Mobile home parks have the lowest default rate of any real estate sector, but when they do fail it always seems to be due to the same factors. In this Mobile Home Park Mastery podcast we’re going to explore the reasons why parks are sometimes unsuccessful and how to mitigate those risks.
Episode 408: Why Parks Fail Transcript
One of the great rarities in the mobile home park industry is for a mobile home park to truly fail. And by fail, I mean miss all expectations, go into receivership, default on their mortgage. These are things we don't hear a whole lot about in our industry. Now, we hear them all the time today with retail centers and office buildings and self-storage facilities and even apartment complexes, but very few mobile home parks ever really go down the drain. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to review why parks go down the drain and then the real-life things you can do to mitigate that risk. When I have seen mobile home parks go bad over the past 30 years, it's broken down into three basic categories. Bad diligence, failing to heed the results of due diligence, and being undercapitalized. So let's break those three items down. On bad diligence, what typically happens is, just as the name would sound, the buyer does not do the correct steps to unlock and uncover all the problems with the mobile home park, and as a result, they don't detect the issues lurking that are gonna kill them, whether it's bad market or environmental pollution. Whatever the case may be, the buyer, for whatever reason, doesn't put in the effort. They don't put in any work.
They basically throw care to the wind, and what typically happens is, not always, but most of the time, at some point in the movie when they own the mobile home park, whatever that weak link in the chain is, it breaks, it ruptures, and causes problems to occur. So not putting in the effort on due diligence is huge. Also, failing to get the bids to truly fix the problems. Because a lot of times what will happen in diligence is, the buyer will hear from the broker or from the seller, "Yeah, there's a problem with my packaging plant, but I can fix it, you know, for like 20 grand if it ever happens." And they don't then put in any effort to get competing bids. They just say, "Oh, well, why should I put in the effort? They said it will cost only $20,000 to fix, when in fact if they'd gotten the bids, they would have found it's not going to cost $20,000, it's gonna cost $250,000." Also, they failed to just look for the basic things that do kill deals, and the things that kill deals typically are giant CapEx problems, permit problems, a market so weak you couldn't give a mobile home away in, and they don't even bother, on top of doing poor and shoddy diligence, to even do the basic diligence on the most important steps. So as a result, they buy a mobile home park, and the minute they buy it, it's already injected with the cancer that's going to kill the park and kill the buyer.
Another problem that we see with parks that fail is that the buyer, even in doing decent due diligence, fails to heed the results. So let's assume a park has got a failing septic system, and it's gonna cost $80,000 to fix that failing leach field, but the buyer, rather than say, "Uh-oh, well, I'm probably gonna have to come out of pocket $80,000 fairly soon," instead says to themselves, "Well, I bet I can get by with it. I bet it won't pop up. I'm only gonna own this thing for five years. I'll probably get away with it for five years. I'm not going to worry about it too much." Or maybe in due diligence, the city said, "You know what? If you try and put a mobile home on that vacant lot, we'll fight you. We won't give you the permit." But the buyer thinks, "Oh, you know what? Once I own it, I'll get in with that inspector. I'll brown-nose him, and I'm sure I can slide that home in without any problem at all." Or maybe the survey comes back showing the park is right not only in the floodplain but in the flow way with a base floodplain elevation of 10 feet tall. But the buyer says, "Yeah, well, sure, there's a little bit of risk of floodplain, but it's not gonna rain that hard. It's all going to be fine."
I'm sure you've heard that response from people down in Kerrville quite a bit recently, situations where people knew there was a problem with the property, but they failed to give that its due and lofty respect and, as a result, deliberately put themselves in harm's way. The final item that causes parks to fail is being undercapitalized. And in that case, what happens is the buyer uses all of their capital just on the down payment, and they have no money remaining for any CapEx or any kind of rainy day fund. So literally, they put everything on one position on the roulette table, and if it goes bad on them, they have no way to maneuver. Also, it can be in undercapitalization because when the park comes up for renewal, let's say they bought it with seller financing, the seller was like, hey, yeah, but just put 10% down, and then later on, the balloon comes due. They have to refinance with the regular bank. The regular bank says, "Oh, you've got to put down 20% or 25% or 30%," and they don't have the capital to take and transfer the loan from that park from mom-and-pop seller carry to conventional financing. So therefore, the park goes into default, termed default, because they can't get a new loan on it 'cause they're undercapitalized to get that new loan. Or one of those problems we've talked about, whatever it may be, just rears its ugly head, and they didn't do the correct budgeting for what it was gonna cost.
They thought that that packaging plant repair would only be $100,000. It turns out to be $300,000. And again, there's no money there to help bridge the gap from the reality of what the numbers are to the fantasy of what they thought it would be. And sometimes it's not even fantasy. Sometimes you can do good due diligence. We all know what happened during the whole Biden era when prices on things just went up like crazy. It's very possible that that was a $100,000 repair back when you bought the park, and that the price tag has grown over time to $200,000, $250,000. But again, you don't have the money to fix it. And then finally, people may not have put in sufficient effort to have a plan B and a plan C on all these many things that they discovered in diligence. And the problem is if they'd only put more time and effort into thinking beforehand, they would have had a lower cost solution perhaps. But often they don't do that. And again, that coupled with their lack of capitalization forces that park to go into default. Now, how do you mitigate that risk? How can you try and not have those things happen to you? Well, it's pretty simple. Just do the reverse of everything I said. Do really good and thorough due diligence. Mobile home parks give you the freedom to do diligence at such a high level that if you do a good job, it's very rare you will miss the mark.
You know precisely how many customers you have. You know precisely what they pay. You know precisely when they pay. And there's no real moving parts in the park. There's not that many areas you really have to put a magnifying glass on. So it's not that hard to do terrific due diligence. Then why doesn't every buyer do it? They're lazy or they just don't know what they're doing. But you can fix that. You can mitigate that. And then paying heed to the results, treating them with their due respect, that's more of an emotional issue. Some buyers say, "Well, I'm gonna buy that mobile home park." You never want to say that prior to the very moment when you complete your diligence because it may turn out in due diligence there's things bad about it and you shouldn't buy it. But some people get in this mindset, "Oh, no, I've got to buy it. I told everyone I was buying it." Don't do that. Keep your white lab coat on until all diligence is complete. You never know what will pop up. You may have to go back and renegotiate. You may fail in the renegotiation.
But just don't get too emotionally attached to the property. Because a lot of times I've noticed that on parks that fail what happened was the people became so committed to the park that even when they knew they shouldn't do it, they did it anyway. Kind of like someone who has a 1031 and they've just got to get it completed in a certain time frame and gosh, darn it, they're going to push forward even though they know it's just a terrible idea. And then, finally on being undercapitalized, if you've got $300,000 to spend on a mobile home park, do not put $300,000 on the down payment. Buy a park with a lower number, $200,000, $150,000, something that gives you some additional money that you can hold back for CapEx repairs or a rainy day issue. And if you find a park that you just have to buy and it is going to take all of your money on the down payment, then I would start now, not later, to find potential sources of money if you need it. A financial partner in case you get into distress or some additional way to tap some form of credit facility to get that money in your pocket so you're ready to go. The truth is, and it's kind of sad, that almost every mobile home park I've ever seen fail in the past 30 years didn't have to. It could have been solved either through not purchasing it or making sure you had the money at the ready to make the repairs that were needed.
But unfortunately, in today's fast-paced world some people shoot first, get asked questions later. Not a good strategy when you're buying a mobile home park. If you don't want to fail, put in the effort, put in the time, heed your diligence, and make sure you've got money in the bank. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon. Hope you enjoyed this. Talk to you again soon.