The slang term “skin in the game” is defined by Wikipedia as “one having an incurred risk (monetary or otherwise) by being involved in achieving a goal”. It was made popular by Warren Buffett, who prefers that high level officers in a company have direct money in the venture to ensure their alignment of priorities with investors. So who really has “skin in the game” regarding mobile home park investing, and who is lacking that alignment of interests with you when you write that earnest money check? In this Mobile Home Park Mastery podcast we’re going to explore this topic in detail, and define who is really on your team vs. those who could care less after the closing has occurred.
Episode 161: “Skin In The Game” Transcript
Warren Buffet has brought forth many terms that investors embrace and hold dearly today, and one of those is "skin in the game". What is skin in the game? Skin in the game is defined by Wikipedia as, "one having an incurred risk monetary or otherwise by being involved in achieving a goal." This is Frank Rolfe, the Mobile Home Park Mastery Podcast Series. We're talking about skin in the game and most particularly, who really has skin in the game with your mobile home parks, so therefore have their interests aligned with yours? That's why Buffet, by the way, brought up the term. He wanted people who were officers of large companies to have risks. He wanted them to have skin in the game, capital invested, things to lose based on performance, because as we all know, there's nothing worse than a big corporation that's losing money while the officers are highly compensated.
But let's talk about mobile home parks instead, and talk about skin in the game. So who has skin in the game? Who cares deeply? Who has something at risk? The first person on the list, of course, your customers, because in the typical mobile home park business model, the customers own their own home and you own the land. As a result, they're a stakeholder just as the park owner is. Now, that's unusual because in no other form of real estate that I can think of do you have a situation in which the customers have skin in the game. They sure don't in an apartment complex. They can get up and just run off when the lease ends. Nothing really happens to them whether the complex looks nice or falls to wreck and ruin. But in a mobile home park, the customers care deeply because they actually have capital and debt and risk involved in living there. And therefore the customers in a mobile home park, their interests are just as aligned as the owners are.
It seems odd to me that the media often tries to portray that the reverse is true, that somehow the park owner and the customers are at odds. Nothing could be farther from the truth in reality, because for the business model to work, both must be happy, both must work together. Now, the next person, of course, who has skin in the game in a mobile home park is, in fact, the park owner. They're the ones that went out and got the big mortgage. The customers may have independently gone out and gotten a mortgage on their mobile home based on the area in which they bought it $5,000, $10,000, to maybe as much as $40,000. But it's the park owner that bears the big burden. If you buy a mobile home park for a million dollars, put $200,000 down, that's a lot of money after tax, and, I might also add, that you still have risk on the rest of the loan.
If the loan goes down bad and you have a recourse loan, they can come after you for it. And even if you have a non-recourse loan, they can ruin your career because having a property foreclosed on would be a blemish. It would make it very, very hard to borrow money again. Therefore, the park owner, certainly as much even as the collective grouping of the customers, has real, real skin in the game. They care very dearly about their investment, they want it to succeed, and there's no better way for it to succeed than, like with the customers, they all shoulder that burden of making it a nice community to live in. But there's another person who has skin in the game, and that, of course, is the lender, the person who creates the mortgage.
There's an old saying that, "Before there's return on principle, there must be return of principle." And in this case, what I'm describing is the fact that the bank, if you don't do well and you don't hit all of your targets and you don't pay them, well, they lose a lot of money. They don't make that much money in interest, really, if you look at the amount of risk banks take. They're really angels because they take a lot of risks and help a lot of people hit a lot of their goals, but they don't really share in that. They don't share in the upside. If your property doubles in value, what percent do they get of that? Zero. But at the same time, they do have extreme skin in the game. So your ledger is very aligned with you. You'll never learn that better than if there is a catastrophe of some type such as Hurricane Harvey and all of the floods that they had.
Many park owners during Hurricane Harvey experienced flooding. They experienced damage in the park. They may have lost part of their clientele. Many would go back to the lenders and find the lenders would very much work with them because the lenders' interests were aligned with the park owner. They all wanted it to succeed. So lenders, again, skin in the game. Finally, investors. Many people buy mobile home parks, not only with their own capital, with maybe that have partners, others who are also interested in investing in the affordable housing space. And these investors obviously also have a lot of skin in the game. So if they're putting up the down payment, you better believe that they care a lot, because if that property doesn't persevere and succeed, then they don't get their money back. So, once again, the investors are very much aligned. So those are the four parties in a mobile home park that have aligned interests, the customers, the park owners, the lenders, and the investors.
But there's another subset that doesn't have any skin in the game at all, but they're sure vocal about things but they just don't have any reason to really truly care. The first one is the real estate broker. Now, brokers are great people and we rely on them heavily. But remember that unless you do something that gives the broker some form of ownership once you've bought the mobile home park, they're transactional, they get their fee and they move forward. And where that's a problem is sometimes a broker may want to manipulate you a little and convince you of certain things that may not be true, that the property tax won't go up, that the demand for homes in that spot is enormous, that the quality of the park owned homes you're getting is beyond suspicion, and it may not be true because they really wanted to get the deal closed and because they're not truly aligned with you, sometimes their thoughts really shouldn't count.
So no skin in the game, first one would be the broker. Unless they have equity in it afterwards. Now that's not to say all brokers feel that way. Many brokers really do deeply care about you and your success and they look at you as a repeat customer. But there are some brokers out there that don't see it that way, they just want to get their commission check and then move on to the next property. The next one, attorneys. Often, we think of our attorney as someone very important as far as getting us what we want. But then again, sometimes we have to always remember that the attorney really is not fully aligned with us. If something goes bad with a mobile home park and they can't make it right to lager, they can't make it right the more fees they're collecting. So even though attorneys freely dispense out ideas, you have to really look through that because they're not truly aligned. That is, again, unless your attorney is a part owner in the mobile home park itself.
So get several opinions. Think about it a lot. Because, again, if you act on someone's input who's not a stakeholder, who doesn't have any skin in the game, you may not have the good ending for you who actually has the skin in the game. The next one is the media. The media loves to beat up on mobile home parks. There's probably no group in America that has less skin in the game, who cares less about how we do, than the U.S. media. Now, why is that? They used to love us so much. It's kind of sad. Back in the '50s, back in the '60s, we had Lucy and Ricky and Elvis Presley living in mobile home parks in movies, and everything was great. And we were on magazines and newspapers and everyone thought very highly of the mobile home park industry. But since the '70s, it's been nothing but downhill.
In recent times, people learned that using the word trailer park gets you a big audience of folks seeking sex and violence, shows like Cops, Trailer Park Boys, Myrtle Manor, the movie Eight Mile. The whole point the trailer park is in it is to provide the audience that subtle suggestion that something will happen. Some violence will happen, something that they're going to want to see. And because of that, the media has absolutely no alignment with our industry at all. They have no skin in the game. In fact, they take delight in taking our industry and perverting that into what they want, which is a greater audience. Do they need to tell the truth? Certainly not, they don't care if they tell the truth. They just want to sell ads, which they gain through greater viewership.
The next group that's not aligned with this are city officials. Now, sometimes they can be. Some cities care deeply about the mobile home park and its residents and how it fits into the overall community at large. And we applaud those cities. In fact, we currently have some expansions going on in a few cities. Not giant expansions, but cases where the city cares deeply about the absence of affordable housing. We had a little extra land in the mobile home park and they're allowing us to build a lot or two to finish that out. Our hat goes off to those places. They really do care. But then there's a whole lot of other cities that really do not and their purpose is not to provide affordable housing to those in America who need it. Their purposes instead to try and make money, to get uses that pay lots of tax.
If they tear down that mobile home park and put it in a shopping center, they get taxed twice, property tax and sales tax. If I can put a Home Depot on that mobile home park over there, and I'm a city official, man, I'm voting for that. And that does not work. It is not aligned with our interests at all. So when a city tells you something, once again, you have to acknowledge they're not a stakeholder, they're not aligned with you, and you have to question their motives, question the validity of what they say. So the bottom line is, always watch out for your property on those who are aligned with you and those who are not aligned with you. Look at the motive of those who are not aligned to be very skeptical. But also look at those who are aligned with you and do everything you can to help that group.
Help your customers to live good lives that have high quality of life in your property. Help your lender to always get payments on time and to feel positive about the industry and make more loans. Make sure your investors have a successful relationship with you. And again, for those who are not in alignment with what you have going on, always remember Warren Buffet's comment that they simply have no skin in the game. This is Frank Rolfe, the Mobile Home Park Mastery Podcast Series. Hope you to enjoyed this. Talk to you again soon.