Besides founding the retail powerhouse Amazon, Jeff Bezos has recently been reflecting on some of his fundamental principles for success, of which the "Regret Minimization Model" is the most interesting. In this Mobile Home Park Mastery podcast we’re going to review what this theory entails and apply that to the purchase of a mobile home park.
Episode 413: Understanding Jeff Bezos' "Regret Minimization Model" Transcript
In 1994, Jeff Bezos left a very good day job as one of the youngest directors at a Wall Street investment banking firm to start an online bookstore called Amazon. People thought he was crazy. Why would he leave such a promising career to start something up in a garage? But he did so based on what he now calls his regret minimization model. This is Frank Rolfe of the Mobile Home Park Mastery Podcast. We're going to talk all about what the regret minimization model is, according to Jeff Bezos, then how that relates to buying a mobile home park. So turning the clock back to 1994, which really doesn't seem that long ago, you had somebody who had this idea that he could link all of the used books in America and even the world together and sell them on the internet, this new thing called the internet. He didn't know if it would work, but he felt strongly enough about the concept that he realized that he just had to give it a try. Because while I talk all the time about with mobile home parks typically trying to go to the end of the movie to figure out what the value will be when you get it effectively full at full market rent and all the costs correct and then seeing if that's worth the effort, Bezos likes to go to the end of his lifetime, not just the end of a project, but the end of his lifetime. He picks the age date at 80 and he says, if I don't do this, whatever the case may be, will I regret it when I'm 80? Will I look back on my life and say, gosh, you know what? I should have taken the gamble. I should have taken the shot because if I had, maybe my life would have turned out differently. And it didn't hold true just for Amazon. He's done some other things. He'd done space exploration and other items. But in every case, he has tried to follow to the letter his concept of regret minimization. He does not want to go to his deathbed regretful of actions he did not take. Now, how do you apply that, you might say, to mobile home parks? How do you use the Jeff Bezos regret minimization model? Well, let's first break it down into two elements, the micro and the macro. Let's start off with the micro. Utilizing his theory, the question would be, if you're 80 years old, will you regret not buying that mobile home park? Is that deal just so good you will never see it again? We all know that there are five parts to any mobile home park deal, and they must all, as a sum of the group, add up to the favorable condition to buy a park. And they spell the word IDEAL.
Infrastructure, density, economics, age of homes, and location. And often you'll hit a deal that scores well in almost all of them. You'll never find any of the scores great in all five categories, because typically to have a great location, the L, you're going to suffer from a lesser infrastructure and density, the I and the D, because parks with the good locations were built even farther back. Those parks often date even to the 1940s, mostly the 50s. If you want to find a park out on the beach in California, you know it's going to date to somewhere between the 1940s and the 1960s. And as a result, the infrastructure will be old, the density will be small lots. But nevertheless, you'll often come upon these deals that are just so good, you'll say to yourself, you know what, I don't think I'll see this combination of factors again at this price. And sometimes that includes with huge opportunities to raise rents to market levels, to fill vacant lots, to cut unnecessary costs. And your gut instinct will be, you know what, I need to buy this thing. And if you violate that gut instinct, if you know you should buy it, but yet you do not do it, well, you violated the Bezos regret minimization model, because you'll look back later and say, man, if I had only bought that mobile home park, I would have made a million bucks. I would have made five million bucks. I would have this additional income stream that would make my retirement so much more appealing. And it's not always the park itself that can trigger the regret minimization model. Sometimes it's the way the note is structured. I know someone who found a mobile home park down in Texas, and it was unique, not only in the park, the park had very good attributes, but the financing was spectacular. And it came with built-in seller financing that was virtually fully amortizing, 20 or 30 years long. And they called me to get my opinion. I said, you've got to buy this thing. If you do not buy that park, you will never see a debt structure like that ever again. Sellers will carry debt, sometimes for three years or five years. Maybe you can cajole them up to seven years or sometimes even 10 years. But you never see a seller carrying a note all the way to the end. Think how much comfort that gives you. You don't ever have to go out and refinance it. You'll never have to go find a bank and ask their permission to refinance it.
You'll never have to go out there and get any third-party reports or any cost or legal cost. What an incredible deal. You just have to buy it. And thankfully, they did. And over the years, they've let me know how well that park has performed for them. But that's the micro side of mobile home parks. When you see a deal that seems rare, it's so attractive, you just have to buy it. Because if you do not buy it, I guarantee you, when you reach the age of 80, you will look back and you will regret it. But there's also a macro side to regret minimization. And on the macro side is, you need to do something. We live in a really screwed up world today. Nothing is for sure. We've got a government that is shut down. It's approaching the longest shutdown in history, and I don't know if it will ever end. And in just most recent weeks, you've seen massive layoffs of people who thought their job was just as good as gold until the end of time. Thousands upon thousands of management level layoffs. And those people, they put their all into their job. They showed up every day. They never missed a day at work. And yet the reward for all of that was they were let go. Today, you've got to build an additional income stream or two. If not, you're at the mercy of whatever your single income stream is. And we all know right now, it's not good to be reliant on others, particularly when the economy is as screwed up as it is. So if you don't get into mobile home parks, if you don't at least give it the shot, you know you're going to regret that when you're 80 years old. You can tell yourself, well, it might have worked, it might have not, but at least I gave it the shot.
Now, right now is a great time to buy a mobile home park. People would say, well, you're in the mobile home park business, of course you will say that. No, I've been in the mobile home park business for 30 years, and I'm pretty well known about just speaking the truth, and I have since inception. I've told you the good times, the bad times. The reason now is such a good time to buy a mobile home park is that interest rates, if they're going to go any direction, they're going to go down. And history has proven whenever you buy real estate in an environment in which interest rates are declining, you do very well. Because even if you never improve the NOI of the park $1, the value goes up because interest rates go down, so do cap rates. As interest rates go down, so does the cost of your monthly mortgage. So this is the perfect time to be getting into the mobile home park business. It's also a time in which mobile home parks have never received as much attention in a positive manner. When I got in the business 30 years ago, you couldn't get financing. Banks would laugh at you. I called my original bank to do one of my financings on an early mobile home park, a bank that I had done a phenomenal job of all of my lending there for 14 years with my billboard company I built from scratch. The guy wanted nothing to do with it. He's like, that industry is a joke. And he was comparing that to the billboard industry, which itself is a little strange, I think we would all admit. But today, mobile home park loans are the most desirable ones out there. We have the lowest default rate. We have access to Fannie Mae and Freddie Mac, which only residential loans can achieve. So you can actually do really well right now with parks because parks finally have the respect that there's liquidity and there's financing. And at this very moment, you're about to see interest rates start to decline. We're already seeing that firsthand. We've had two cuts by the Federal Reserve. We also know that Jerome Powell is leaving the building in May. And his successor will no doubt be handpicked because they want to lower rates significantly. But most importantly, we know since 1950, in every recession, rates have dropped about an average of three points.
And we know we're about to go into a recession now. Everyone can feel it. It's just a question of exactly when it occurs. Is it tomorrow? Is it a month from now? A few months from now? None of us really know, but we know it's lurking on the horizon. The bottom line is if you don't look into mobile home park buying at this moment, at the very moment when rates are starting to decline, you will definitely violate the Bezos regret minimization model. And when you're out there looking at mobile home parks and you see the really good ones that have all the outstanding fundamentals you want to buy, or perhaps terrific financing again, you have to buy it or you will violate Bezos rule. Now Bezos doesn't guarantee, and he didn't know with Amazon if it would truly be successful or not. The whole point of his concept is if you don't take action, you will later regret it. You want to think like a person of action and act like a person of thought. You have to have the two components. Bezos would not have jumped out of his good, solid-paying job to start Amazon if he didn't have a good feel that the concept had opportunity. There was an intelligent decision. But when you see those kinds of opportunities, you have to take hold of them and run with it. This is Frank Rolfe with Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.