“Lonnie Dealers” are investors who buy and sell or buy and rent mobile homes inside mobile home parks, labeled after an early advocate of this concept named Lonnie Scruggs. And although this investment program had a lot of interest in the 1990s, the number of individuals engaged in this sector has been continually dwindling. In this Mobile Home Park Mastery podcast we’re going to explore the “Lonnie Deal”, its waning popularity, and the resulting impact on the mobile home park industry.
Episode 396: Where Have All The Lonnie’s Gone? Transcript
In 1992, Lonnie Scruggs wrote a book called Deals on Wheels that talked about a business opportunity in buying and selling mobile homes inside mobile home parks. It was the birth of a cottage industry. Lonnie drove all over America, literally selling these books out of the trunk of his car. You couldn't go to any kind of event where it was all about mobile home park investing or just new business ideas without Lonnie showing up, hawking as many of these books as he could. And the basic premise was simple in Lonnie's book. You buy an old used mobile home for a couple thousand dollars, and then you sell it to somebody else for $10,000 with a couple thousand down so you get all your money back and an $8000 note at 10%. And Lonnie claimed if you repeated his theory over and over and over, in no time flat you could build a million dollars of notes at 10%. At least that was the theory anyway. The problem is that reality did not prove out to be as successful as the book would suggest. And many people got sucked into the Lonnie concept because it showed a very low price point to get in, and it offered vast riches without a lot of effort.
Now, unfortunately, many people who were doing Lonnie deals have elected to stop doing them, and suddenly the sheer number of Lonnie dealers is declining. And the big question is how will that impact the mobile home park industry? This is Frank Rolfe with the Mobile Home Park Mastery Podcast. We're going to explore the world of the Lonnie dealers, review why they are starting to diminish, and then try and forecast what the impact will be. So Lonnie was a nice guy. I met him at a lot of events back in the olden days, back in the '90s. And he was a very early adopter of the concept of trying to make money with mobile homes because back in the '90s no one really cared about mobile homes or mobile home parks. And if you were even dabbling in mobile home parks or mobile homes, you were considered kind of a weirdo who should move on to one of those better asset classes like strip centers or self-storage. But in fact, Lonnie was just ahead of his time. He saw opportunity when others did not. And in many ways, he kind of helped the mobile home park industry 'cause a huge number of Lonnie dealers went on to buy parks.
So there's certainly nothing wrong with anything that he did. He, in fact, is no longer with us. Lonnie died many years ago. But many people still have a fondness in their heart for Lonnie, and he was always a fun guy to listen to speak and to talk to after an event. But the problem has been that the Lonnie deals haven't worked according to plan. And one of the big problems is that when they brought in the SAFE Act and Dodd-Frank back in 2008 through 2010, it pretty much put a dagger in the heart of Lonnie's theorem because suddenly overnight you could no longer create notes for mobile homes unless you became a SAFE Act licensed dealer. Now, Lonnie probably, in a good way, died before the SAFE Act and Dodd-Frank came on the scene because it would have negated his book. It would have required a complete revision of the business model. So Lonnie never saw the fact that nor would he have imagined that the government would have been crazy enough to create an environment where you could not create notes on homes. But yet they did. And as a result, many people who read the book and wanted to do the buy and then resell and carry paper concept were denied that opportunity.
So for many Lonnie dealers today, they can't buy and then sell. All they can really do is buy and then rent. And as we all know, there's no greater curse you can have in life than renting mobile homes. The repair and maintenance would just absolutely eat your lunch and take any perceived profitability out of the mix. But there are other reasons why we're starting to see fewer and fewer Lonnie dealers out there. One is that park owners are much more aggressive in buying used homes today. Back in the '90s, Mom and Pops rarely dabbled in buying mobile homes that might be come up for sale in their park. They would just let others do it. They didn't want to get involved. But the modern mobile home park owner is, in fact, very involved in sales transpiring in their property. They're often the first person on the scene to buy the home. And all that additional competition has been gravely injuring Lonnie dealers who kind of relied on flying under the radar and are unable really to compete with park owners who typically get ahead of them in knowing homes are even coming up.
Another big problem is that mobile home park lot rents continually get higher. And as a result, there's a much smaller margin for the Lonnie dealer because to find a renter today at the max they will pay, if you take out a $500 or $600 lot rent as opposed to the old $300 lot rent, and let's say you rent the home for $800 a month, well, your margins are basically halved. And really, you're only going to see that advancing farther as time goes on because mobile home park lot rents are ridiculously cheap, unsupportably so, and only gonna go up significantly in the years ahead. Also, and this was a big issue which Lonnie could not have foreseen, did not exist in the '90s, was the introduction of financing programs through companies such as Performance Equity Partners, PEP out of Chicago, or 21st Mortgage's Cash Program, or Zippy, or Triad. Those things didn't exist back then. The whole concept of floor plan lenders making capital available to mobile home park owners to buy and sell used and new mobile homes, no one ever saw that coming. That was really triggered by Warren Buffett buying out Clayton Homes back in the early 2000s. His vast amount of capital kind of made the business model possible.
Then after he was the forerunner of the industry and tested it out, others got in on that also. But when you have floor plan lending available, then park owners are able to buy and sell homes themselves, and they don't really need an intermediary. It used to be, back with Lonnie Dealers, the big attraction to them was that they did what you didn't want to have to do, and that was spend capital to fill lots. So they would buy a used home, they might even buy a new or used home and bring it into your park. Then you'd say, "Well, this is fantastic for me, I now get my lot ramp, didn't have to put a penny into the whole thing." But now today, you don't have to put a penny into filling lots either. You can buy a new home through a floor plan lender, or you can buy a used home, bring it in, rehab it, sell it, get all your money back and do it again. That's a huge change in opportunity for park owners today. But one thing we didn't think about back in the olden days with Lonnie Dealers, which we now all know, is there was one hidden problem with Lonnie Dealers having lots of homes in your park. And that is that most lenders and a lot of buyers are not very happy about parks in which one person owns a large number of the units.
Because the beauty of our industry is diversification. If you have a 100-space mobile home park with 100 tenant-owned homes, and one of them gets mad at you and runs away, you only lost 1% of your occupancy. If you have a retail strip center with three tenants and one tenant runs off, you just lost 33% of your revenue. So we learned over time, but many people didn't learn it until they went to sell or refinance their park, that having a lot of Lonnie Deal homes in there was probably not a very good thing to have happen. Today, you probably want to hold your Lonnie Dealer homes with any one Lonnie Dealer done probably not greater than 5% or less of your total home occupancy in the mobile home park. In some ways, the decline of the Lonnie Dealer has probably benefited park owners because some were unaware of this hidden time bomb. If you had a park, let's say at 70% occupancy, and you filled the last 30% of occupancy with nothing but Lonnie Dealers, you would think you were ahead. You'd say, "Look at this, I bought this thing at 70% occupancy, I've driven it to 100%. What a total success I am." Until the submarine moment you went to refi or sell the park, and the bank or the buyer said, "Oh, no, I can't buy your park after all, or I can't make you the loan because you have too many homes held by one group. If they pulled out, you lose a third of your occupancy."
And of course, that would be true.
The bottom line is that it's perfectly natural for business things to come on the scene, grow in popularity, diminish, and start to die out. Now, Lonnie dealing as a fundamental investment option still works decently in some markets. You still see people doing it in abundance in places like Denver and Austin. Anywhere where the home prices are high, there probably is the ability for someone to get in on that, to kind of arbitrage mobile home prices from low to high. But through most of America, it occurs to me we'll probably see a decline in the sheer number of Lonnie dealers going forward. But in the end, as with most things, that's probably not bad for mobile home park owners. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.