When you’re looking at buying a mobile home park, the seller will always tell you glowing stories of how great and valuable their park-owned rental homes are. They’re lying to you. In this Mobile Home Park Mastery podcast we’re going to expose the top truths about rental homes that the sellers will never tell you.
Episode 443: What Sellers Don't Tell You About Rental Homes Transcript
When you go to a car dealer looking to buy a car, the salesman will tell you how great that model is, how well it will hold its resale value, how dependable it is. And then if you go in later in the day to sell the car back to them, they'll tell you, "Oh, that brand, nobody wants that. That car breaks down all the time. It's only worth a half of what you paid." And in the same way, mobile home park sellers are doing the same thing when it comes to park-owned rental homes. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're gonna talk about all of the many lies and deceptions and untruths that most sellers will tell you regarding their park-owned home rentals. Now, some of these they don't really know because they've never really done the math, and others they know full well and they're hoping that you just won't be bright enough to figure it out.
So here are some of the untruths which many mom-and-pop sellers will tell you regarding their rental homes. Number one, they don't bother to tell you that the average park-owned home rental is gonna cost between $200 to $300 a month to maintain. That is a huge amount of money if you look at the amount of rent payment for the home that's coming in the door. Now, to truly analyze park-owned home rentals, you have to subtract the lot rent. It's only fair. You could give the home away to whoever's in it for free and they would start paying you the lot rent free from any possible involvement you have on the rental part of the equation. And when you take out the lot rent from the park-owned home rent and you take out the taxes and the insurance and $200 to $300 a month in repair, what do you end up with? In most cases, you end up with zero. And that's the big issue is no one ever wants to admit or accept the fact it costs an exorbitant amount of money to keep those rental homes in service.
Now, you might say, "Well, now wait a minute, I have a rental in my park and I'm not running $200 to $300 a month." Okay, great, let's just give it some time. Invariably, the tenant is gonna leave because unlike people who own their own homes in mobile home parks where the average length of tenancy is 14 years, on the park-owned home rental side, it's often not even a year. And when they leave, they will have broken who knows what. You'll go in the unit for the first time, you'll see the carpet is ruined, you'll see a kitchen cabinet has fallen off, you'll find just every problem known to man. And then suddenly, even though you thought you were gonna beat the $200 to $300 number, suddenly now you're back on average to $200 to $300 a month.
Also, when you look at the people living in these rentals, you will find that they are typically completely non-vetted. There was never any application process done. We don't know anything about them other than perhaps their name. Many moms-and-pops don't do any screening at all. They don't even get a copy of a driver's license. Somebody comes in, wants to rent the mobile home, they take down the name they give them, and as long as they can pay the first month's rent and whatever deposit there might be, they're in the door. And as a result, often the people in those homes cannot truly afford to pay the rent or to maintain the property. And that's what often leads to the serious lack of continuity on the part of people who live in those homes. That's why they will last rarely even a year at best. Also, the park-owned homes that most of your moms-and-pops are renting are in terrible condition. They have not been properly maintaining them, never did. Even when they knew there were issues, they would just try and gloss over it, never make any structural modifications that need to be done. And as a result, when you take the plunge and step into their shoes, you're not gonna run it like that. You want the AC to work, you want the heat to work, you want the plumbing to work, you want the lights to turn on and turn off when you throw the switch. And you will not be accepting of the condition many of these moms-and-pops have left the homes. And as a result, you will once again be thrust into a huge amount of capital outlay to get them back into good condition.
So if it's not bad enough that the park-owned homes will need $200 to $300 a month of repair on average, the average rental that mom-and-pop will thrust upon you probably needs anywhere from $4,000 to as much as $10,000 of capital outlay day one before you can truly even get the home rented in a condition that a normal landlord would want it to be. And there's a whole lot more capital out of your pocket that mom-and-pop did not remind you that you better budget when you bought it. It's also a fact if you go through any mobile home park in America and you identify the worst homes in the entire property, it's always the ones that are the rentals. Those are the ones who typically have all of the rules infractions. And it's all because they simply don't care. There's no pride of ownership. See, that's one of the great things about owning a mobile home park is the tenants own the homes and you own the land. So you're both stakeholders in the business, but when you take out the stakeholder portion on the part of the tenant, all you have is basically a detached apartment complex where nobody really cares, no one maintains the property. And that's unfortunately what happens with those rentals. When you sell them off, what do you end up with? Stakeholders. People who care, take care of the property, touch up the paint, keep them clean. But as long as they remain rentals, they are typically always the worst-looking homes in the entire mobile home park.
And it goes without saying that your good tenants, the ones who own their homes, the ones that pay like clockwork, the ones that do everything right, they hate having these rental tenants who are not good members of the community and are not stakeholders. It's not really fair to have the person in the rental home look out on all those very well-maintained privately owned homes and have the people in the privately owned homes who maintain their property looking out on that terrible-looking rental. So when you add it all together, the bottom line is the rentals simply don't, nor will they ever really work if you're trying to make the business model a successful one. And that's the big thing the moms-and-pops poorly educate the buyers with by trying to claim that the rentals are an important part of the business model. They never are and never will be. If you talk to moms-and-pops, which I have for the past 30 years continuously, you'll find that maybe the problem, the reason they don't recognize the failures of the rentals is they never simply subtract the lot rent out of the equation. If you talk to many moms-and-pops, let's say a guy has 10 rentals that rent for $800 a month. He sees that as $8,000 a month of income. But in truth, if the lot rent is $500 a month, then $8,000 less $5,000 leaves only $3,000 a month. And from that $3,000 a month on those 10 homes, we'd have to take out repair and maintenance and tax and insurance. And suddenly that $8,000 a month that he tries to claim is coming from rentals as positive actually has now turned negative. You'd be far better off just simply giving the homes away.
And that's the big moral always of park-owned home rentals. We like having the homes on the property. I would much rather buy a mobile home park with rentals on it, which I can convert to privately owned, than one with vacant lots. It's a lot harder to go out and find used and new homes to fill those lots and take all the steps to get them done until I achieve tenancy. So I don't mind having the rental homes. But the key item is, from the moment you hit the ground running in any turnaround, your sole objective should be to convert those homes from rentals into privately owned. That's what makes our business model work. It only works when the tenants actually own the home and are stakeholders. That's where the property looks its best. That's when your net income is maximized. That's when your park will achieve the highest amount of value. So when you're talking to mom and pop about their park, about its different attributes, and if they try and tell you how great the rentals are, you can sit there, you can smile, you can nod your head, you can pretend you believe in what they're saying. But on that one single point, you must never forget, it's not the truth. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.