The slang term for signing the documents and closing on a mobile home park is often called “pulling the trigger”. It’s a major commitment and one that can create angst with many buyers who are concerned if they are making the right decision. So what are the key factors that must be aligned to feel good about making this big step? In this Mobile Home Park Mastery podcast we’re going to review the various factors that must be in thumbs up position before you should sign those closing documents. Having a system to the way you close on a property will give you a greater chance of success and reduce your stress level.
Episode 192: Before You Pull The Trigger On Closing Transcript
'Pulling the trigger' is a slang term for total commitment because once you pull the trigger, you can't un-pull it. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to be talking about pulling the trigger on a mobile home park deal, which means basically go into closing, signing the documents, giving them your money. So how do you align yourself properly? What are the current steps you should take before you should pull that trigger? Well let's start off with doing some very, very smart financial calculations. I call this best case, worst case, and realistic case.
Let's start with the worst case. Put on your pessimistic hat. What's the worst that could happen here? You're looking at buying a mobile home park. It's probably got at least probably 10-20% vacancy. You probably planned on filling those lots but let's assume that you can't, that you don't. Also, there may be other cost cutting measures, other assumptions that you're making in your budget. What if those go awry? What if you can't hit those? Effectively, your worst case scenario should be what happens if everything you plan for fails. Now, you can't take it to too big an extreme. If we all said our worst case in driving our car was we're all going to be hit and killed, we couldn't drive our car. So you can't go full bore pessimism.
But there are certain assumptions you make in any real estate purchase that you might be able to scale back a bit, and then see what the net effect would be. Can you, in a worst case scenario if you don't fill those lots, if you don't raise the rent, can you still make your mortgage payment adequately? You still have that ability to pay the bills and to feel good about life. And if the answer is no, in my worst case scenario I go bankrupt, then you might not want to pull the trigger because bad things do happen. We've noticed that here obviously with the COVID-19 pandemic. Unexpected things do occur and you really don't want to extend yourself too far. So I would want in my worst case scenario if I have nothing but bad luck that I can still cover the mortgage. Maybe not make any return at all on my down payment principle, but be able to at least at a minimum until such time subsides, be able to make my mortgage payment.
Then you have the other extreme of the scale which is the best case scenario. In this scenario, everything works perfectly. You fill every lot. You raise all the rents. You cut all the costs. Everything is going perfectly. Is that really that impressive to you? Is that best case scenario really enough money, enough profit, enough enhancement of value to make you want to go forward or not? Are you excited about it? Is it a big deal to you? I want to say obviously in my best case I want to see something that would even make the pessimist an optimist.
And then in between those two you have the realistic case scenario. Now, the realistic case scenario is kind of a hybrid. You get some of the things you hoped for accomplished but others you don't. it's kind of hard to say what the realistic would be. You could say well let's go to the middle between those two gaps, but that depends on how much of that is left up to chance or luck, and how much of it is simply the fact that you raised the rent, which you can because there's not rent control law in your state and you're just following the law. So if you look at your best case which should be amazing, your worst case which should be survivable, and your realistic case which should still be a success, okay then you've passed that step and you're one step closer to pulling the trigger on the deal.
Then, have you done all of your due diligence homework? Is all of that been completed? So did you follow to the letter the certificate of zoning, verifying all of the costs, line item by line item by the real provider or three bids? You have a handle on every aspect of your property. If you have private water, private sewer, did you check out all those systems? Do you know what it will cost to fix them in their current condition? You have to be an absolute expert on that property before you should even think about pulling the trigger on closing. So did you do it? Did you do the homework? Do you know all the market comps? Do you know everything about the property? If the answer is yes I did, I've done great due diligence, then you can move on. Remember Ben Franklin said that diligence is the mother of good luck. So again, to be successful, to feel good about pulling the trigger, you've got to have all your homework done in the due diligence department.
Number three, let's look at the risk reward scenario and just make sure it's healthy. We all know that Sam Zell is a huge disciple of risk reward management. He in fact is the largest owner of not one, not two, but three sectors of real estate: office, apartment, and mobile home park. He even wrote a book on it called Am I Being Too Subtle. His business card even has "risk reward" on the business card. But his risk reward, it means that if a deal has lots of reward and very little risk you should always do it. If it has lots of risk and very little reward you should never do it. There needs to be a healthy relationship between those two things. So if you're going to take risk, if you're going to buy a park that has a lot of lots to fill or other problems, and you're going to fix that, you should get a huge amount of reward. And similarly if you're buying a property that doesn't have a lot of risk to it than your reward doesn't have to be that great. But you cannot be involved in buying things that have lots of risk but not a healthy amount of reward for the trouble of doing it.
Now, where do you follow trouble in this formula typically? Well, you know where. It's from the seller. Some sellers want you to get into an uncomfortable position regarding risk and reward. They want to factor in all of these risks as though they were a certainty, and that they didn't exist. They might price into their model the fact that you fill 10 or 20 lots to come up to the price they want to get. Or maybe those rent increases you were going to do that should have gone into your pocket, they're going to go to the seller's pocket because he's priced it as though those rent increases have already occurred. Don't do that to yourself. You've got to have a very healthy balance between risk and reward. You cannot have it any other way. If your risk reward is out of kilter, what's going to happen is you're going to put yourself in a very, very bad position because you may not attain everything that you were banking on. As a result, it will be hard to explain to anyone why you did the deal. There are deals that have been done like that across America over the years by buyers who got in way over their heads as far as not truly evaluating the relationship between the risk and the reward in the deal. But if your deal has a reasonable correlation between risk and reward, higher the risk higher the reward then you can proceed to the fourth item before you pull the trigger.
The fourth item is kind of the hardest to really put your finger on, but that is having a positive gut feel about pulling the trigger. Now, if you've ever seen a documentary on how a naval ship works, typically you have all of these guys on the boat with little computer monitors, screaming out bits of data. And the captain of the ship standing in the middle pondering the data, writing on an erasable board his thoughts. They do that in the Navy because at any given moment if there's a nuclear attack, the computers will go out and the captain is going to try and run that ship just based on his grasp of the facts and his memory of where they were at. But also the reason is the human mind has more potential at this moment than if they were to merge all those computers together. Your mind is able to take into account more bits of information and make better decisions typically than a computer can. We call that gut feel, because your brain is at all times giving you a continuous stream of data, if you'll only listen to it., There's a real problem when you're buying mobile home parks and you don't have a positive gut feel. The problem typically stems from the fact that your brain is trying to warn you that you should not do this. There's danger ahead, there's a problem.
In the past, I have failed on one occasion to follow my gut feel. Very early in my career, way, way back, I bought a property in Shreveport, Louisiana. I did not feel positive about it at all. I was moving forward because I had a broker calling to say, "When are we closing?" I had a seller saying, "When are we closing?" I had the bank saying, "When are we closing?" The title company, "Hey when are we closing?" and I couldn't put my finger on why I just wasn't really enthused. I thought well maybe I'm just in a grouchy mood but I just didn't want to do it. Just didn't want to drive to Shreveport, didn't want to sign the papers for whatever reason it might be. And in the end, it turned out I was totally correct. That park was a disaster. I was able to fortunately sell it off and get my money back, but had I only listened to my basic inner gut instinct it would have saved myself a huge amount of time and trouble. There's nothing more embarrassing than buying a deal, doing the work on the deal, and then selling it for what you have in it because you wasted all of that time. And that time could have been spent on a different deal that could have been more successful.
So the final item before you pull the trigger is what are you thinking, how are you feeling. Are you excited? Are you happy? Are you feeling good about buying this mobile home park? Or are you kind of filled with dread and really not that excited? If that's the case, pump the break for a moment. Try to figure out what is it exactly about the deal that you do not find comforting. What is the problem here? See if you can analyze it. Go back to basics. Recheck did I really do all of my proper due diligence book work, or is the problem that I didn't and I have this nagging feeling that there may be something lurking that's wrong? Or did I not really look at my best case/worst case/realistic case scenario and lo and behold no wait, I can't do this because that worst case scenario would sink me. Or is the nagging issue the fact that you think the risk and reward isn't fair? You're maybe taking too much effort, too much danger without the necessary amount of upside. But whatever the reason is, you've got to have everything in alignment including feeling good before you pull the trigger.
Now if you've done all four of these steps and everything is pointing yes do it, then by all means don't hold back. Because you've taken all of the effort necessary to succeed. But until you can answer yes to those four categories, you should not go to close and you should not pull the trigger. You have the capability of getting this pulled off? Of course you do. It's just effort. It's just work. It's just knowledge, but yes you can definitely do it. Many mobile home parks are bought constantly where everything is in perfect alignment, but definitely it's a great idea to have all things aligned if you want to succeed. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.