Nobody likes last-minute changes: particularly not mobile home park buyers. In this Mobile Home Park Mastery podcast, we’re going to discuss how to work around sudden changes in deal terms that can happen during diligence, financing – or even closing. You have to be flexible in forging some deals, and this topic should be of interest to anyone who has faced making a sudden decision on a property.
Episode 198: What To Do With Last Minute Problems Transcript
There's a long standing tradition in most mobile home park deals, maybe it's just our deals, that something always pops up near the end. You then have to figure out can you go forward with the deal as originally priced, or can you go forward at all in light of this new revelation. This is Frank Rolfe, the Mobile Home Park Mastery podcast. We're going to be talking about last minute problems and what to do when they occur.
Every time we do a deal, it always seems as we approach the end, some new bit of data just pops up out of nowhere and makes us question, from the beginning, does this deal still hold together? Now, these are the ways that we analyze these problems and I'm hoping this will shed some light on maybe how to apply some science when these last minute issues pop up.
The first thing you have to ask when it pops up, maybe it's a house you thought was occupied turns out to be vacant, is whether this is a structural change or is this a timing issue? Now, what do I mean by that? What's a structural change from a timing issue? That very example, the mobile home that you thought was occupied, a park owned home, and it turns out it is in fact vacant, the person ran off and the seller always claims they "just ran off," but you know they probably ran off three months ago, maybe longer. That would be more of a timing issue. If however you're looking at a park with 40 lots and the new revelation is it only has a permit for 35, now that's a structural change. You'll never get those five lots back, so you've got to re-price the whole deal accordingly because that's never going to happen. But when you have issues like a vacant home that's really a timing problem. You'll get that home reoccupied and it will cost you capital out of pocket to rehab it, and it will take some amount of time to get somebody in there so you won't have any payments for a while.
So can you survive that? How much does that quantumly add up to? You have to look at them very, very differently. If on that 40 space deal which only has 35 lots, those five lots might be worth $20-30,000. I'm going to have to renegotiate that deal down to maybe $100,000 to $150,000 to make me go forward with that deal. But that vacant park owned home, well that's something I might be able to get somebody in for $4,000. It's a quantum difference. So if it's a structural change, you've got to jump on it immediately with gust, the deal is bys going to now die unless you can make that last minute negotiating concession to get that solved. But on the timing issue, you might still go forward despite the fact it's not what you thought, but you might say you can afford to handle that little extra bit of negativity for a few months.
Another issue you've got to think about immediately is whether it's loan fraud. If you've gone out there and you've borrowed money to buy this mobile home park, is the revelation, the new change, put you in the position that you've committed loan fraud? You've told the bank it was 40 lots but it's only 35. Do you need to tell the bank, "Uh oh, this deal turns out it's only 35." Well the answer is probably you do. You've got to look at what the issue is and see how that impacts the loan. Now, going back to the park owned home example, the bank isn't even using the park owned home as collateral but at the same time you might think well, but they thought it was occupied and it's not occupied. You never want to get in the position of committing loan fraud. Nothing is worth that. So if it's a big deal, it's a big issue, certainly you'd have to tell the lender your account officer, whoever is at the bank that you're working with, what has happened. If it's a smaller item you may say well, it's not really technically going to be a problem with the loan. But any issue that pops up you've got to say, okay, this put me in a precarious position with my lender or is it not?
Next is whether this will derail me from being able to hit my goals. What do I mean by that? Well, I'm buying this park to make money. I don't know anyone who buys mobile home parks for any other reason. If they are, they shouldn't. Definitely you should not be in the park business unless you're trying to build an income stream and trying to build the value of the property. Can I still hit those targets now in light of this change? Or can I not? If the answer is well no I can't, I've got to renegotiate. If it's a big structural change that's going to hold me back from my destiny of where I thought I would be, I'm not going to do that to myself. Seller never disclosed it, I want the seller to go ahead and take a price adjustment. Why should I do it? They knew better from the onset. I didn't know what was going on. They probably knew that home was vacant. They knew those five lots didn't exist. Why am I the one who gets all the pain and suffering from that? So if I can't hit my goals I'm going to go renegotiate it because gosh darn it I want my goals.
Next, can the deal support the extra weight of this problem? So some deals have a lot of fat in them. You anticipate raising the rents, cutting the cost, filling vacant lots. Some don't. If you look at a park that's fully stabilized, 99% occupied, rents at market, how are you going to carry that extra dead weight of this new revelation of that home being vacant, of missing that extra lot? How will that work? The answer normally is it won't, it's not going to work. So if you can't support the extra weight you've got to put on the brakes and go back and renegotiate with your seller and say, "Look, this isn't fair to me. I've done all the numbers. I did everything I was supposed to do. I did it all in a very timely manner. I've met all my conditions of due diligence and financing. Now at this last moment this has sprung upon me and this isn't fair because this deal isn't meaty enough. I'm going to have to get some form of concession to fix this." Maybe the form of concession is that the seller goes ahead and puts some money up in escrow. If that home is vacant, you thought it was occupied, then it seems only appropriate he put up the money to rehab it and the number of months it will sit empty that you are going to lose, and get that money to you because it's not fair to put you in that position.
Finally, is there a quick offset? Is there something that can be done right now, here and now, very rapidly with the seller that they're amenable to fix whatever the unknown problem is. So if the unknown problem is once again you've got the vacant park owned home, well will they go ahead and start making payments on it as though the tenant was still in it, until you get somebody in the home? Can you come up with some creative solution that is once again fair to everybody? Because at the end of the day on all of these things, it's all about win/win deal making. That means both buyer and seller must be happy. It's not fair for the seller to spring things on you at the very end of the movie that makes you unhappy. If there's going to be any unhappiness, it has to be equally shared by both parties.
The bottom line is every time you do a deal, you have to anticipate on the front that things are going to pop up. It's just the nature of bringing old assets back to life. There are always unknowns or known's the seller didn't want to disclose to you that are going to pop up, and that's why you've got to always put a little extra fluff in every deal to account for those kinds of a problem. We all know that you can certainly raise the rent an extra $5 beyond what you probably put in your budget. You thought you could do a $30 rent raise on day 90, but you can probably go to $35, may be able to go to $40. A lot of times when we buy these things, we could literally pay a little more. We haven't maxed ourselves out on the final dollar, we're not wringing blood out of that final dollar to get the deal done. No, there's a little bit of fluff in there too. But always remember that when you're building these deals. You need to leave yourself room for error because invariably things always seem to pop up at the end. As long as you put some fat in the deal then you can account for those, you can move on, you can proceed. If you have everything down to the last penny any little issue is going to derail the train.
It's kind of like having shock absorbers on your car. You ever driven in a car that has no shock absorbers, maybe an old timey car like a Model A Ford or a Model T Ford? You hit the smallest bump in that thing it almost breaks your spine. Modern cars can hit a much larger bump at a much higher rate of speed and you won't even hardly feel it. That's how you need to construct your deal because it always seems there's something that was left out. Maybe not intentionally, but it always seems to fall out that way. But every time something does, no matter what it is, no matter what happens in the final days, maybe even the day before closing, you've got to apply science to the problem. Don't get all bent out of shape. Don't think gosh darn it I'm walking this deal, I can't deal with a seller who isn't honest to me completely. That's not smart, that's not good business. Instead apply science to it. Decide whether it's a structural change or just a timing issue. Does this mean I have to notify my lender? Am I committing loan fraud or is it okay? Can I still hit my goals or are my goals now completely unattainable? Can the deal support the extra weight or can it not? Did I not put enough fat into the deal that I can't handle this new hiccup that has occurred? And is there a quick offset to fix it, something the seller can do right now with his checkbook to make me go forward?
Now what's the worst thing we ever had happen at the very end of a deal? You know, we've had some times in the old days that at the very end there'd be this revelation that there weren't anywhere near the paying customers this person had said, but we got around a lot of that by today having the contract require the seller give us all those documents prior to the start of the diligence clock. Going back into the 1990s where it was very common that the seller didn't give you the diligence items until sometimes the week before closing. All kinds of horrible revelations would pop up. But in the modern world there's no reason for that. You need to get all the documents on the front end. Often, those documents are what contain all of those time bombs and if you only know what's really going on, how many units are occupied and who is paying and who is not paying, it's the very act of getting those at the end that often caused a lot of those derailments. Typically if you get all the documents on the front end and you follow your due diligence guide to the letter, you're going to have no problem in sorting out all of these apparent conflicts early on so they don't fester and pop up at the end. But even then, sometimes they just do. When they do pop up, don't panic, don't ditch the deal, don't get all worked up emotionally. Simply calmly apply the science. Typically you can solve it and still move forward. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.