What happens when a home comes back?

Many MHP residents are only a stone’s throw away from a crisis that could jeopardize the roof over their head. While there’s no substitute for personal responsibility, as community owners and note holders we can manage relationships with our note makers to work out mutually beneficial solutions to problems that arise.

Novice Lonnie Dealers or investors may be concerned about what happens when a homeowner walks away from their home. Those who have been in the business for a while will tell you that getting the keys back doesn’t have to be a money losing situation. Recently, a couple we sold a home to a year ago, approached us about moving into one of the newer doublewides we now have available. We were not excited about this, we were already receiving a note payment from them, and we’d rather bring in new residents and create new notes. But our wants aside, they were good payers, and we wanted to keep them happy. So the issue was how to structure the transaction so that it was beneficial to all parties involved.

The home we originally sold them was one we inherited with the acquisition of Madison Woods. We ascribed a value of $3,000 to this home. We then spent $4,000 rehabbing the home, so our total basis was $7,000. We sold the home to the couple for $12,000 (including taxes) with $1,000 down and financed the balance at $300 month for 48 months at an interest rate of 13%. Structured as a typical Lonnie Deal, we would have an ROI of 45% on our money. That’s pretty good, but we need to bring in a lot of homes, so we recycle our money by selling some of the notes we create to private investors. They receive an annuity, we get our investment money back.

When the couple came to us, we advised them to sell their home, payoff their loan, and use the profit on a down payment for the home they wanted. After a couple of weeks they returned and asked us how much we would give them in trade. After we explained to them that there was no way we could give them as much as they could receive from a private party sale, we told them we’d take their home back and give them a discount on the down payment needed to move into the home they wanted. They agreed. After retaking possession of the home, we resold it as-is for $10,800 cash.

Let’s look at what happened to the investor that bought the note. We sold the note at full face value with recourse and serviced it. It has been a completely passive investment for him, with the payment electronically deposited in his account on the 1st of each month. Over the past year, he’s received $3600 in payments. Using the proceeds from the sale, we could write him a check for the loan payoff amount, but we promised him a return of 13% for 4 years, so we reinvested the proceeds into another home.

This was a win-win-win-win situation. The couple is thrilled with their new spacious doublewide; the singlewide home owner is happy with his first home, a significant improvement over what he was living in; the investor continues to receive a return much higher than his other investments; and we get additional lot fees and note payments.

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