had done what you're about to do, if they had filled all the vacant lots and they should receive the riches, but in this case, no, the roles are reversed.
You've got to make a lot of money to do it. Now, we've done a lot of those deals over the past 30 years, and they can be done and they can be successful, but you have to make sure you've checked all the boxes on everything we just discussed. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.