What’s the highest hurdle you can jump over? Can you clear 4’ or more? In this second part of our Mobile Home Park Mastery Podcast two-part series on the “Top 7 Deal Killing Hurdles” we’re going to review the three highest hurdles that any park buyer must face and why they are so difficult. We’re also going to discuss the limited options to scale them and the enormity of the risks involved. If you want to clear these last three you better get out to the track and start working out, as they have destroyed many a park buyers who didn’t know what they were or how to address them.
Episode 146: The Top 7 Deal Killing Hurdles - Part 2 Transcript
"Problems are only opportunities in work clothes." That's what William Kaiser the famous industrialist once said, but sometimes those problems are insurmountable and a smart buyer has to know when they've come upon something that they simply cannot get over to have a successful mobile home park investment. This is Frank Rolfe in The Mobile Home Park Mastery podcast series. We're doing the top seven deal-killing hurdles, and we worked our way up to the final three.
Number three, Lonnie deal concentration. Now this is a very unusual deal-killing hurdle that most people are fully unaware of, so let me explain what this is. Let's say you bought a mobile home park and you bought it with 30% vacancy and over the years you did a great job of filling it, but you filled it from just one source. There was one Lonnie dealer in town and they kept bringing in their own homes and renting them out. Why do we call it a Lonnie dealer? It goes to a book written back in the 70s and the 80s called Deals on Wheels by Lonnie Scruggs. The concept was you make a fortune buying and renting or buying and selling mobile homes. I can't really tell you whether it works or not. We don't do that business model. Some people in certain markets of America like Colorado tell me it does work but most people tell me that it doesn't work too well.
What happens is you ultimately spill your park up, 30% of your occupancy to this one individual. Now that was great for you because those lots were not in your budget and you filled them up, but what about the next guy who buys that park? They now are going to be constantly worried about that Lonnie dealer pulling out 30% of their occupancy. That's a very reasonable concern. In fact, bank lenders won't deal with it at all. Typically if you have a bank lender on a mobile home park, they will not make the loan, particularly sophisticated lenders unless you have no individual that owns 5% or greater of the mobile homes in the mobile home park. That way, their portfolio of risk, their diversity tells them if they lose that one concentration, they still have 95% of the occupancy.
We've seen parks however where one Lonnie dealer can be up to 50% of the total lots. This is a catastrophe situation. That means when you try and raise the rent, they may say, "No, I'm not going to pay a higher rent. I in fact demand lower rent." If they pull out half the park, you'll go into bankruptcy. I learned this the hard way with one of my early parks out of East Texas. I had one Lonnie dealer, it was a 52 space park and he owned about 15 of the units in the park. I went to him during due diligence and told him I would be raising the rent but trying to make it a better place to live, and he told me, "Well you got to do what you got to do," and then after I bought the park and sent him the rent increase notice, he called me up and told me if I didn't drop the rent on his 15 units, he would pull them out.
I said, "I just talked to you in due diligence and you told me it was fine." He said, "No, I said you got to do what you got to do. Now I've got to do what I got to do. I have to maximize my profits and since I have 15 of your ..." At that time there were only roughly 40 occupied, so almost half the occupancy, "I know I have you over a barrel and I want lower rent. If I don't get it, I'm going to yank them all out."
Now it costs about $5,000.00 to pull a mobile home out and put it somewhere, so I called his bluff. I said, "You'll never do it. It's $75,000.00 to remove them. Why would you do that? My parks will be the nicest in town when I'm done with it, my rent is reasonable." Nevertheless, he went ahead and found another park and he moved them all over there almost immediately. It was so painful on that park because it took me years just to get back to the occupancy I thought I bought when I bought the park. That's a problem when you have a high degree of Lonnie deal concentration.
How do you get over that hurdle? That's a mighty high hurdle, what can you do? Well, what you can do is you can see if you can buy the homes along with the park, so you have like a simultaneous closing of buying the park and then all the Lonnie deal homes in the park, but that's very capital intensive and there's no lending for that. If the guy says, "I'll sell you all the homes for $5,000.00 a piece and there's 10 homes and it's 50 grand," and you have 50 grand, then maybe you can pull it off, but if the guy has 100 homes and he wants $25,000.00 a piece, you're not going to be able to write a check for $2.5 million for those homes at closing clearly and the deal is effectively dead.
Lonnie deal concentration is one of the toughest items because there's no tie together between mom and pop who want to sell you the park and the Lonnie deal guy who could care less whether you buy it or not, in fact they may prefer mom and pop continue to own it because you know that mom and pop will keep the rents low or give them some other item that they like. It's very, very hard. A lot of these other items you can work with mom and pop to get over the hurdle kind of in a win-win format, you can work collectively. However on a Lonnie deal you really can't because they have absolutely no control over the behavior of the Lonnie. So Lonnie deal concentration is a very, very tough hurdle and that's why that comes in at hurdle number three but there's two more even tougher.
The second toughest, tallest, highest, most difficult to jump over hurdle in buying a mobile home park is a weak market. Now let's define what a weak market is. Here's how you scientifically figure out the strength of your market. When you're buying the mobile home park, it has a ZIP code. Go to BestPlaces.net and put in the ZIP code, and then up will pop a whole bunch of information on that ZIP code, median home price, it will have unemployment rate, median household income, various items. Then underneath that big box, you'll see a bunch of little additional links and one of those says Metro: and then hopefully, the name of the metro that it's in. Then you click on the metro. The metro is where you need to concentrate as far as if a market is strong or weak initially because that's where all the employment comes from is the metro. Often your ZIP code as a park owner is nothing more than just that little suburban ZIP and that doesn't mean a whole lot. It's all going to tie to how many jobs are out there, what they pay and how frequently they lay off.
The first question on the weak market is who are the employers in this market? There's three that we like. We like healthcare, government and education and I think the pandemic has proven that we were right for all these decades because those are the three that are essential businesses they really can't do anything to. However if your market is going to be dominated by one single employer, which we have also seen with the pandemic, that basically has to shut, let's say for example your park is in Orlando and you're right next to Disney World, well Disney World is shut and even with its reopening, it's a fraction of what it was. In fact I don't think the actual park is even open. So the employers are a big part of whether your market is weak or not, but there's other factors that make your market weak that are even more important.
Number one, what is the cost of housing in the market? To make a mobile home park work, all the rest of the housing has to be expensive. We call this concept contrast. What it means is you've got to have the contrast between high housing prices and the low housing price that your park affords. In cases where you've got a market in which the single family home is $100,000.00 plus and the average three bedroom apartment is $1,000.00 a month plus, that's a pretty healthy market. You bring in your mobile home park and you have the ability to live in that mobile home park for significantly under the apartment rate and if you own your home free and clear, in fact it's the least expensive you can live and no one can afford to buy the house who is one of your customers because it's $100 grand or up. So that's one element of having the strong market. Another item is vacant housing. Some markets can have high home prices but maybe no one can afford them because the market's no good and therefore you will have huge vacant housing rates. I've seen as high as 30% in a single market before. Again, another common trait of a very, very weak market.
There's a third item and this is probably the most important of all and that is how you do in your test ad. When you run your test ad to gauge demand and you're going to run your test ad based not on he metro name but on the name of where you're located at, that little city, maybe even the slang term for that neighborhood in that city, you're going to see total realtime how many customers respond to that ad. If you don't get a whole lot of calls, if you don't get at least 20 or 30 calls over a 10 day test ad run, then that means the market is probably just too weak.
Also let's talk about population of the metro. We prefer metro populations of 100,000 people and up. Why? Because that means you're plenty big. You have all the big box retailers, you have Home Depot, you have Lowe's, you have McDonald's, you've got Walmart. You've got a large Chamber of Commerce. You have a very diversified employment group normally. We like those big markets but what if your metro is only 10,000 people or 5,000 people? Again, that's a really, really bad sign, so how do you define when the market is weak and how do you fix it? Well, it's possible to have a population of 25,000 but if that's offset by enormously high home prices like you see in places like Colorado, then the market may still work perfectly well. How will you know? Well, you'll get good test ad demand. We find that a test ad is probably the single most important way I can differentiate between the weak market and the strong market because I don't really know that market that well coming in as an outsider but the locals sure do. If I run the ad and no one calls me, then that means the people have spoken, they have voted, they have said, "No, we don't want to live in that part of town. We don't want to live in that particular mobile home park," and regardless of what you see as far as housing prices and employers that nothing else matters.
We once did an evaluation of a mobile home park in Las Vegas. We could even see the Las Vegas Strip from the mobile home park, at least the tops of the buildings. However, the problem was we ran the test ad and no one responded, only got two or three calls in a 10-day run. Why? No one in Las Vegas wanted to live in that part of Las Vegas despite the fact it was an easy drive to the Strip, despite the fact it didn't look that bad to me, an outsider, a stranger. I did not realize that that area has a terrible reputation for poor schools and crime and other items and so therefore no one wanted to live there anymore.
Can you get over a weak market? Well, not easily, but let's talk for a minute how people have gotten over the weak market hurdle. Let's turn to the lady down in Orlando, Florida who owns a series of what are called sex offender parks. She knows her market is not strong enough to support the mobile home parks so what she did was she converted them to mobile home parks that only served sex offenders. She goes to the head of the prison system where the sex offenders are and when they get paroled, they have them call her to see if they have any housing. She's one of the few people that provides housing for sex offenders in Florida and as a result, her phone is ringing off the hook. She always has customers. She basically takes the mobile homes and rents them out by bedroom monthly and the model has been working very, very well for her. So there's a case of a weak market where someone got over the hurdle.
Another option would be if you're in a very weak market, perhaps you could go to Section 8. Now people have reduced incomes where the government is paying is the difference, so once again, you might be able to creatively get over the weak market hurdle but it is by far the most difficult. Bear in mind when you have a weak market, you can't get away from it. Even if you buy the park, if you can pull it off with seller financing, somebody in [inaudible 00:11:15] will have to get to ultimately get a bank loan and the banks don't like to make finances on weak markets so once again, despite all your hard efforts and years and years of grooming the park and grooming the rent, you may still never find anyone who can buy it because the banks just won't make a loan on it and that's a huge problem, so often the things you can do to fix it still won't work in the end because at the end of the day, it's still considered to be too weak, and don't forget about the next buyer.
Most everyone has learned what's weak and what's not. It's pretty easy to figure out that for a mobile home park to thrive, you've got to have a lot of demand and you have to have high home prices. When you don't have those factors, the number of buyers looking for something that doesn't meet that criteria are few and far between.
A weak market is a tough, tough, nearly impossible hurdle to jump over, but now we move on to the toughest one of all. This is the hurdle that I don't think anyone can jump over. I've never figured out a way to get over it and I don't know what I could even tell anyone or counsel them to do if they came upon one, and that is the mobile home park that is 100% illegal. Now you might say how is that possible? How could there be a mobile home park? How could there be a 100 space mobile home park with streets and homes and kids that play in the yards and people riding bicycles and yet it's completely illegal? Well, let me tell you some of the ones I've found over the years. I've found a gigantic mobile home park in Fort Worth and I loved everything about it, the location was great, it was just a great park, but then in diligence I went to the city, and they told me, "Oh yeah, that park. Well that park is illegal. It does not have an operating permit." "How is this possible?" I said. "How could you have a mobile home park this big, this full, and not have a permit?"
They said, "Well, when the guy built the park, he was well-connected in the city. He was a well-respected local businessman. He came in and said he wanted to build a mobile home park." We said, "No, you can't do it, it's the wrong zoning. He just went out and started doing it anyway and no one really wanted to get crosswise with him so they looked the other way while he built it and put in the utilities and the whole time without any permits whatsoever and ultimately filled the park." So I said, "So how does the movie end?" He says, "Well the person who buys the park from that guy, we're going to shut the park down. So if you buy that mobile home park, we can't stop you, but afterward, just as soon as closing happens you're going to be getting a letter from us demanding you shut the park down."
You see, mobile home parks come in three categories. You got legal conforming, that means it's completely legal, it meets all current ordinances. Then you have legal non-conforming, that means it's grandfathered, it does no longer meet the current ordinance but yet it's legal to operate. Then you have illegal, which means it never had a permit. It's completely different than a grandfathered park. A grandfathered park has very certain rights. In fact, in five different state supreme court cases, the park owner has won under the simple argument that he's grandfathered, he's protected from all new ordinances except health and safety. But if it's an illegal park, you have no such rights. You have nothing at all.
Then how do you get over that hurdle? How can you buy an asset that might be shut down at any moment? You can't finance it, bank isn't going to finance that ever, and there's no real purpose in owning it, right? Because if you own it and they shut you down, your whole investment is wiped out, maybe there's litigation that even comes in from the various residents in the park. Then what would the possible way you can ultimately solve that? Well the only thing you can do if you have an illegal mobile home park would be to go in there and fight it if you think the case is there. If you went to your lawyer and said, "Hey, I think this park is somehow legal. Is there a way it's legal? Is there an angle to make it legal?" If the attorney says, "You know what? Let me look here. Oh you know what, there was a provision in the law in 1968 that if you built a mobile home park that it was still okay in this town as long as you got it in and the power turned on by a certain date." If you could find some loophole in the transaction to try to render it from illegal to legal, that's about the only option you would have.
How would you do that? Well, you would have to find a good municipal lawyer. You would have to come up with a decent case that you think might work. Then you have to litigate it before you buy it. Now most moms and pops aren't going to really want to get involved in that mess, right? Because if you go in and put a microscope on the legality of the park, number one the city may go ahead and try and tear it down, number two it might make it impossible to ever find another buyer or another bank, but you simply have to to protect your interest. If mom and pop realize that an illegal park is completely a liquid asset, they may give you the ability to do it.
Now you could go to them and say, "I'll go and pay the legal cost because it may not really be that high." You probably would have to file a lawsuit on the city and hope they would settle it. If you don't you can just walk away from the transaction. That might be one possibility and mom and pop will still have to sign some paperwork in order for you to basically take over their rights as the owner and try and get it rendered legal, but it's a very, very, very tough construction. I have only ever seen it one time successfully hurdled. It was in a smaller market up in the Northeast. Basically the city didn't want to mess with it. That's why the person won. They saber-rattled and said they would file a giant lawsuit, they had this very convoluted, complicated explanation of how it truly was legal, and the city just didn't want to go there. They didn't have a lot of money. It didn't really mean much to the city. The park was already there. The damage had already been done. The neighbors already had a park as their neighbor and no one really wanted to pay the costs to go to court so they gave in. That's the only time I've ever seen it happen.
Is it possible to hurdle the illegal hurdle? Can you jump over that thing? Well, maybe but it is a very, very tough, nearly impossible thing to do, but if you think the material is there, the raw material is there, you might be able to pull it off, then you could, but again, that's why that is our number one winner, the number one spot on the top seven deal-killing hurdles is an illegal park. This is Frank Rolfe of The Mobile Home Park Mastery podcast series. Hope you enjoyed this, our top seven deal-killing hurdles, Part One and Part Two, and we'll talk to you again soon.