Ep. 2 | 11 Steps to Consider When Evaluating a MHP Purchase

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On this episode of The Mobile Home Park Lawyer Podcast, Ferd gives you 11 steps to consider when evaluating a mobile home park purchase. These 11 steps could help you find the perfect deal and makes life that little bit easier when you’re in the negotiation stage. Enjoy!

 

“For beginners this will be invaluable, for experienced buyers and operators this can serve as a crosscheck or as a supplement to your current processes..”

 

HIGHLIGHTS:

0:00 – Intro
1:12 – Step 1: Establish the geographic location in which you want to invest
2:56 – Step 2: Evaluate the size of the purchase
3:45 – Step 3: Evaluate the current occupancy, and quality of the park
4:11 – Step 4: Evaluate whether you are getting a fair and reasonable price
7:06 – Step 5: Evaluate infrastructure and utilities
8:32 – Step 6: Evaluate its bankability. Can you get a loan for the park? What is the overall risk?
9:06 – Step 7: Evaluate the market. Get a feel for the housing needs to help you with pricing.
10:18 – Step 8: Evaluate your gut feeling. Change your focus from macro to micro and find out whether you’re going to feel good about the deal
10:51 – Step 9: Begin to a detailed financial analysis on the park.
12:09 – Step 10: Draft a letter of intent. This is an offer to purchase, sets the initial terms of the deal and should be as detailed as possible.
15:20 – Step 11: Draft the contract.

 

RESOURCES:

Evaluating A MHP Purchase

LOI template for MHP

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation. Here today again to talk about a new and exciting topic, evaluating a mobile home park purchase.

Are you unsure about how to get started? Do you worry about making a mistake? Do you want to avoid wasting time? Well, in today’s episode, we’re going to go through a number of things that can help you and prepare you to buy a mobile home park. For beginners this will be invaluable, for experienced buyers and operators this can serve as a crosscheck or as a supplement to your current processes. Today, I’m going to talk about 11 key steps to consider when evaluating a mobile home park purchase.

I think when you enter the mobile home park space, the first thing you need to do is you have to identify the location or the geographic region that you want to invest in. So for me for example, I’m in Kansas City, Missouri here. I typically invest in the Midwest, Kansas, Missouri, Nebraska, Iowa, Illinois. I’ve looked at parks and other communities. I actually own pieces of parks in a couple of other States. But as far as I’m going to be the main operator, personally, it’s going to depend on a number of factors that we’ll go over here. But really the workload, the risk factor, my need to be involved as an asset manager, but really that location is key. I’m not looking for the mobile home park in Alaska. I’m not even looking at the mobile home park in California or Florida. It can be hard for me to watch it. And those are different markets altogether, but that’s me. Some people have great success with a nationwide portfolio. I’m more of the, in my backyard and obviously there’s not a lot of product in my exact backyard or in my city. So I have to go kind of regionally. I’ve looked at parks nationwide, but it’s just been harder to pull the trigger for one that’s not in my location. So I think that’s one thing you need to figure out first when you’re evaluating a mobile home park is what distance from you are you comfortable with? And then as a supplement to that for locations. Which Metro size? I’ve bought mobile home parks in metros that are 10,000 or 15,000 and also in the millions. So obviously most people in this space, most of your competition are probably looking for the same type places, metros of 100,000 plus, diverse economies, all that kind of stuff. But to get in the game, you may need to cave on some of these criteria. I’m not asking you to take on undue risk, but being overly picky on your location may be tough. It maybe tough to get in the game, but that’s the one thing you need to fully understand when evaluating a mobile home park purchase.

The second item that you need to evaluate is the size of the purchase. By size I really mean the purchase price, kind of relative to your appetite, if it’s your first deal, you might want to go after a $20 million deal, you might not be able to have a $20 million deal. A lot of people try to get going in the, $250,000 to $750,000 price point. I mean, I looked at a deal last week, it was $235,000. I looked at a deal two weeks ago, it was $25 million. So at this point in my career, I’ve got a wider range for the size of my first purchase. And I’ve got established investor relationships and things like that, where I can put together a team, where five years ago it was just dad and me. We couldn’t buy a $25 million park. We still haven’t bought one at that price, but it’s in the realm of possibility where it wasn’t five, six years ago. So really you need to look at your risk tolerance, look at your own financial capacity of you and your team.

The third item that you should look at when evaluating a mobile home park is the current occupancy. And by that, I mean the current number of lots and the current number of occupied lots. And if it comes with park-owned homes, you should also look at the current number of park owned homes and their occupancy. These things are going to really dictate how much work you have to, how much upside you have, how bankable the deal is. And really just overall look the quality of the park, which goes into a number of other factors leading into our fourth portion or step for evaluating mobile and of purchase. And that’s the price reasonableness.

So we already talked about size and price and occupancy, but reasonableness, meaning is this a fair price or a reasonable price? The standard in the industry is, essentially, you take lot rent, the formula if you will, a lot rent times number of occupied lots, times 12 months, and then times the net operating income ratio, which typically is 60% if the park pays the water, and 70% if the tenants pay water and it gets you your net operating income. So for quick math here, if you’re looking at a park that has $300 lot rent times 50 occupied lots, say it’s 50 out of 60. So 300 times, 50 times, 12 months, that equals $180,000. That’s your gross income, the potential gross income. If the tenants pay the water, you take that number times 0.7. That’s gives you the net operating income of $126,000. Now what’s the value? Well, you look at the cap rate and this is kind of a key variable here. If the cap rate is eight, 8%, you divide that $126,000 divided by 0.08. The value reasonably is $1,575,000. If the seller is requesting or requiring $4 million, you’re probably a long way away from reasonable, but if that’s a park in Dallas, in the Metro with a thousand lots, then it might go for a three or four cap. Cap rates can be subjective as to what’s important to you and what’s acceptable to you, but really for price reasonableness, you should look at things like cap rates, look at the cost per lot. And I’m looking at a park right now in Illinois and the cost per lots, like 15,000. That’s pretty reasonable for Illinois. Some parks are selling at 20 and 30. If I was looking in urban Dallas again I’d probably never find a park at 15,000, at least not one that’s reasonable or one that’s in good condition.

Another thing to look at is when you look at a cap rate and you can look at the historical financials versus the proforma financials. So sometimes you may have to pay a little bit of a premium. So you’ve got to pay a six cap for a mobile home park, but it’s not a big problem. If 90 days in you can sub meter the water and increase the rent, now nine caps are okay. And I’ve bought parks, numerous parks in the 10, 12, 15 cap range. I’ve bought parks that had an infinite cap, meaning there was no net income. I mean, I bought a park that there was $200,000 a year of staff payroll. That was more than the gross income. And these guys were just choking on it, right out of the gate I cut all that staff, hired one manager. I hired one part-time maintenance guy. That’s going to change your income, that’s going to change your ratios. And then another thing you can look at for price reasonableness is cops and comparable sales if you can find them. Or if you can get them through a broker to see, in this market, what are these parks straightened for? And that’ll kind of help set you up for properly evaluating price reasonableness.

The fifth key item for any mobile home park you should look at is infrastructure utilities. I think the, I think most everybody would agree that’s kind of the Holy Grail is no private utilities. Meaning city water, city sewer, direct build would be even better. And then the city streets, and then even better, does the city push the snow on the streets? If the city repairs the streets, they typically would if it’s city-owned streets, that level utilities is great. A worse set of utilities would be private water lines, private sewer. It gets even worse if it’s a well water system, a septic system on the sewer, a lagoon system on the sewer. And then the sewer has old, crappy lines, like in Orangeburg. That’s a problem as opposed to, schedule 80 PVC or on the water lines. Peck split lines are okay, a lot better than old galvanized piping. So really evaluating your initial criteria is what this is all about at the beginning, figuring out your ideal criteria, what kind of infrastructure and utility setup can you handle and are you willing to tackle? It might not be a good idea on your first deal to tackle a park that has master-metered electric or master-metered gas and private utilities. Cause it’s just going to be a harder riskier animal. And if you can’t fix or change those, that’s also going to impact your exit strategy and your bankability. So infrastructure utilities is very important to figure out what you’re comfortable with, regardless of which ones you proceed with, to understand your particular systems.

Number six, is it bankable based on the above mentioned factors, can you get a loan on this deal? Does it make financial feasible sense? If not, do you want to do it? And even if it’s, let’s say it does make financial sense, but you can’t get it banked. Is the seller wanting to do a seller carry. What are the terms that the seller carry? Is there a recourse on the loan? What’s the loan term? What’s the amortization, what’s the overall risk if you can’t turn a project around? How much time do you have before the balloon or before the loan expires? So really looking into bankability is important whenever having a mobile home park purchase.

Number seven is what the market is. Get a feel for the housing need and the housing stats. I’ve talked about in other episodes doing a test ad, running ads on Facebook to figure out the demand, but also for pricing you need to have a feel. You can get some of that with your test ad, but also research the stats and go to the local chamber or go to the local city website, economic development website, there’s a national website called www.bestplaces.net. I’ve had some, I guess I got mixed reviews on that website, but I don’t really know of a better one. So I think still check out www.bestplaces.net and type in, Tuscaloosa, Oklahoma, and then click on housing stats and then drill down and see what the two bedroom apartment rents are. See what the three bedroom rents are. Ideally those will be over a thousand dollars a month for a three-bedroom apartment. Check what the average home price is. Ideally it’s over a hundred thousand and then it’ll show you national and state average. Hopefully the market you’re looking in at the micro level has better ratios of vacancy and kind of age of housing, the price of housing relative to the national average, but overall just get a feel for the market.

Okay those first seven steps are kind of coming up with your ideal criteria just in general, but number eight, I call it a gut feel time. And then I think about, will I regret this? And this is when I started to look from macro to micro. Look at specific deals. Am I going to feel good about this deal? I mean, there’s an old saying that I’ve heard that is “the best deal I ever did is the one that I didn’t buy.” So don’t buy yourself a headache, and a lot of it’s going to be gut feel and it’s pretty subjective obviously. And then maybe it takes a site visit or maybe it takes a better understanding of the market in order to grasp what makes sense for you.

And that kind of goes into the next phase of number nine, drill down time. I say, drill down like this, mobile home park by mobile home park. This is not going to be at a macro level, but really begin to do a detailed financial analysis, begin getting bids to kind of firm up your numbers and do things like review the property tax bill. If you’re buying a park for $800,000 and it’s on the books for $200,000 now there’s possibly, or probably going to be a property tax increase. What does that do to your income? What does that do to your deal? I’m going to go and get into property tax appeals at the tax appeals and property tax projections in a whole another podcast. I’ve got a background as a county appraiser. I was a Jackson County appraiser here in Kansas City, Missouri in my twenties. So I was the youngest guy in the state had a 65, 70 person team and a $7 million budget. I’ve worked on hundreds of millions of dollar deals with tax appeals, so I’ve got lots of opinions on that topic that I’m going to save for another day, but you got to be in the middle of the property tax projection. I’ll tell you that.

Next on that same vein. You want to look at the seller financials. You want to question your assumptions, question their assumptions and continually revise and review your numbers. If you can get a third person to do a deal review or just second guess your numbers, that’s great. You don’t want to make a mistake, run your numbers, run your numbers, run your numbers throughout the process. After you get through those nine steps, you’re starting to kind of get a feel for what you want and you’re drilling down on a specific deal.

Well, now it’s time to put pen to paper and draft a letter of intent. Letter of intent is basically an offer to purchase. It sets forth the terms at which you would be comfortable with. You know, things like purchase price, earnest money amount, due diligence period, closing seller representations, maybe allocation of the purchase price, location of the property, clearly buyers name, seller’s name, whether or not it’s seller finance or bank financed, what due diligence materials seller going to provide. Whether you get an extension, who’s paying for the title commitment and the survey, who’s paying for an environmental report, tax and special assessment proration’s, buyers and sellers closing costs, any easements or any commissions. I like to have the seller represent the zoning. A reference to the leases and then any miscellaneous provisions. So really in that letter of intent it’s important to be detailed. I always make my letter of intent binding, and I don’t know why people don’t do this frankly, because if I’m the buyer and then, oh, it’s binding on me to yeah, well I have a due diligence period. I can spit the hook for any reason whatsoever. So I’m willing to make it binding on me because then I can terminate the contract during the contract period, during my inspection period. But I like to make the LOI binding so that the seller can’t weasel out on me. And I have literally closed two mobile home parks that this provision saved the day. I’ve even closed one mobile home park, where the seller refused to sign a purchase contract at all. And I have in my template LOI, and you can get a copy of this by click on my website. I’ll give it to you for free, I don’t care, it’s great. There’s a paragraph at the end that says, I’m going to read it to you real quick here, as I just pull it up, “this proposal shall constitute a binding letter of intent or contract. Upon acceptance of this letter of intent buyer shall prepare a more thorough purchasing sales agreement, consistent with the terms here in for the mutual review and acceptance by the parties and their legal counsel, notwithstanding the foregoing sentence. Seller hereby acknowledges that it will discontinue marketing the property, negotiate with other potential buyers for a period of 30 days, the parties can draft review,” … “however, in the event a more thorough purchase contract is not executed, this letter of intent shall become the purchase contract.” Boom, you got it. You got them tied up.

So I had one time where a seller and attorney get back to me and said, I don’t like your contract. My guy doesn’t want to sell anymore. And I said, we already have an LOI. He said, well, LOIs are not binding tough. I said, did you get a copy of the LOI? He said, no, why? I said, let me email to you right now, read this paragraph. He goes oh, well that certainly changes things. I’ll have the contract right over. He signed, he had the kids clients sign my purchase contract unedited, no red line because I had him by the balls, because I had this provision in there. I’ve had that happen on two different deals. Why would you not do it? If sometimes the seller will object? If they object well, it kind of shows you what kind of character he has got. I’d say, wait, why are you going to object? I thought we were negotiating a deal here? Are you going to turn around and after I spent all this time and energy, and I’m serious about buying your apartment, you’re going to turn around and double cross me? Usually leads to a moment of silence and then they say, no, no, no, no. You’ve kind of, I won’t say offended their character, but you put them on the spot. You put integrity in the spot and this helps get them to sign your LOI. After LOI, you draft the contract, you should probably hire a lawyer. Do you know a lawyer? I know a lawyer.

Anyway, drafting the contract is important. I like to draft it with the seller or the buyer. You can then make it a little more to your favor. And I mean, I have reasonable contracts that are used for both sides, but there’s a couple of provisions that I’ll go through in another episode on the PSA, purchase and sales agreements that are a little bit more one sided. So you want to be the one to draft the contract and it’s going to cost a little bit more to have your attorney draft it than not. But actually it probably generally saves money because frankly, because then you have to, your attorney has to read and review and redline and argue as much on the back end. So I like to be on this side of the party that drafts when I’m the buyer or the seller.

So there you have it today. Hopefully this is going to give you some good tips and some good strategies. Whenever I have any mobile home park purchase, go through these processes, find a friend, find someone to help do a deal review. Share some of this workload as you go through the process to make sure that your assumptions, make sure your processes are sound so that you can get a hit, get a home run on each and every deal. That’s all for today, stay tuned for the next one.

 

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