Can you buy a dollar for 50 cents? In some mobile home parks the answer is “yes”. Poor pricing practices by mom & pop owners are legendary. In this fourth episode in our five-part series on Easy Turn-Arounds, we’re going to give real-life examples of parks that were priced way too low, as well as how to find them and negotiate them. We’re also going to review another component to these deals, and that’s often insanely great seller financing terms. So if you want to hear how to avoid heavy lifting altogether, then tune into this week’s installment.
Episode 47: Easy Turnarounds That Are Just Improperly Priced Transcript
Would you buy a dollar for three-quarters? And, if so, how many would you buy? This is Frank Rolfe, the Mobile Home Park Mastery Podcast Series. We're in our fourth installment of a five-part series on easy turnarounds. We're going to be talking about just that, buying mobile home parks that are under-priced. Basically, paying for an asset at a reduction in value of what they could sell for the very moment that you buy it. Let me start off by giving you an example, my very first mobile home park called, Glen Haven. Glen Haven had 83 lots and I bought it for $400,000, which was less than $5000 per lot.
Now, you maybe saying, "So, what?" Well, here's the deal. It cost about $15,000 per lot to build a mobile home park, plus the cost of the land. Right off the bat I was buying Glen Haven for a fraction of replacement cost, but even then that doesn't mean much. You see mobile home parks all the time on the highway, that just shouldn't have never been built. And even though they also cost $15,000 plus land, there's no reason to believe that was a great bargain. But Glen Haven was right on the freeway, right in Dallas, Texas. If you really look at the numbers, right off the start, if I had it appraised, which I didn't, because the seller carried the paper. I guarantee you it would have come in for being worth way more than $400,000. The seller only priced it so low, because he was losing $2000 a month with it. Which I've already gone over in an earlier turnaround story, but the bottom line is he didn't know any better and neither did I.
He through out a price, right there on the phone with me, to get me to buy it, right on the spot. And he priced it way too low. Then to make it even crazier he offered me seller carry. I only had to put down $10,000, which came out to about 2.5% of purchase price down. Then he carried the balance, $390,000, for 30 years of the fully amortizing mortgage and non-recourse on top of that. It must have been a good deal, because I sold it about seven years later for about $1.5 million. I think that was a case of buying an asset that, right off the bat, I was paying less than it was worth.
But you maybe saying, "Okay, well, that's a turnaround story." There were other issues in that. You were losing two grand a month. He had to save the day on that. Well, let me give you another example. This is a park that we bought back in Laramie, Wyoming. We bought this park at a 12% cap-rate, even though the seller thought it was at a 6% cap-rate. He had his revenue off by $60,000 when he came up with his analysis of the property. Now, Laramie is a really good market and any mobile home park that you can buy today, even at an eight cap would be considered good. Here he was selling it at 12% cap-rate, right out of the chute, and that did not even include the fact that he revs were far below market, and that he had some vacant homes we could rent, and some storage units that could be rented.
The bottom line is that parks are often over-priced, or I'm sorry, under-priced and it's due to several different reasons. The first one, lack of proper accounting of the performance. That's what happened in Laramie. The mom-and-pop seller did not really have a good handle on his N-O-I. Now, he didn't because the manager had been embezzling $60,000 a year, but nevertheless, the fact still remained that the park was producing far more net income than he actually thought. The second reason is just a general lack of knowledge regarding prevailing cap-rates. Now, we all know that the current market, out there, on cap-rates is typically seven, 8%, on up into the 10% range. But if you're a mom-and-pop, and you've been out of the market for the longest time, you haven't bought or done anything in the industry for long periods of time, then you don't really know what the cap-rates are.
When you go to price it to sell, you're really operating in a vacuum. You don't really have a whole lot of knowledge on it. You might think, well, the person's broke or they would help save the day. But what happens is, typically, the broker wants to get a commission. And if the seller wants to sell him the property, at a low price, it's great for the broker, because he knows he'll get that deal closed really fast. The third reason is just straight up operational stress and a desire to sell the property quickly. That's what happened with Glen Haven. Mom-and-pop owner had owned it for many, many years, lived in California and just really had lost complete interest in the property. The fact that it was losing money every month made them think, well, I just want to get rid of it. I don't really care what the value is, I just want to get it off my plate, because I don't even care anymore.
You see that a lot with mom-and-pop sellers, particularly, greatest generation and silent generation folks. Because they're really getting far on in age, and the concept of having to go out there and collect rent and all those different items, which may seem exciting to the new buyer. To the older buyer, they don't want to much want to do it anymore. They'd rather just, basically, do more fun stuff; go get on their boat, go play golf, play with their grandkids, something like that. They don't really have the enthusiasm anymore that really makes them want to go forward with the deal.
Don't forget that Warren Buffet, among other people, have said that without enthusiasm there's no energy, without energy there's nothing. And that's what happens a lot of times with moms-and-pops. They just lose that spark that made them want to go to work everyday and get that park the best it can be. That's when they drop the price very low, is they just don't want to do it anymore. The fourth reason, which is seldom talked about a lot, but we're going to talk about it now is, bonding. Now, what the heck is bonding you might say. I think I've talked about it in earlier podcasts, but I cannot possible emphasize it enough. It's the magical power that makes amazing deals happen.
What happens with bonding is you and the seller hit it off, and the seller says to himself, "I really like this person. I really want them to do well and I'm going to price it a little lower than I probably should. I might even carry the paper in a manner which I probably shouldn't, because I want them to succeed." Let me give you an example of bonding. This is a non-mobile home park example, but I think it will be very apparent to you quickly. I used to be in the billboard business, as we all know. I once built a billboard on a property on Interstate 20, east of Dallas. And when I went to put the pole in, there was a little plaque on that spot.
I asked the property owner about the plaque and here's what he told me. Years back there had been an auction during Dallas' savings and loan crash back in the '80s. What happen back then is if your property went into default there would be an auction, where the property would be sold and the bank would always bid in the loan amount. Then, once they took control of the property, they would try and market it to get their money back. It's pretty standard practice back then. At the auction, if anyone showed up, they'd have to bid more than the loan value to have any prayer of buying the property, because the bank would always bid the loan. Well, in this case, property was large, highway frontage, and there was one person who wanted to buy it, at a price more than the bank's note. That was a guy named, George Lucas. No, not the Star Wars guy. This is a different George Lucas. A very large landowner in Dallas back in the day.
He goes to the auction, out at the property, there's the auctioneer. Here's George Lucas, but the bank has not shown up and it's time to start the auction. And for some bizarre reason, the bank has not shown up. This is a true crisis, because if the bank does not show up, it only has an opening bid of $10,000 and no reserve. If that banker doesn't show up quickly, Lucas can buy the property for $10,000 and the loan, in this case, was about a half a million dollars. It could be a very, very bad day for the bank. Suddenly they notice, here comes the banker, across the field from the other side. Seems weird that you would walk through the weeds, and all the insects, and everything to get to the auction spot. Why didn't you just pull up on the highway, but they thought, well, who knows, the guy may be wanting to walk the property and see what he's getting into.
But here comes the banker to bid the loan value. But when the guy gets there, they see, this isn't a banker. This guy isn't dressed nicely. He doesn't look, at all, like a banker. So they say, "Hey, who are you and why are you at the auction?" And they say, "Oh, well, I live in that shack back behind the land and I was just curious because I see your Jaguar and I want to look at it," because Lucas drove a really nice Jaguar automobile. So Lucas said, "Sure. Let me show around the car." He opened up the door, showed him inside, showed him the engine, said, "Isn't this a cool car?" The guy said, "Yeah, it's a really cool car. I really like it a lot. I hope someday to be rich enough that I can buy a Jaguar like this."
During that little episode, Lucas suddenly took a liking to this guy, just like him, liked his character, liked his story. Lucas said to the auctioneer, "It's time to begin the auction, enough time has passed. We've got to get it going." And the auctioneer said, "Okay. Well, this is a catastrophe. The banker should be here, but he's forgotten, or something, so I guess let's start it up." Lucas said, "I'll bid in $10,000." Well, that's the end of the auction, except Lucas suddenly says to the guy, "Hey, guy, why don't you bid in $10,001?" Now, this caused a problem because the guy had no money, so he refused. Lucas said, "You got to say it, just say, $10,001 to humor me. If you have no money, it won't matter anyway. They couldn't sue you anyway, just say it."
So, the guy said, "$10,001," and Lucas said, "Okay. I drop out, that guy wins." Well, the auctioneer suddenly thought, wow, this is actually the best thing that could happen, because Lucas has got money and this guy doesn't. And he now has to come up with the money or the auction is negated and it goes back to the bank to be auctioned once again. However, instead, Lucas said to the guy, "Here, here I'll give you the $10,001 and one day, when you get $10,001 together you bring it to me. Here's my business card," and he jumped in the Jaguar and took off. Now, why did Lucas do that? Why would Lucas give, basically, the land to a person he'd never met before? The answer is, bonding. He had liked this guy, from showing him around the automobile, and he wanted to help him.
He saw no reason to add on more land to Lucas' land empire. Why not give this guy the land? Why not? What did he care? He had thousands of acres of land. Now, the reason I know this story, again, is the property owner, the new one, told me how he came to own the property. What he did with it was, he went down to the bank and he mortgaged the land. He got $50,000 for the land, even though he had terrible credit and no money, at all. Because the bank felt, at least, the land had to be worth 50 grand, because it was valued a half a million. He used the money to build a barbecue restaurant and he also built that little plaque. He told me the end of the story was that Lucas died only about a month after the auction. So, basically, Lucas knew he had terminal cancer, even when the auction was going on and he had more fun, more enjoyment, out of helping this guy than he ever would have had in taking that land.
That powerful force is called, bonding. We see it every day in the mobile home park business. You see it every day in many, many different things. The greatest generation folks, the silent generation, all these people are so dedicated and so kind. They really like helping people. That often if they bond with you, if they like you, magical results can happen. Now, you know my wife used to work at Neiman Marcus. She sold different things at Neiman Marcus many, many years ago. Neiman Marcus has its own unique wrinkle. They have to honor the price on the product, even if it was miss-marked. I don't know if they still do that today, but 30 years ago you could go into Neiman's and if they had priced something wrong, if they had left off a zero, or even two zeros, they quietly had to honor it. They could not say, "Oh, I am sorry. I missed tagged that merchandise."
So my wife and I would often go around to different Neiman's stores and turn over all the tags on the different items looking for things that were miss-marked. Over the years we found thousands of dollars of items that we could buy for hundreds of dollars. It was that simple. Basically, you would find a bowl that was supposed to be selling for $500, marked to 50. You'd find a woman's dress, it was marked at $700 supposedly, but, in fact, it was only marked at 70. It was amazing, in fact, how many tags were miss-marked. Now, why am I telling you that? Because the same often happens with mobile home parks. They're simply miss-marked.
Now, people will say, "No, that's impossible. The world is too perfect. There's too much math, too much computers. There's no human error anymore," and that's completely wrong. Maybe that's true in cases where you have sophisticated sellers who really understand computer programs and are all over Excel and QuickBooks. But the fact of the matter is, with mobile home parks, many, many times they're simply miss-marked. And that's a very easy turnaround strategy, buying something for less than it's worth the minute you buy it. Is, obviously, a really, really great way to make money, but it's still not the easiest turnaround plan.
Coming up on our final installment, our fifth installment, in the turnaround plan called, easy turnarounds. We're going to talk about the easiest turnaround plan of all. I'll be back with you shortly with that and our fifth, and final, installment in the series, Easy Turnarounds. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. Hope you enjoyed this and talk to you again soon.