fbpx

Ep. 98 | Case Study – Mitigating Infrastructure Risk and Obtaining Entitlements Before Closing

Share:

Share on facebook
Share on twitter
Share on linkedin

On this episode of The Mobile Home Park Lawyer, Ferd reviews two more of his own case studies focusing on how you can mitigate risk and get entitlements before closing. Enjoy!

 

HIGHLIGHTS:

0:00 – Intro
1:35 – Ferd discusses how he found a deal in his hometown of Quincy
2:27 – Ferd introduces two smaller deals that he did in western Illinois
3:41 – The first deal was on market, and Ferd was able to get it for well under what it was worth
5:10 – Because the park appraisal well, Ferd didn’t have to put much money into it to sell it for a profit
5:40 – Ferd sold the park because of its location and sewer setup. There was too much risk involved
8:44 – Ferd sold the park on MobileHomeStore.com, and sold it very fast
9:12 – The second deal that Ferd is discussing was in Canton Missouri
9:40 – Ferd put about 40,000 into the park and sold it about 6 months later
10:30 – Ferd sold the park because he was unhappy with the city
12:15 – Ferd discusses zoning issues and why you should know what you are getting in before you buy the park
15:40 – Ferd discusses selling the park in Canton, this was his least favorite park and he still made money

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation. Ferd Niemann here again today. Today I’m continuing my little mini-series on case studies. These are deals that I’ve actually worked on and lessons can be learned from them. So I’m not going to go over every deal, but go over different types of deals.

On the previous episode, I covered the first project I ever bought and just kind of the blocking and tackling, you know, if you go to the Frank and Dave Bootcamp, it’s the typical, you know, light Cap Ex, infill, sub-meter, increase rents a little bit, you know, buy it right, sell it right. Get some cash, get a little bit cash flow in the interim. Now I had, I brought in a number of homes, bought, and renovated some homes. So I had some home sales in there that really, it’s not part of the typical model of actually one of the homes. Well, I feel don’t want to own the homes, but that did increase my profit on that deal. Just, it required me to grow slow. So it’s not always the best approach. And it’s definitely harder to do if the park is not in your own backyard.

I bring up that deal as we move into the next one. But I wanted to mention, I forgot to mention the last episode, cause I’m just kind of winging this here and be honest is how I found the deal and how I sold the deal and just thought that would be helpful. And that deal, my dad found it was in our hometown of Quincy and he basically just went to every park in the town and in the region and said, Hey, you want to sell? And most of them said, not just no, but hell no, these are cash cows. So we just kept looking. And finally, we found one and we actually, we’re not very good negotiators apparently or weren’t at the time, but the guy said, I want 680. We said, you know, how about 675? And he said deal. And then when it came time to write the contract, he said, I need 695 to pay the taxes or something. So we said deal. And we bought it pretty much at retail. It was off-market, but we bought it pretty much at retail, but we still made several hundred thousand dollars in that deal. So, still well worth it.

So today’s deals. I’m going to just kind of jump into two smaller deals that I did about the same time. Also back in that Western Illinois Northeast, Missouri market. The first one was, it was south of Quincy, Illinois, my hometown. It was in a little bit rural and it was out on a county road. Like for example, my road costs were non, and it was a county road, no curbs, no gutters. There was a small gravel drive for the mailboxes. It’s just a small park. It was 18 pads. There were 14 occupied, lots at purchase. And then we bought it in 2016, sold it about 18 months later. So not a very long holding period. So you may ask why.

So let’s talk first about the lessons that we’re going to learn on this. And the lessons learned was just, you know, slight imperf curb appeal, increase occupancy minimally, increase rents, and really just avoid the downside and that’ll be part of the sale. So the reason we bought it, well, the reason we bought it, right, we bought this for 295,000. It appraised for about 500,000. I didn’t really believe it was worth 500,000, but I thought it was worth about 400 at the time I bought it, which was a pretty good discount, you know, 25%, 30% discount, it was on market. And what’s was interesting about this, it was on-market by a local real estate broker who had owned it and operated it for several years. My dad was a realtor at the time, worked under this guy’s brokerage firm and this guy hired dad to manage it in his spare time, because he knew he had a different one.

So dad was managing it because we already knew about the park, manage it for over a year. So we knew where the bodies were buried, you know, if any. But the guy, he was a successful realtor and he didn’t want to own a mobile home park anymore. So he decided to sell it. But here’s where he made the mistake, Interestingly as a broker. He listed it for sale as land. The local MLS required you to list stuff as single-family, multifamily or land. Because there was no structures, He thought, well, this is basically land. Well guess how many people go looking for trailer parks in the land listings. Not very many. The only people looking for land are people who want to buy a farm ground or hunting ground or potentially development ground. And this was not any of the above. It was a small pad, parcel. So it was listed improperly. Had he listed as multi-family, the people who were looking for 8 plexes and 12 plexes and stuff would have stumbled upon it. And he probably would’ve got it bought. So he listed it at like 535,000 and it didn’t move and he lowered it 5,000 a week. And when it got down to 295,000 we said, we’ll take it. And we got it bought.

Interestingly, because it appraised well, we only had to put about $20,000 in this project. So about a $300,000 trailer park with 18 pads for 20,000 down. Now, why did I sell it? I sold it in a short time period later and I sold it as part of a two-park portfolio and sold it for 420. So made about 125,000, really by the time I had some home sales in there, a little bit of cashflow, I made closer to like a 175,000, 185,000, which was really good from a cash on cash. It was an equity multiple over 10. And I’m like, you know, I put 20 grand in this thing.

The reason I sold it was the lagoon, didn’t know much about Laguna time we bought it. It was a three-stage lagoon, and we had a licensed engineer that monitored it. And it was, there was no problems, the state of Illinois come and inspected every five years really, but the permit would get renewed. They just suppose they do an inspection everyone year, but honestly, I don’t think they did it.
I think they just did it from their desk because they would come by and send us the list of violations and be like abandoned vehicle number nine. It actually be a like number 109. I’m like, there is no 109 and there’s no abandoned vehicles. And they never came back like reinspect. And there was violations like that, like tall grass on number five, you know, I think it was just some bureaucrats sitting at their desk pretending to do their job. Those were the annual inspections.

So why do I get rid of it? Well, I went to the Frank and Dave Bootcamp. It would have been, I think it was Labor Day, 2017. So I’d already owned a couple of parks, I think I already own three parks at the time. And at that Bootcamp, I kind of got scared of lagoons to be honest. Because this one was out in the country and Illinois’ high regulation. And I thought if the state of Illinois ever comes around and says, you know, we’ve elitist in Chicago thinking that lagoons are yucky and all of the folk are to convert to city sewer. I’m kind of stuck because the city is several miles away, the city sewer several miles away. And it would have cost many multiples of the value of the park to have to convert. And I also realized that my upside was limited. I had to fill the park, so it was now 1818. It had six park-owned homes. It was 11. We got it down to six. There were nice park owned homes, you know two and three years old, the previous guy had bought several of those nicer ones. We brought in some older used ones. And I was like, I’m not going to really get much more out of this. I’m just never going to be, five cap play cause the size of the lagoon. It’s never going to be agency debt cause less than 50 pads.

So I thought, you know what? My upside is limited and my downside is significant. So going back to the Sam Zell risk-reward analysis, I was like, there’s a lot of risk if this, you know, maybe low profitability that I need to convert to lagoon, but high pain point if it does. So we decided to sell it and sold it to couple of guys out of Chicago, a nice guys who, we still manage this park and the next one for these guys. They’ve invested in some of my other syndications, and the parks had no problems and the Lagoons had no problems, so maybe I shouldn’t have sold it. But at the time I thought, you know what? I can make a six-figure profit off of 20,000 investment in just over a year and you know what? I’m going to sleep easier at night. Cut my downside. So the lesson learned was, you know, take a little couple chips off the table to reduce your risk, reduce your debt.

Alright, next deal. And how I sold that one. I told you how I found it from the realtor, we sold it, it was put on www.mobilehomestore.com and these guys found it and sold it pretty quickly. I don’t remember the cap rate at that time, I want to say was like a nine. So it wasn’t, we didn’t get a great price. I think we left some money on the table to be honest, but I was wanting to do that cause I wanted to get rid of that lagoon so fast and we sold it super-fast. But you know, maybe I was too conservative, but it worked out.

Another project nearby was in Canton, Missouri, small town. Bought this deal for about 181,000. How’d I find this one? Ironically, my uncle owned it and he like stumbled into it. He was a contractor who lived in that town and he had a couple of rental and had a couple houses and he just had this mobile home park. And he was, I think he was getting tired of the maintenance. They were 16 occupied lots. 12 occupied lots excuse me. They were all parked owned homes. There are a total of 16, 12 were occupied. Bought at about 180,000. I had to put about 40,000 in, you know, basically down payment and a little bit of, you know, a little bit about our cost, but it was really low entry. I sold this one about six months later and I sold it as part of the same sales as a previous sale to the guys at Chicago.

So why did I sell it? And what was the lesson learned? I sold it fast because the city of Canton does not deserve me. There’s a guy in my law firm did a lot development law, building new shopping centers and apartment developments and you know, big industrial buildings, all stuff. So we would tell, he said this to cities. He said, capital goes where it’s welcome and stays where it’s appreciated. And we would take big developers into these small towns. They’re not small towns, but towns throughout the Midwest. And they wanted to feel like they were welcomed. Well, that’s how I’ve wanted to feel in Canton. I said, look, I’m going to put some money in this park. I’m going to fill the last couple of lots. I’m going to paint all the houses. I’m going to fix up the park. And I’m going to, you know, this is a small, you know, not downtrodden perhaps, but kind of a downtrodden poor town. And I was going to improve this place. I mean, low-income housing was necessary. Put it this way. They allowed mobile homes on any city lot. So you didn’t have to have a trailer park. You could just put it in a subdivision. Like that’s how loose the zoning code was and how loose the governor restrictions generally were.

So I was going to invest in this, but in order to fill the last two lots, I needed two or last four lots excuse me. I had to bring in some homes and I had to get a variance from the setback. On the backside of this park was an alleyway. And the alleyway was, I don’t know, 15 feet from the houses or small alley. Well, the setback was like 20 feet. And I was like, there’s nobody back there but my alleyway, which I owned and then there’s no buildings next to it. So I said, I need to get a variance to bring in homes. And the city inspector said, no problem. City planning guy said, no problem. Mayor said, no problem. Well, the appraisal or something took long. I don’t remember. We got an extension and my uncle was not really that jazzed, but give us another extension. And we were buying it. We thought was a good price. He goes, look, buy it or don’t. So we said, okay, we’ll buy it. You know, and I should have pushed harder for an extension.

But what I did was we closed on the property without getting the variance. We trusted the government fatal flaw lesson learned is get your entitlements and get your necessary approvals, all that stuff. Get your zoning squared away before you buy it. The zoning was good. I just needed it. So it wasn’t like I had no permit. I just wanted to make this deal economically, make that much sense for me. Then I need to, I needed to get this variance.

Well, we go before the board of zoning adjustment for the variance and we go on the docket and just so happens, you know, bad luck for us. Well bad luck more for someone else here in a second. There was another mobile home park right next door. And it was really crappy and the homes right around on top of each other, some of them didn’t have siting on them. Like the insulation was visible from the outside. There’s no skirting on some of them. It was a really junky park.

Well, somebody in one of those homes was making meth or something and they caught the home on fire and they burned alive. So obviously worse news for them to me. But the bad is for me was the variance that I was requesting was going to make homes closer together. I also needed to, I forgot to mention an internal variance of instead of 20 feet between homes I needed like 16, state fire code was like 15 or 10. So I was just like, I need to put these homes a little closer together. Not that much closer, but it was important. Well, now that somebody burned alive next door, they’re like, why would we agree to let somebody put homes closer together? So if one burns, they’re all going to burn and the mayor still supported this. But when the fire Marshall stands up and says, if you approve this, people will die. You’re toast.

So rest of the story was the mayor said, will have a motion to approve, crickets. I guess it wasn’t the board of zoning adjustment. Now think about it, because typically that’s an administrative body, not the mayor, but it was the mayor. So, it must have been this town that the BZA was the same as the council, which is not completely uncommon, I guess. Cause it’s a small volunteer council. Anyway, no motion, we lose. We’re pissed. Dad was the one was there and the mayor apologizes afterwards. So we say, you need to make this right. So we got back on the docket, literally two weeks or four weeks later. And this time every single council member individually came and visited the property and walked through. Here’s the difference in size, all this. And we thought we had the votes. We think we had like, I don’t know, five to two or something and came back on the docket and the mayor assured us he was going to get it done. Mayor’s not allowed to make a motion under typically under Robert’s rules of order. So the mayor had the mayor Pro Tem make the motion, motion to approve. Is there a second? Crickets. We never even got to second. We never even got to vote and we never got our entitlements.

So we put the park for sale the next day, ended up tying it in with the first property I mentioned on this episode and we sold it for 220. So still made 40, 45,000 not a bad day, but pretty disappointing. And that was one of a long line of examples of where I lost faith in bureaucrats. So we sold it on the same. We sold it the same, we sold it to the same guys because from the one who’d been listed in www.mobilehomestore.com.

So anyway made a little money. The money was made basically by just buying it at a reasonable price and then selling it at a, buying it for a discount and selling reasonable price, no magic on this one. This was really more of a pain point, but it was nice that this was the worst you know, I’ve done 20 plus projects at this point. This was the worst one and I still made money. So knock on wood. If you buy right, you make your money when you buy, you get paid when you sell or when you refinance. In particular refinance with non-recourse debt. Till next time, hope you learned something today, have fun, be safe. God bless.

 

RECENT

BLOG

RECENT

EPISODES

Get new posts by email:

You can have results or you can have excuses but not both.

Arnold Schwarzenegger