Sam Zell wrote an entire book about risk and reward a couple years ago titled “Am I Being Too Subtle?”. And there’s no question that these fundamental laws must be in a healthy balance in order for a deal to proceed. But what are the issues with risk and reward in this sector, and how can you model that into the perfect mobile home park? That’s the topic of this lecture. We examine what the typical risk vs. reward scenarios under various basic buyer tranches from low capital and high risk to high capital and low risk. We also pinpoint items of risk that should never be agreed to, as well as concepts on mitigating all risks in a realistic manor.
If you want to learn more about mobile home park investing, take the Mobile Home Park Investor's Boot Camp. You'll learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks. The course is taught by Frank Rolfe who, with his partner Dave Reynolds, is one of the largest owners of mobile home parks in the U.S. To learn more, Click Here or call us at (855) 879-2738.
Risk, Reward and the Perfect Mobile Home Park - Transcript
Welcome to our lecture series event on Risk, Reward in the Perfect Park. This is Frank Rolfe. Let's start off with talking about what is risk. Webster's dictionary says it is a situation involving exposure to danger, so for the sake of today's talk, we will assume that risk means losing your investment money. But what is reward? Webster says the thing given in recognition of one's service, effort or achievements. So in this talk, we'll assume that reward means making money. So, risk is clearly a bad thing and reward is a good thing, but the problem is that you can't get a reward in life without taking a risk. So each and every action you take from backing out of your driveway or flying on a plane to buying a Mobile Home Park. Every single thing we do comes with a risk. The only risk-free thing that you can do would be to just sit in a concrete bunker, except even then that has risk of poor exercise and diet and possibly bad air quality, but then how would you pay for your food anyway?
So, let's all agree that what's important is analyze risk, think of how to mitigate it, and make sure the reward makes it all worthwhile. This is one of the biggest issues in general in life and also in Mobile Home Park acquisitions in particular. Maybe that's why Sam Zell wrote an entire book on this topic called, Am I Being Too Subtle? And in that book, Zell declared that you should only buy deals that have low risk and high reward or high risk and even higher reward, but never high risk and low reward. So, we all have to admit there's a certain relationship between risk and reward that must be healthy. There has to be something to gain for us to take the danger of our actions.
So, the purpose of tonight's Lecture Series event is to define the options for all buyers, both risky or less risky and how to mitigate those dangers, and so doing, we'll show you how to try and construct the Perfect Park as far as the attributes of the good balance between risk and reward. So I've broken this up into various tranches of the type of buyer and the type of park you're looking at. We're going to go over what the different risks are and then the different ideas that you would have to mitigate those.
So, let's first start off with a Park buyer who does not have a lot of capital. Let's say you wanted to get in the industry, but you don't have a lot of capital to spend, so in that case, how does it work? Well, we all have to admit on the frontend if you're trying to buy a Park with almost no capital as far as Park ownership, most of your risks are going to be optionally very risky, right? When I bought my first Park Glen Haven for $400,000 with $10,000 down, I knew Glen Haven was a risky mass of a Park to buy. The quick drive thru would tell you as such, a quick scan of the P&L would tell you, it was losing two grand a month, so clearly, it was a very risky deal. It wasn't even breaking even from purchase, but I also knew that in order to me to get a deal like that at 2.5% down with a seller carrying the note non-recourse, I would have to jump into a deal that was a little wild and wooly.
So, these are the kinds of deals that you can do with very little capital down, but they do have high risk. The first one would be a zero down or nearly zero down turnaround mess. So, what we know on the frontend, if you try to buy a Park with very little capital that more than likely you're going to have to buy a Park that has high risk. It just comes with the territory. No way somebody's going to sell you a Park that's in perfect condition with great financials for nothing down, it just isn't going to happen.
And typically when you're looking these deals where you're trying to find Arc Parks that have terrible aesthetics, but the infrastructure itself is not so bad, that way you can try and go in there and clean it up with a little sweat equity or very low dollars and make it a much nicer place to live. But if you're buying a Park that's in really terrible condition from an infrastructure perspective, even if the deal is structured for 0% down, you still have to come out-of-pocket with massive infrastructure cost. So it's going to have to be just the right zero or nearly zero down deal.
Now another option you have if you are wanting to buy a Park and you have virtually no capital is to do a master lease with option to buy, and once again, you're going to be buying a big old mess, that comes with the territory, so in a master lease with option to buy, what you're going to do is you're going to buy a property that is so poorly performing that looks so bad that it cannot even get a mortgage conventionally to cover the existing mortgage that it has. That's the normal construction, but that's not always the construction. We bought two Parks in Oklahoma, both on master lease with option to buy. One Park had no debt on it, but you could not pay what the guy wanted, and the other one, the guy had dead on that it was so high that you could not pay what he needed to close the deal, because you couldn't pay him enough to cover his own mortgage.
So what was the solution? Well, the solution was a master lease with options, so you take the Park under your wings at a certain amount of month, it can be a percent, it can be a flat face, whatever you negotiate with no rules on them and then you had the point to buy it, let's say three years into the future, five years into the future at a certain set price. So, why is this construction work? Because you're not owning it on the frontend, so you don't have to come out of pocket with big down payments, big capex. Typically, in these deals, what you're providing is your strategic mind, your sweat equity in trying to make this thing work.
How do you normally make them work? Well, you can't do anything big on the dollar side because it's not yours and you don't want to spend any big money on something that you don't own, so normally you're going to be raising the rents, you're going to be cutting the cost typically replacing the manager, maybe there's a big old water leak in there that you can fix for not a whole lot of money. That would be another item you can do, but you can't go filling lots because to fill lots is very capital intensive bringing in homes and things like that.
So the master lease option route again, it's very risky. How is it risky? Well, the Park you're buying right off the bat while your master leasing is already performing totally or they wouldn't do it with you to begin with, but then you always have the risk where Mom and Pop actually come to the closing table and close on it after you've done all the work to fix it. One of the deals became happily, the other one not so happily. We had to threat and sue, but again, those are two routes if you are a buyer who has not a lot of capital, but want to buy a Park, but again, I emphasize both are high risk.
Is there any way to mitigate the risk? No. Only in your selection of property, that's the only way you'll mitigate it, so doing really good due diligence helps, picking a property that has a good location where it's worth the effort helps, but a lot of times, it's basically in some ways kind of just gambling with your time, so you can put it all together. Now, you're already mitigating to some degree that risk because it is zero-doubt non-recourse situation, you can give it back to the to the seller and he can't do anything about it. So at Glen Haven what gave me the confidence was I could always give it back to the owner who's carrying the paper and lose my $10,000, but that was a whole lot better than me buying it and then potentially losing $400,000.
On the master lease with option, you've mitigated because you haven't actually come out of pocket yet or done anything where you actually have any real money at stake. You don't really have any skin in the game. The only skin of the game is your time. Well, you'll be straining to lose your time, but let's be honest, we all lose time on all kinds of endeavors that don't work or never had a purpose anyway. How much time do you spend during the year watching football or playing a video game or walking? So, losing your time is not the worst case scenario.
Now, what are your low risk options if you don't have a lot of capital? Well, there's basically two. Number one, doing contract assignment. So, what is a contract assignment? You tie a Park up on an end or a times contract that instead of you buying it, you assign it to somebody who wants to buy them to pay you a fee. In our industry, a typical assignment fee ranges from about 5% to 10%, but that's not set in stone. It could be lower, it could be higher based on the quality of the deal and at the end of the day, how much you're asking for it with the purchase price and the assignment fee, by putting them together.
But the contract assignment is one method people have used for a long time now when they're trying to start up with low amounts of capital to create capital without a whole lot of exposure. I mean, you don't really have any exposure at all in the contract assignments. You sign the contract, the person who you assign it to they replace your earnest money, so now your earnest money is no longer at stake, right? So basically, if they walk and don't close it, you didn't lose anything, but once again your time.
Now the other option would be to find a capital partner because there's a lot of people out there who have capital, but they don't want to actually actively have to go find deals or manage them. So, another option to totally change your playing field if you don't have a lot of capital and reduce your risk, you need to find somebody to front the capital. Now, where do you find a capital partner? You can find them anywhere. It could be a family member, someone from work, someone from your church, someone from whatever hobby you have to be could be a neighbor, but you'd be shocked how many people out there are very unhappy with their other investments and how those are performing and they're looking for somebody who would actually want to go out there and find the Park and run a Park that they'll all happily put up the capital to do that.
Let's go to another type of buyer and that is the Park for the buyer who has lots of capital. So now, you're not capital constrained, you have the ability to put big down payments down and so on and so forth, so now, how does that work? Well, you have now two options. If you were trying to buy the Park and you have very little capital, both your options are high risk. Now, again, because of how you identify risk, not super high risk, you don't have a lot of skin in the game, but you're having to buy Parks that are much more rough and tumble and your low risk options if you have very little capital basically contracts assignments and finding a capital partner.
But now if you have some capital, now you have even more options so you also have more risks to worry about, so on the higher risk category, you can buy a Park that where you need to fill the lots. So, you're going to buy it cheap and you're going to trying to make your profit by filling those lots. How do you mitigate that risk? Well, you mitigate that risk by having a test ad that's very successful to show the demand is there and by having a plan A and a plan B and a plan C to fill the lots. Plan A be would be probably new homes through 21st Mortgage, plan B new homes again through 21st Mortgage and Plan C, new homes where you have to access the bank yourself, which is very, very capital intensive.
Another option you can do is you can buy a park that needs to have its rent increase to start raising the rent. And how you mitigate raising the rent and how it will work? Well, you can run a test ad and make sure the demand is there, so you can replace people if they should run off. You can do fantastic market comps to make sure that you have a good product and even at a higher rent, people are going to want to live in your Park. You can look at how many folks on the rent roll right now are current on their rent, that'd be a good idea, so you want to raise the rent and nobody's current, probably have a whole lot more defaults unless they're all current.
You can even look at the quality of the cars they drive. Often, the cars in the Mobile Home Park are an excellent way to get some competitive data. If they've got a lot of newer cars, then that means they have the credits and the gumption to buy a car with a loan on it, so that means that they must have enough credit score to pull that off. If they have a bunch of really old cars in really poor condition that would suggest that they don't have very good credit and that may mean that they therefore can't get any deals done with 21st to get a brand new house. So, those are some ideas to mitigate that.
Now, another thing you can do if you've got capital in the higher risk category is to buy a Park with private utilities. Now, private utilities, no matter what anyone tells you, are always inherently riskier than city utilities, so if you have a well that is infinitely riskier than city water, if you have a septic then that's riskier than city sewer. But nevertheless, many times, it's something that you have to do. If everything else on the Park works out well, you have to just face the fact that you have a well, you can do that.
So, how do you mitigate that? Well, you do terrific due diligence on that private utility for starters and/or you're looking to doing a utility conversion to city water or city sewer. Now, city water is much easier I will tell you. City sewer is much more difficult that's because city water is pressurized, so long as they can get their pipe to any point of your system's pipe, it's all good. On sewer, it all has to flow downhill, so to connect to city sewer may cost a fortune as far as building the lines there and you may put in a lift station, but that's how you could potentially mitigate private utilities.
What about smaller Metros? Let's say you're looking to buying a Park and it's a good deal with a smaller Metro. Again, we've said, I've written a million times, we prefer 100,000 Metros and larger, but let's assume you're looking at a smaller Metro, less than 100,000, maybe 50,000, maybe 25,000, maybe 10,000, how can you mitigate that risk? Well, number one, do a great test ad and make sure the demand is there, that's important.
Number two, check out who the employers are in that market because the three we love are education, government and healthcare because those seem to be recession resistant, but if you are banking your entire investment on a single, large private employer in a smaller Metro when it goes bad, it could be an absolute catastrophe for you, so you have to make sure that you've got enough breadth and diversity in the employment base.
Also, high home prices. It's very important if you're in a smaller Metro because you want to make sure since there's fewer people that you've got a really, really hot product. There's few things hotter than affordable housing in a market with home prices are $180,000, $200,000 and $300,000, things like that. Also make sure that you have low market vacancy, because you want to make sure in a smaller market, you have plenty of demand to make the phone ring and obviously there's a lot of market vacancy, perhaps the phone doesn't ring that much.
Now, another risk option you have to buy if you have capital to buy a Park that has some kind of extremely complicated environmental or legal issues. So, how do you solve that? That's what you're going to solve before closing, but I know people who have done good deals, buying parks that has a problem. Maybe even though they had a valid permit, the city was fighting them on the very existence of the park and they've gone out and hired the right law firm and beaten that back. Maybe the Park has a problem on phase one and maybe there's a way to cure that problem economically and fix that. So, most of these environmental and legal issues, you're going to mitigate those simply by doing the steps necessary to do that before closing during your due diligence period.
Another option you have with higher risk if you have capital by a Park is having to go with bank debts, so not our favorite groups, not seller carry, not conduit, not agency debt, those are all non-recourse but instead bank debt, which has a shorter term is full recourse and you have bank to tell your risk. Right now with COVID-19, all the business is closing down, some people don't remember the olden days, but I certainly do. The Texas SNL crash 1988, 1989 where all the banks in Texas went bankrupt. They all went to the U.S. government. The government basically called every loan. So, when you have loans with a bank, you have some degree of risk just in the fact that it is a bank. You don't have that risk with a seller. You don't have that risk with a conduit lender. You don't have that risk with an agency lender, because they're not banks. So, when you have a bank, you do run the risk of bank failure.
So how do you mitigate those risks? So, the risk of bank debt? Well, first thing you do is make sure that your term on your loan is at least about five to 10 years because where most people get burned is when they go with very, very short terms and they're not able to fix the Park before the loan comes due and it has to be passed onto the next bank, so as a result, they can't find a replacement. That's called a term default. So how do you stop a term default? Make sure you have a long enough term that gives you plenty of time to make your improvements and then to find a replacement.
Next, manage your renewal very, very carefully. Typically start at least one to two years ahead. That way, if you can't get the loan renewed, at least you have time to possibly sell the park. Nothing drives me crazier when I get a call from Park owners, you find my name and number on the internet and they call me up and their loan is expiring in three weeks, five weeks, and the bank has just told them they won't renew and they don't know what to do. Well, I can tell you what to do, but it's too late now. You should have started doing that about a year before then.
Now, you're in deep trouble. Now, you probably won't have a term default. Now, it's possible just maybe you can still pull it off, because maybe your bank will do what's called an extend and pretend, which means they will pretend that you're still timely, that you haven't expired yet, such that you can go ahead and find that replacement, but it's a terrible, terrible position to put yourself in.
Another option you have to reduce that that risk on bank debt is to use a loan broker. Loan brokers, there's many of them out there. We like Bellwether, MJ Vukovich, one of our favorites, Security Mortgage Group. These are groups that basically go and obtain loans for you and the important point of them going and obtaining these loans for you is they number one have a much larger breadth of banks than you've got. They know hundreds and hundreds of banks and they can also have a backup bank in case of catastrophe. So they have very, very good diversity of potential banks to solve the process much more than you have.
Another wild card on a higher risk Part where you have capital is seller financing with a lower amount down and with non-recourse debt and another wildcard option you have would be to do non-recourse debt with the traditional bank. Going back to what we said a moment ago, a typical bank debt having a shorter term would mean full recourse. Sometimes you can ask the bank, "Well, what about what I have to put down on this deal to get nonrecourse?" Now, most banks when you ask them about non-recourse, they'll say, we don't do that. We like for you to have skin in the game.
But if you say to them, "Okay. I say, well, if I put down 20%, it's full recourse, but if I put down 50%, would it be non-recourse?" "Oh, yeah, it'd be non-recourse at 50." "Okay, well, then you just contradicted yourself, you actually do, do non-recourse debt?" "Well, we do, but we don't normally talk about it, because no one ever does it." "Well, I'm interested in doing it." And you may find that you can get non-recourse debt maybe with instead of 20% down, with 30%, 35%, 40% and maybe that's important for you to mitigate your risk like that. It would depend on what kind of buyer you are and how much you like risk.
Now what about some lower risk options if you have capital? Well, first one is buying a Park with stabilized occupancy that you still have room to fill lots. Now in the higher risk category where we were assuming Parks with massive vacancy, 50%, 40%, far from stabilization, which is defined as 20%. But now, let's say you're looking at a Park that has 80% plus occupancy so that is fully stabilized. It's blessed by the lending community, fully liquid, and now all you're going to do is you're going to just fill the final remaining lots, those final 20% of lots. Okay, that's a that's a pretty good idea. And how do you mitigate that? Well, you mitigate this the same way you do with lots of vacancy, you're going to want to run the test and make sure there's lots of demand and you need to have a plan, a plan A, plan B, plan C to fill those lots, but the good news is if you don't fill a single lot, you're still stabilized occupancy, which means you can still refine, you can still find a buyer.
Next, rents closer to market, but with a potential for continual meaningful raises. So, in our high risk category, we had the Park where the rents are 200, the market is at 400, so you're going to try and raise rents at $200. In this example, the rents are at $350 and the market is at $400. You're going to try to raise those rents up and still get to 400 and then do a continual increase then based on the market and the comps. But again, much less risky, because probably no one is going to move out over that rent increase. Going from to $200 to $400 might make some people make the decision they don't want to live there anymore, so going from $350 to $400 will probably not.
Another one, buying into a Metro with 100,000 people or more in it, right? When you're buying a Metro under $100,000 in our opinion, you're saddled with much more risk than you are over at $100,000. Now, these numbers are merely guidelines. There's no magic in the number of $100,000, $98,000 same as $100,000, $92,000 same as $100,000. We're really talking about those with the big variations well under $100,000. So when you drop from $100,000 plus Metro to a $40,000 Metro, you will notice some significant differences between those two animals. You're going to find that that $100,000 plus Metro has every kind of big box retailer, every franchise known to man, a whole lot of employers and typically a fair amount of health care, education and government like we like.
But when you have a $40,000 Metro, you may find that you've only got one or two private employers that are the entire employment force then that can be scarier. Again, how do you lower your risk when you've got a low Metro? Well, you've got to make sure you've got high home prices, high test ad demand, but when you're in a $100,000 plus Metro, your risk is greatly lowered. So there really is nothing to mitigate if you're in a low risk category buying the Park with the higher Metro because that's great.
Next type of low risk if you're buying a Mobile Home Park and you do have capital would be buying a Park that's a three-point spread, either on day one or with the first rent raise. Now, what do I mean by three points spread? What I mean is you take your interest rate on the loan and then you take your cap rate. If you've got three points between an interest rate and a cap rate, that is a very, very healthy spread, and that will get you a 20% Cash-on-Cash return approximately, so that's healthy. So, if you're buying something that has that day one or with the very first rent raise, and again being the lower risk category troche, we're talking only $40, $50 below market with that one rent raise, now you will go to three-point spread, then again, that's a much lower risk shot, so that will probably work out favorably for you.
Another lower risk Park keeping buying if you have capital is using non-recourse institutional debt on day one, which means your load is going to be non-recourse and 10 years in links, which is fantastic with a fixed interest rate. And of course, the other option is you could still do seller financing, so a lower risk option if you have capital buying a Park that comes with seller financing or when would you convince the seller to finance, so, that works. And also, as we mentioned a moment ago, in the lower risk category, if you use seller carry, conduit financing, or Fannie Mae, Freddie Mac agency debt, you are protected from bank failures.
And I know, people haven't talked a lot about it because many people are not old enough to remember the Texas SNL crash or they weren't in Texas at that time, but if we enter into another period in American history, in which you see a lot of bank failures, and I myself am worried because between COVID and all these businesses that I've seen shuttering all about me, they all have loans with some bank somewhere and if those banks start to fail, and we end up with another crisis with the FDIC stepping in, what you're going to have happen is you're to have some people whose loans will be called. And so, there's a much greater comfort being in seller financing conduit and agency debt because they're not banks, so therefore you have no risk on that.
Now, there's another troche of options for you if you have capital, which have so low risk and so low reward, why would you even do it? These are ones that have virtually no risk, but they virtually have no reward and remember, we're only really taking any risk at all because we want reward. The first one is when your rents are completely at or even higher than market, so you have no room to raise the rents at all. Now, let's do another one on top of that. Let's assume you're in a State with rent control, I mean, you may not be able to do anything to improve the value of the property, so it would be very, very hard to make sense of doing that, right? Another option would be to buying a Park that has 100% occupancy. So, once again, you are at full occupancy of no room to improve anything, so it's not a situation where you're going to make any big money simply because there's not much more you can do to increase the revenue on the property.
Finally, where you have a crazy low interest rate coupled with a crazy low cap rate, and I see those deals today that people are doing. You see them in the paper, you get little postcards out of them, deals where a private equity group will be able to buy a Park at nearly the lowest capital demand, a two-cap, a one-cap, a three-cap, and they'll say well, but I borrowed the money at a 2.8 cap, so it's such a smart deal because I bought it at a 3.1 cap. The problem with that is, what do you do when interest rates go up? Our interest rates right now are nearly the lowest in American history, and yes, I know they're going to go down again now between COVID and everything, but that's not what interest rates do.
Interest rates do also rise and when they when they arise and you are in there at a very low cap rate and those rents go up, then what in the world are you going to do? You're going to be upside down so fast, it's not even funny and you won't be able to find anyone to buy the Park in what you paid because they're now having to borrow at a higher interest rate. So to me, those are some options that are too low risk and with zero rewards, so it's not even things you would want to do.
Now, some other big wildcard risks, we should also talk about are COVID-19 susceptible markets with lots of non-essential industries. You're already seeing on MSN and other places, lists of all the various industries out there that have been just absolutely decimated by our nation's desire to shut down businesses that are what they call non-essential. Now what is on that list? You already know what's on that list. The airlines, all of the travel industry, casinos, the dining industry, these people are all in deep, deep trouble. Now, most markets have a little bit of that, but there's some markets that have a whole lot of that exposure.
Like what would be a market that has huge exposure to non-essential businesses? Well, here I can name them right off the top of my head: Orlando. Virtually everything in Orlando doesn't work in an area where we're going to try to be socially distanced. It just doesn't work. Look at the Las Vegas Strip. When they shut that thing down, Las Vegas literally collapsed. Now they've reopened it, but if they shut it down again, I don't know what happens there. So clearly, if you're in a market that has heavy, heavy exposure to non-essential services, that's a really, really bad risk right now.
Another one area is urban unrest. Most Mobile Home Parks are not in gritty urban areas. They're more suburban by nature, but there are some Mobile Home Parks in urban areas. If you're in an urban area that's showing a lot of social interest at this point, that's risky. I mean, I don't think you'd want to buy a Mobile Home Park in an area where you're concerned that there could be rioting or shuts downs or occupied zones, whatever the case may be, so there's another wildcard risk you got to think about.
Another one, oil and gas markets. Now, I've been writing articles now for at least a decade on the dangers of oil and gas when it comes to Mobile Home Parks because I saw with my own two eyes what happened during the last great oil crash in the late 1980s. I was in a Park once in Villa in Odessa during that period, I wasn't even the park business at that point. I was just looking around the carnage that was Texas back in that period. There was a giant park, it was almost completely vacant. There were probably only about 10, 20 trailers in it.
They probably built the whole 400. It looked so hopeless, I couldn't even figure out what you would do as an adaptive use. Make it into a runway for an airport? I mean, there wasn't anything you could much do. Oil and Gas has gotten forever scarier. It seemed to have very high peaks, very big collapses. When you talk the wholesale oil concept, of course, you have to have oil at a certain price to make that even economically possible to extract the oil. So, oil and gas, another big wildcard that you've got to watch out for.
Then you've got States and cities that could go bankrupt due to all this various disruptions and reductions. We've all seen firsthand right now, there's certain states certain cities that are having huge budget shortfalls. And what happens when you have budget shortfalls? Well, a couple of things happen. Number one, they're going raise your property tax as high as humanly possible to try and offset the decline. Number two, you're going to lose some basic city services, most importantly, the police. If that happens, the area may become more dangerous and then no one wants to live there anymore. So, you know you want to watch out for any kind of area that's showing the great economic disaster based on all these different events we've had recently.
Another one, which we've talked about for a long time is weather risk, especially hurricanes. So, if you've got a Mobile Home Park and it's coastal and the hurricane hits you, you are going to be in a lot of trouble and here's why. Because even though you have insurance on your Park, you don't carry the insurance on all those privately owned homes and they probably don't have any insurance, so when the hurricane washes them away, those who have insurance will get a truck and they'll run away. Those who have no insurance, they won't get a check and they'll run away, and now your Park is reopened, but you have no customers. Just be very, very careful about the type of weather risk you're looking at.
Tornadoes are different, almost everyone has wind coverage and what the FEMA does and the Red Cross do is they will offer to use the Mobile Home Park as the safety valve to rehouse those in tornadoes often giving residents as much as $30,000 in cash to go buy a mobile home to put back on the lot, but when you come to these giant hurricane events, such as Harvey, which had $200 billion of damage and only $20 billion that was actually insured, there's no way with $180 billion uninsured loss, anyone's going to come out of that smelling like a rose.
Now, there's some other things when we talk about risk/rewards that are things that should be cherished. These are extremely good things to have and just want to reiterate these. Number one, extra strong market constructions of healthcare, education and government. Where do you see that? Well, there are certain markets in America that have more than that than others. What it comes immediately the mind is good old Kansas City. Why is Kansas City so good? Well, Kansas City has more government agencies in it than any other city in the United States outside of Washington, D.C., so it's got a whole lot of government.
And then it's also got a whole a lot of education, a lot of colleges based in and around Kansas City and there's also a huge my healthcare because the city is kind of the central hub of that portion of the Midwest when it comes to hospitals. But it's just not just Kansas City, there's many other markets you can find out there who have a higher concentration of healthcare, education, government and that reduces your risk enormously, particularly in times like these with COVID-19 and all this pandemonium. It's great being in markets that are fairly stable, that are pretty much recession resistant.
Next, boring markets that are off the radar screen of highs and lows. We have always found peace of mind in owning assets in basically flyover states. They don't really have any peaks or valleys. They just stay flat, not a lot of excitement in them. They're never going to be on an episode of HGTV. They're never going to have a Flip or Flop from Dubuque, Iowa, never going to happen, but we like those kinds of markets. Have you ever noticed that the markets that always get the articles on how hot they are, you later see the article and what a catastrophe they were? And Las Vegas comes to mind foremost of any markets. I mean, you get one moment in history, the condominiums go to $400,000 in value, and then another couple of years later, they're down to 50,000 in value. We hate markets like that.
We want to be rewarded. If we do a good job in our risk/reward assessment, we want to know that everything is going to work out okay. And if we if we don't get it where it's going to work out okay, then we're in trouble. So, we've got to continue at all times to make sure that we position ourselves in the markets where there's no risk that despite the fact of us doing a terrific job is the market itself evaporates, not so much as sound. That would just be a terrible situation to be in. Again, I've seen it in Vegas over and over again, where people mind their own business, do all the right things, and essentially, the market itself falls down around them and I think that's just a terrible position to be in from a risk/reward standpoint.
Next thing, Red States or you can call them Red States, you can call them anything you want, but States that have strong eviction and property rights laws. We've seen recently with all of the chatter about rent controls in certain States, so maybe those aren't the States that you want to be in. Because for most of us, that's not typically how we want to be. We want stability. We don't want to wake up one day and find that our investment that we did, that we did everything right on, has been stripped away from us in value, simply because we've got a State that has decided to go with rent control.
Now, the big one from this past year to me it was the State of New York, because that was a big hit to people. They've never expected to have rent control in the manner in which it went down in New York. We just had it happen in Oregon, earlier in the year and there, it was very soft rent control, 7 points per year of increase plus CPI, means only roughly 10% a year. But in the case of New York, to my understanding, you've got no point. It's just CPI and that's rough. So, you want to try at this point, when you're buying a Park, you want to make sure you understand the basic political spectrum of that status trajectory on such issues as rent control and property rights and stay clear of States where you may see that erode. That's just a risk that you don't want to have.
Also, residents with a high level of pride of ownership. This debt should be always cherished because people who really liked their property, that's the kind of partner you want. In our industry, basically, the tenants are stakeholders in the business and so you own the land and they own their trailer, and as a result, they're basically making the property better for you and you're making it better for them and everyone's happy. But in certain cases when you buy a Park with very low pride of ownership on the tenants, they're actually working against you. They're hurting your ability to increase value, to sell it down the road at a profit, to retain customers, to attract new customers. So, you should always cherish when you have residents who really make excellent partners, excellent stakeholders.
Next, non-recourse debt. I don't care what kind of debt you go with this non-recourse. The very fact it's non-recourse to me, that's the most important thing there can be. Now, what are your options again for nonrecourse debt? Well, really everything has that option, but the key one is for most people is seller debt, agency debt and conduit debt, but again, you can get it with bank debt, too. And whenever you can get non-recourse debt that should be very important to you. You should be very, very excited that you've got non-recourse debt because non-recourse debt just makes you feel happier, makes you sleep better at night knowing that no matter what happens with your Mobile Home Park or anything else, you are fully protected. So, it's a really nice, happy way to be.
Another thing that should only be cherished is long-term debt. I had someone call me recently they had a deal where it was a seller carry and the seller would go 30 years fully advertising. That's fantastic. I told him you need to buy that deal if you can, because you'll never see that again maybe in your lifetime. Rarely will Mom and Pop seller already their 70s or the 80s, do you a 30-year fully amortized in mortgage, but long-term debt is absolutely essential when you're trying to reduce risk because when you have that 10-year note, that 12-year note, that 15-year note, it means you may only have to refile that thing one time during its entire life or even better if it's longer, zero times. It takes all the risk off the table. No more worrying about term default, find a new or replacement lender, none of those items. And even better yet, if it's not a bank construction, if a seller carry conduit, agency debt, then what's going to happen is you don't even have to worry about bank failure, so everything in that case is good.
Now, at the same time, while those should be cherished, these are some things you probably should never do that I wanted to point out in our discussion of risk and reward. This first one is just the worst idea ever and that is buying a Park that is in fact illegal. So, what do I mean by that? What I mean is you've got some options when you buy a Mobile Home Park that will be shown on Certificate of Zoning. It will say it was either legal conforming, which means you can build it again today, legal non-conforming, which means it's grandfathered and then illegal, which means you have no right to exist.
So, what does that all mean ? What that means is that if you buy something that's illegal, you don't have any rights theoretically for it to be there. So, that is I think we would all agree, a scary thing to be involved in, would be not having the ability to go in there and have a Park. And I've seen it many, many times. I've seen people who have Mobile Home Parks that they don't have operating permits on even big ones, not little. I've seen giant ones that have no operating permit and as a result, what happens is at some point in the movie, the city may come in and shut them down. They also will not be able to refinance that park. They won't be able to sell that park. It basically has no exit strategy at all.
So, the bottom line is if you say, "Well, I'm a big risk taker." There's no reward to be had in parts that are not legal. There's no reward. It doesn't work. It works for Mom and Pop. Mom and pop built it illegally back in a time when no one pushed the envelope, and yes, they may have had it for 50 years illegally, but I guarantee you the minute they sell that and you buy that and you're a new owner, and they don't have any sympathy for you, they probably knew Mom and Pop, they probably was well-wired in the city, they will come after you in all likelihood and shut it down and if they don't, everyone else will know it's on the radar screen, so your Park is basically valueless.
Also, a Park with a failed Phase One or you're not even doing the Phase One. You've got to always be cognizant of environmental risks in today's world. Some of these environmental cleanup sites are insanely expensive, millions and millions of dollars to clean them up. There's some out there are in the hundreds of millions of dollars and the bad news is if you buy that Mobile Home Park, it's environmentally contaminated. Even though you didn't do it, the law says you are jointly and severely liable to clean it. So, what it means is you've got to get a Phase One Environmental on everything that you buy.
Another one, no title. It is not a good gamble. It is never a good strategy to buy a park where they cannot deliver good and clean title. What it means is you could be buying the Brooklyn Bridge. You're buying something that you're not actually sure the person you're buying it from is actually the owner, then why would you even buy it? It doesn't make any sense. I wasn't even building billboards back in the day when I had my billboard company on properties, where there was no clear title, but the guy was signing a billboard lease. It didn't have a title. Why in the world would you buy real property when you don't know who has title, it's way, way too dangerous.
Another one, no survey. You should never buy a Park without a survey. You got to have a survey. Just as the Park is there, just because there's an interest in the sign, there's so many lots and there's little roads in there, that doesn't in any way mean for even one minute that the property you think you're buying is in fact the one that you've just bought. Now, if you want to go cheap, a boundary survey is certainly better than nothing and if you can go out and find all the property corners and stakes to make sure you understand where the boundary is since the park is contained within it, but you would never want to take the risk of buying without a survey.
This next one I see people do, I always shake my head in horror that they do it. What they do is they don't buy the Mobile Home Parks, but instead buy the stock of the entity that owns the Mobile Home Park. They do this often because Mom and Pop convinced them it's okay and safe to do and convinced them as long as they buy the stock, then there won't be any property tax increases, no one will actually know that the Park is sold. The problem is that typically it's a terrible idea because if that Mom and Pop has done something insanely stupid, you're now stuck with it. So, if Mom and Pop did some terrible illegal activity, while they were the owners of the entity and then you buy the entity, well, you inherited their problems. So, if you can't know the actions of Mom and Pop, it's just too risky to do. I'm pretty confident any attorney will tell you that.
Now, there are some limited circumstances where you can hedge that risk and make it happen. Typically, a zero down non-recourse situation might foot the bill, but once again, you got to make sure because if they did something crazy that hasn't come around yet, because the person hasn't filed charges or filed a lawsuit yet, are you still going to be okay with your zero down non-recourse construction or can they hurt, pierce, they'll come after you personally. These are all things you'd have to figure out. What's the safe way to go, a way to mitigate that? You always want to buy a Mobile Home Park as an asset, an asset purchase, you do not want to buy it as a stock purchase. Never, never do that. And again, it doesn't make any sense for you as a buyer to do that. It's always something that the seller wants to convince the buyer to do, but it just doesn't make any sense.
Next one, a seller note without a cure period. So, what do I mean by that? I mean many people when they buy a note, the seller financing have this vague feeling that everything's going to be fine as long as you just mail in that payment, but there are certain cases where that's not true. If you mail in that payment in some States and the seller doesn't get it, not because of your fault, because it was lost in the mail, they can then call that new note due in full and unless you can pay it off right there on the spot, you could lose the Mobile Home Park.
How do you mitigate that? You've got to have a cure period in your note. You never want to sign a seller note that does not have a cure period or a bank note for that matter. What a cure period says is they'll give you a letter that says "I didn't get your payment" and then you have X number of days to fix that situation to go in there and get the payment. And if you do it during the cure period, you continue to move on. If you don't do it obviously the note gets called, but that's what gives you peace of mind that you're not going to have otherwise.
Now, what are some risks for what I call the portfolio builder groups? We've gone over people would have low capital, people have capital, and then there's another group out there of people trying to build entire portfolios and things, so they have some additional risks while yes, they also have some risk-reward scenarios to think about. The first one is geographic efficiency. It is probably far less risky if you have your Parks somewhat clustered together, because as you build that portfolio, you could have the next round of management up from the community managers managed more efficiently, that means there'll be more on top of your properties, which means you'll perform better which means you have lower risk, if we define risk as losing money, so geographic efficiency is important.
But at the same time, you don't want to have too much geographic dependence, you must rather have some degree of diversity. So, if you were going to go out and buy five Mobile Home Parks in your portfolio, I would not want to have five Mobile Home Parks in one city. I would rather have it spread maybe over five cities. They're all within reasonable driving time, but still, so that you have a little diversity. If one city for whatever reason, somebody had a terrible hit with a major importer that shut down, then at least you're propped up because 80% of your portfolio is still performing fine.
But if you put all five in one city and that city should have a bump in the road, then what are you going to do? You're 100% exposed. Think of it like stocks in the stock market. You would want to have some diversity in your portfolio. You don't want put all your money in one stock. Even Warren Buffett will tell you that's not a smart idea. You want to have diversity of your holdings and the same with a portfolio of the Parks.
Now that is unless you can find the most ideal, the most perfect market on the planet earth, not that necessarily one exists, but if you found one that you thought had the ultimate construction. It had recession resistant employment, it had a strong high home values that had high demand, then you might be willing to push the envelope a bit and maybe have several parts in that one magical spot. But if you don't find that magical spot, you're really probably better off having a little bit more diversity.
Also, if you are as a portfolio builder mode, you want to make sure that you are working towards the size and quality that can give you an exit to an even bigger institutional group. So how does that work? Well, you would look at what people like to buy in the institutional world, which in many cases will be for example a hundred lots and more. Certain markets, they like certain other attributes, you want to mirror that. That would be the key that gives you a much greater chance of selling in the end, which will get you a higher price, gives you more liquidity.
Back when I had my billboard company, that's where I got that idea from. I realized that one day, I probably would sell the billboards. So, I thought, "Well, what would other people want to buy from me?" So, while other people were out there doing their own thing, making their own pioneering concepts, I was deliberately copying verbatim what the folks over there at Foster & Kleiser were doing. I tried to match how their signs were sized, how they were built, their safety equipment, how much they like to pay you in ground leases, the length of the ground leases, because I knew one day I probably wanted to sell to them.
Now, in the end, I didn't sell them the first round. I sold it to somebody else who then sold them to them, so I was 100% right the entire time. But you need to always keep an eye from a risk perspective on what would the next bigger buyer want. If you don't do that, well, then what's going to happen is you're going to again have greater risk yourself because it may make it harder to find somebody at the end of the movie to buy at what you did.
So the moral to all this is you need to take risks. You have to take risks. If you don't want to take risks, well, that's fine. You'll never own anything or build any kind of financial foundation, but you got to take risks, but then you want to mitigate that risk, that's also important and you got to make sure your reward makes sense of the risk that you're taking. Those are basically the three steps: You got to take risk, you got to mitigate that risk the best you can, and don't take that risk until you know that the reward makes it worthwhile. If you read Sam Zell's book Am I Being Too Subtle? He serializes, "You always buy a deal with low risk, high reward and you never buy a deal with high risk, low reward." Often, it's not that simple. Often, we have to sit back and reflect on the deal of various attributes and say, "Okay, well, given old Sam Zell's formula, where did this one fall?" And it may take you a while to realize.
You got to think about all the various risks, you got to think how you can mitigate them, you got to figure out the reward. You know many deals that people do, the smartest thing they could do is to do what I call going to the end of the movie and working backwards. If you're buying a Park that's got a lot of vacancy and low rent, whatever the case may be, model what would happen once you get these things fixed and then apply a cap rate to that. In today's market, maybe you apply a cap rate like of an 8, 8-1/8 based on market just so you have a fair number.
You're not pushing the limits on valuation, and then see how much reward you will make from that deal and let that be your barometer. Some people will look at that and go, "I'm not going to do that deal. If I just take all that risk, I may make only $100,000." Then I think it's probably true you should do it. If you on another deal say, "Well, if I do this deal at the end of the movie, I can make $750,000, okay, that risk is worthwhile." Well, once again, I agree then that might work for you.
But risk versus reward is part of all Mobile Home Park buying and it's a part of, of life in general and we're seeing that right now with the COVID-19 crisis. People are wondering, "Should I go out of the house? Should I go to the stores?" Smart people say, "Well, yeah. I need to do these things. I can't function unless I do some basic items, but hey, I'm going to mitigate that. I'm going to socially distance. I'm going to wear a masks. I'm going to stay away from hotspot areas. And then here's my reward for doing it. Okay, that makes sense. Okay, I'm going to go ahead and step out there and do it." Same thing applies in the Mobile Home Park sphere identically. You don't want to make any stupid gambles. You want to make always smart gambles. You want to mitigate those gambles and you want to make sure at the very end the reward was there all along for what you did.
I'm now going to put the phones on Q&A format, hold on here.