In forging successful mobile home park deals, one of your most important tools is simply "thinking outside the box". In this Mobile Home Park Mastery podcast we're going to review some of the most successful creative tactics to make deals work for both buyer and seller. As we'll discuss, today's winning buyer is a mixture of one part scientist and one part sculptor.
Episode 384: The Creative Dealmaker’s Playbook Transcript
For the longest time, being a successful mobile home park buyer was all about being good with numbers, being good with negotiating. But now it's changed. The playing field has had a seismic shift where now one of the key attributes of successful mobile home park buyers is creativity. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk about using your outside the box intelligence to solve practical problems that often kill deals so that you can forge a successful deal with a buyer and a seller using your wits, your street smarts, your comprehension of creativity, and what can be done with the raw material. Now, why is this only now becoming a big deal? Well, that's because for the longest time, we had a level place playing field. We had a flat line of interest rates and values, and it was all about who could basically come up with the money for the down payment, who could negotiate deals slightly here and there, but we all know what happened. Jerome Powell went crazy with interest rates in Q1 of 2022. And suddenly rates rose higher and faster than they had in the past 40 years.
Suddenly what happened was you had lots of sellers who missed the boat. They missed their opportunity to sell at the price they wanted. And now with interest rates going up, in many cases double, sometimes even triple, you couldn't get those prices anymore. And suddenly we had like a siege, we had a deadlock because the sellers would not sell for what the price that they thought they could have had had in the past using conventional financing. And the buyers were unwilling to pay the price of what was there back in the days of lower caps and interest rates. But then suddenly a new type of buyer came on the scene, and that was the one who could figure out how to solve these problems, embracing the fact that times had changed, how to deliver a price that was satisfactory to both buyer and seller. And I call this the creative deal makers playbook, because it's basically tactics that you can use over and over again based on the individual details of the deal. So let's start off with the most basic, and that is the problem that when the seller wants more money than the net income will support.
So in other words, the seller wants to sell you the mobile home park at a 6 cap when the interest rate on your loan might itself be higher than 6%. So how can you solve that? What are some creative, outside the box ways to solve that? Well, one, it's become very popular and is always popular. Was popular when I got in the business was seller financing. You can say to the seller, look, oh, I see you want the value of 2019 before interest rates went up later. So if you want that, you'll have to sell or finance for maybe 10 years at what the interest rate was back then. I can't get a loan at a bank and pay out 7% and buy it at the 6 cap, but I can buy it at the 6 cap if you'll carry the paper at 3% for a decade. And many deals have subsequently been forged by that one single creative solution. If they want the pricing of the olden days, they'll have to carry the financing like the olden days. Another thing you can do is do a master lease with an option. We've been big fans of that construction over the decades.
What you do is you pay the seller a flat fee every month to take over full control of the property. And then you fix it. You raise rent, you fill lots, you fill vacant park owned homes. All the things you need to do, cut cost, fix utility leaks, etcetera. And then when you get it all fixed up, then you close on it. That way you're not closing on it at a 6 cap when the interest rate's at a 7. You close on it when you're at a 10 cap and the interest rate's at a 7. How long does it take to do it? Most of those deals, you can hammer out a deal where the mass release is probably three years and as much as five years with a set price to pay. But it gives you the ability to mold and sculpt that deal into where it's worthy of that higher price before you close. Another thing you can do is use the first rent raise in your numbers. You know, most of the rents in our industry are crazy stupid low. And let's say the current mom-and-pop rent is 350. The market rent is 550.
Well, you could probably use the first increase, which you can enact in most states within 90 days or so. So we're going to go ahead and assume we already had that first $50 increase, as though that was there on the first day we closed the deal. And you'll say, well, it's not, right, it's not for 90 days, but you can give maybe three months on that. A lot of deals are now done where people are throwing in that first increase into their NOI projection, because that's what you have to do to make up the difference. And it's really not asking that much. The final thing is, of course, is just to negotiate the price down. Now this requires a lot of artful strategy as a negotiator to convince somebody that they're living in the past and they got to embrace the now as far as valuations.
Of the things I mentioned that in some cases that may be the hardest of those four ideas, but nevertheless, those are the four basic ideas that you can utilize when the seller wants too much. Now, another problem sometimes is a seller has too many rental homes that causes you heartburn because lenders hate them, buyers hate them, the whole world hates rental homes. They do nothing but lose money and create endless headache, heartache and liability. So what do you do then? Mom-and-pop's got a 50 space park, they got 20 rental homes. What do I do with that mess? How do I creatively fix that? Well, the creative solution there is to get rid of the rental homes, to sell those to the existing tenants. And if the homes are from the '80s, but preferably '90s to newer, you can even get paid to do it. Go to a lender like Performance Equity Partners, PEP, out of Chicago, and they might give you for each home that you sell the customer, they might create a mortgage on that of. 10 grand, 20 grand, 30 grand, and then you get that money and you can use that money to either pay down debt or to do other renovations in the park. So converting those crummy rental homes into an actual asset where you get paid with a mortgage, actual cash in your hand, that's a very good solution to those.
Also, another thing you can do is you can go ahead and just give the homes away sometimes. Just go to the residence and say, you know what, here's the deal. You're paying $500 a month to rent that home and I'll just give the home to you and you start paying me 400 a month in lot rent only. Because in most cases that home was costing two or three hundred dollars a month in repair, maintenance, tax, insurance, commissions, and by simply giving it to them, you cut off the negative that you would have with those rental homes. Another problem that comes up sometimes is failing infrastructure with a big capex price tag. That might be that the roads are failing, water lines, sewer lines, packaging plant, septic field, you fill in the blank and you don't know how to pay for that. How's that going to work?
How am I going to come up and fix that packaging plant for $200,000? And where am I getting the respect from the seller regarding having to do that? Well, what are the creative solutions? Well, number one, see if you can finance those renovations into the original bank loan. Some banks will allow you to finance those big capex items. That takes a lot of the burden off of you. Also, maybe you can find a cheaper way to fix them and the seller can give you a big discount to fix it. And you end up as a real creative champion because it doesn't cost you anywhere near what mom-and-pop anticipated it would cost to ultimately do the trick. Let's assume the roads are shot. And mom-and-pop says, well, the roads are shot. They'll probably cost you 150 grand to fix. So they take $150,000 discount off the deal and then you bid it all over the place and you get it done for 75,000.
And you basically made $75,000 from that infrastructure issue. Another option is to have the seller carry a second mortgage. Tell the seller, look, okay, I'll pay the price you need, but this thing needs another $200,000 of work. So you'll have to carry a second at closing for the $200,000. You're going to put a part of your proceeds in the form of a note because the bank isn't going to do it. And the bank can't even support that much debt. So you'll have to contribute if you want to get this deal done. Or what if the problem is you have too much vacancy, not just your traditional 20% vacancy, which for most lenders is adequate, but let's say you're at 50% vacancy, then what do you do? Well, the first solution typically is, number one, they're going to have to carry the paper because there aren't many lenders out there that will do mobile home parks with sub 80% occupancy, and most of them call it quits at under 70% occupancy.
But the seller may carry the paper and that eliminates that whole banking hurdle that you can't possibly get done. Or you could go in with a lower down payment with seller financing and tell them you need to use that capital to help fill the lots, because you probably will. So that's not a bad idea. And then a final, really creative solution is to get rid of the vacant lots, reclassify them into another purpose. If you have a whole bunch of small lots in a park that's got a lot of cars, maybe you make that overflow parking. You just pave those lots over, and now they no longer are vacant lots. Or you create a green space amenity area where there is none. But sometimes vacant lots aren't doing you any good. They're actually harming you. When you run your numbers with the bank, you're based on actual existing occupancy, so you're not inflating that number. You're simply saying, look, I don't think I'm going to fill this many vacant lots, so I'm not even going to try. I'm going to use those for other purposes within the park. And typically a smart lender will look at that and say, you know, I can live with that.
Now, later if you want to utilize a lot. I've never heard of a lender who argues over you making more money than you were supposed to with the asset. But nevertheless, that's a creative approach to try and get the deal done. The bottom line to it is successful mobile home park buyers today have a little extra artist, a little extra sculptor. They are part Rodin, part Picasso. Not just numbers crunching, not just negotiating. Those are very important traits. But right now, creativity is a big part of deal making. So you got to think a little more outside the box. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.