Benjamin Franklin is well known for his wisdom. And he nailed the importance of due diligence on mobile home parks when he said “diligence is the mother of good luck”. Indeed, due diligence is the key step to ensuring that the mobile home park you are buying will perform as anticipated, and be devoid of terrible physical and operational problems. We’re going to examine three important action steps to performing great due diligence on a property on this week’s Mobile Home Park Mastery podcast. If you like to only invest in successful properties, then this podcast is for you.
Episode 12: Why Ben Franklin Was Right - Three Action Steps To Better Due Diligence Transcript
Benjamin Franklin once said that due diligence is a mother of good luck and he was correct as much today as he was 250 years ago. In our over two decades of buying mobile home parks, one reason we've been so phenomenally good and lucky at always picking winning parks has been the fact we do very, very thorough due diligence. Anyone who wants to succeed in buying mobile home parks need to first apply themselves, doing some of the best due diligence that they can humanly do.
We're going to go over today three action steps to doing good and thorough due diligence. The first one is, always do your deal killers first. There are many, many mobile home parks out there, roughly 44,000 of them and you cannot afford to waste your time doing diligence on deals that have some potential issue that would derail your very desire to buy it. You want to identify those deal killers first, seek out the answers on those, and if those all pass, then move on to the more minor items.
What are the big deal killers? Well, such items as does the property have a legal permit? You'd be shocked how many mobile home parks there are out there floating around. They can be large, they can be in large cities, and nevertheless, they do not have the right to be there. When you buy a mobile home park, you're supposed to get a certificate of zoning. What this document from the city tells you is A, what the property is zoned, B, whether you are legal, illegal, or legal non-conforming, which means the same as grandfathered at how many lots you're allowed to have. You'd be shocked at some of the things I've come across over the last 20+ years of doing this that just blew my mind. Here's an example.
A mobile home park that was roughly about 30 spaces in size. Signed the contract, proceed down to City Hall to inquire and to get the certificate of zoning. I go to the zoning department and I say, "I'm looking to buy this mobile home park. Can you tell me real quick what you're going to show me, which I will later receive in writing as far as the number of lots it's allowed to have, whether it's legal, illegal, or non-conforming?" The zoning official comes back in a few moments and says, "There's no mobile home park at that address." I said, "Yes, of course there's a mobile home park at that address. I have it under contract." He says, "No, there's nothing there." I said, "Look, I was just there. In fact, you know what? Hold on. Here in my briefcase are photos of this mobile home park."
He takes the photos and he disappears again. He comes back five minutes later and says, "Well, I think I've unraveled what happened here. This property was annexed into the city and when it was annexed in, like we require of all annexations, the property owner had to give us a complete list of what was on the property. As you'll see here, he wrote just a house, one single family home." Yes, there was one single family home on the tract, but he kind of, sort of, forgot to add those 30 mobile home units. Now, he did that so he would go in with a much lower tax valuation, but when he did that, he also rendered his property illegal. He had no operating permit to have a mobile home park there. That's the kind of crazy things that we find.
We found a mobile home park in a large city, a hundred lots in size. Then, we went to City Hall, we found out that the city had never granted the park holder the right to have a park there and for some bizarre reason, they never had enforced the fact he had no right to be there, but they decided instead to spring that on the new owner because they liked the old guy that built it. They didn't know the new owner at all. These are the kind of issues that are a complete waste of your time.
What else are deal killers? Well, there's many other big deal killers. The fact that the property has master metered electric or master metered gas, that might be a deal killer for you. Obviously, failing the phase one examination. That would be a deal killer, but typically you want a go after the things that would make you say, "Nope, I don't want it," on the front end so you don't waste all your time. If you can go to the city and check on that permit day one, if you can check on whether it's master metered gas or master metered electric or whatever it is that most concerns you about the property, always do that on the very front end so if it doesn't work out for you, you don't waste time and can move on to the next property.
The next item is, you need to build your due diligence book and yes, we do an actual book. We wrote a course on it called 30 Days of Diligence in which you have to build a book. You take a three-ring notebook and you put in, what I call, slick sheets from my old days as a high school debater, some might call them vinyl sleeves, and you put each item requested in the chart into those sleeves. In the end, you've got a thick, little book that has everything you'd ever want to know about that mobile home park in one spot. However, when you're building that book, you need to always wear your lab coat. You need to think like a scientist. You're just there to gather the facts, but not to make any decision. Only after you've completed filling out the book, do you then review the book and decide whether you want to go forward and buy it or not. Many people make a terrible error when they do due diligence. They become way too emotionally connected to the property on the front end or during diligence, and then when it's obvious they should not buy it, they still go forward. Isn't that crazy? Why would you do that? You already know that the property is going to be a loser, yet you still go forward and buy it. They do that because they become so emotionally invested in it. They told their friends and family they were buying a mobile home park. They convinced themselves, hey, I can make this thing work. The due diligence doesn't really mean anything. I have a good gut instinct. Whatever it is, they lie to themselves and then they don't look in actual fact. Instead, the go down a path of fiction, which ultimately leads to their economic ruin.
You cannot work it that way. You have to be a scientist on the front end and then, after you've gotten all the science out of the way and you know all the facts about the property, then you can put your deal making hat on if you'd like, but now you know the reality of what you're getting into. So, never, ever get emotionally connected to any property. That's one reason we've sold so many properties over the last 20+ years is because we're not really emotionally tied to any of them. To us, they're all income properties. They may have some good attributes, they might have some bad attributes, but nevertheless, we'd sell any single one of them at the right price and that's how you should always approach things. These are merely income properties.
Never think using your ego. Never think, oh, I wish I'd buy that mobile home park. Wouldn't it be cool to be able to drive by that and tell people hey I own that mobile home park? Well, number one, this is not an industry that really is like that. It doesn't sound cool at a cocktail party to own a mobile home park. At least, it never has for me, but number two, you're going to get yourself in lots of trouble when you make those kind of emotional purchases that are not supported by the facts. So, just always think like a scientist, gather the facts and then sit back, read your book, and make a decision. In fact, even better, have other people read your book and make a decision. Why just you? Why not get two or three different viewpoints? You probably have some friends that are in the real estate business or people who are business people that have a pretty good outlook on business and what makes it work and doesn't work. Have them read the book. Have them look at the basic gray areas and decide whether they would take the gamble or not. That's the best way to do it, but just never, ever become emotionally involved.
Finally, the third action step to due diligence is never trust anyone. Gosh, doesn't that sound terrible? Here we are, a world where you're supposed to trust your fellow man and I'm telling you don't trust anyone. Don't trust that fellow man, don't trust that seller, don't trust their attorney, don't trust that real estate broker, don't trust a soul, because at the end of the movie, after you buy it, they're not going to do a darn thing if they maybe, you know, misled you a little bit. You have to be in charge of yourself, you have to never, ever, ever let your guard down. So, what do you do? Well, you rebuild everything from scratch. During due diligence, a smart buyer rebuilds the entire PNL based on only things they can tangibly see or hear that come from, directly from the source that they know is 100% accurate. On the revenue side, what do you do? You go out to the property yourself and you walk through the property with a legal pad or a clip board. You tangibly walk up and touch each home, write down the lot that that home is on, and any signs of life you have. If that home looks vacant for any reason, you write down that that home is vacant. You can then revisit that later with the seller and say, "Prove to me there's somebody in it because I don't see anyone in it." You may even ask them to get an estoppel letter, but that's what you have to do.
You have to go through and make sure the revenue is what it's supposed to be. If you see someone out in the yard, say, "Hey, how much is the lot rent here?" See another person in the yard, say, "Hey, how much is the lot rent here?" Don't tell them you're doing due diligence. Just tell them you're interested in maybe renting a lot for your mother in law. Try to gather as many facts as you can. Don't just go buy the rent roll. Don't just go by the PNL of the seller. For all you know, he cooked those books and those aren't very tasty cooking's. Go ahead and yourself verify everything.
On the expense side, what's neat about a mobile home park is you can tie a mobile home park expenses down to the penny. How do you do that? Well, what you do is you actually call the provider of everything in it and get the last three years of the actual cost. For example, if mom and pop tell you, "My water bill last year was $12,000," instead you're going to call the water company and say, "What were the last three years water bills in the mobile home park?" They may tell you $18,000, $17,000 and $19,000 and that's the actual number. Not what mom and pop are providing you. In cases where you can't call and get a third-party provider to tell you what it is, get three bids.
If mom and pop were mowing the park themselves and you're going to have to hire it done, then the best thing you can do is to get three mowing bids. Need an insurance price? Call good old Kurt Kelley at Mobile Insurance and find out the actual cost to insure it. Curious on the property tax? Find out the property tax rate per thousand of assessment and then work backwards knowing what you are paying for then you can then run the algorithm to see what the tax will actually be. The bottom line is, you've got to, underline the word got, to never trust anyone. Don't trust anyone. It must be scientifically proven to you that every, single number is accurate.
There was a case years ago of a guy that walked in to a Marcus and Millichap office in San Francisco and opened fire. He killed several people and they later found out he was a mobile home park owner. He was that upset about a mobile home park he had purchased and he could not pay any of the bills with. What had he done? Instead of actually doing any of the math himself, he'd relied, apparently, on a pro forma budget the broker had given him as part of the package. Then, assuming it must be accurate, he never had bothered to check it. What a pro forma budget is, it's a budget that a broker will often give you that shows how the property would perform at 100% occupancy. They do that to try to get your excited about what the park could do. He, instead, did not understand what a pro forma was and simply thought that actually was the PNL of the property. In the very first month, he couldn't make his mortgage payment and he was so mad that he went on a killing spree.
The bottom line from good due diligence is that does not need to be you. If you do good due diligence, you will never be put in a position where you're unable to hit your budgets because you built that budget from scratch. There's no more empowering feeling than knowing that you have gone out and single-handedly solved the mysteries of the earth regarding the revenue and expenses on that mobile home park. Sure, you can make some errors in it. No doubt, one day you'll buy a mobile home park and find that that home you thought was occupied is actually vacant, but that's a survivable error. That is something that you can solve.
There's typically enough fluff in any mobile home park you buy to overcome little mistakes like that, but instead, what would happen if, for example, the park it has a septic system and the septic system has gone bad. The seller told you, "Oh no, it's working great." It needs $200,000 of work. I've had that scenario before. Someone who called me up, just called me cold. Got my number off the internet. Here's one conversation. They called and said, "Hey, I bought this mobile home park and the septic is not working." I said, "Well, what's wrong with it?" "Well, the tank is leaking sewage everywhere." "Oh, well, did you have this checked in due diligence? "No." "Well, why not?" "Well, because mom and pop told me It was working great." "Okay, well clearly they were wrong. Have you looked in to what it would cost to fix?" "Yes, it will cost several hundred thousand dollars and I have no money to fix it." Okay, and then they said, "Yeah, there's one other problem. The EPA is fining me $10,000 a day for not having it fixed."
What an impossible situation this person put themselves into. Not understanding what a septic was. Not checking the field, but simply relying on mom and pop. You must never, ever, ever do such a thing. Every single thing that is in that mobile home park, every single moving part. Every little widget, every little piece you must identify and check out, to the best of your ability, that it is 100% accurate because if you don't do that, terrible, terrible things can happen and you don't want terrible things to happen with your investment dollars. Here's the sad part, you'll blame yourself forever because you could have easily avoided the issue. Just as that person could have easily avoided that septic disaster had they gone out and gotten a third-party report on it and really give it good due diligence.
Again, just remember old Ben Franklin. He was a smart guy. Again, due diligence is the mother of good luck. You must apply good due diligence to any deal to truly be successful. Now, on my next podcast, I'll be going over the three action steps of turning around a mobile home park. I think that should be pretty exciting. Again, this is Frank Rolfe with Mobile Home Mastery. I hope you've enjoyed this podcast and I'll talk to you again.