In this fourth installment of our five-part series on Tough Turnarounds, we’re going to examine a property in Illinois that looked like Berlin after the war – just a giant pile of rubble with a mobile home park underneath. But beneath that rough Hollywood set of destruction was a fairly nice asset that had, at one time, been a luxury community. Learn how we bought this mobile home park back to life despite drug dealers, trash, dead trees, burned homes, and a general lack of pride that was determined to drag it down.
Episode 42: This Must Be A Hollywood Set Transcript
We've talked about piles of debris. We've talked about crazy mountain men in diapers chasing me down the street. We've talked about deals that had no P&L, no rent roll, but we're gonna do something even rougher now. This next turnaround in our five part tough turnaround series is a park over in Illinois and this thing looked like something straight out one of those war movies. You know the ones where they show Berlin after the war, just a bunch of smoking ruin? Picture that in mobile home part forum, 'cause that's exactly what this was. Here's how the deal went down. It was a mom-and-pop who had this property and they just let it fall into complete abject ruin. I'm not really sure why, but they just did. When trees fell down, they didn't even pick them up. When people threw their trash on the ground, they didn't even pick it up. When people abandoned their mobile home, they didn't even attempt to find another resident. If the home burned, they just let it sit there as an Incredible Hulk. So picture absolute abject destruction, that's all you saw when you entered the property. It was piles of debris, broken homes with broken windows. It would scare virtually anybody off.
However, there was one appealing feature to the deal, it had really, really low cost. There were only asking about $5,000.00 a space and let's go over what that means. If you were to build a mobile home park today in America, you'd be looking at spending roughly $15,000.00 per pad, plus soft costs, plus land. So this very park, it was being offered at $5,000.00 a pad, would cost to build new today probably more like 20 to $25,000.00 a pad. So $5,000.00 is an incredible bargain. I think we would all agree with that. We also found that the property had one unique feature, at one time it had been a really, really nice property. It had great bones, people always talk about bones. What does bones mean? Bones mean when you look through all the clutter and debris and all the distractions, what kind of infrastructure does it have. And this one had concrete curb, paved streets, it had everything. It even had a giant, top of line clubhouse, not in its current form. Currently, it was just filled with junk. But at time, this place had been really, really fancy.
There had been a pool behind the clubhouse, but it had been totally filled in. It had green spaces for residents to congregate and enjoy nature with picnic tables and stuff. So it had some really great features to it, but it was probably the roughest turnaround physically that I had ever seen. So what do we know on the front end of the property? We know that it's cheap, there's item number one. But we also know as a result of it being so cheap and in such bad repair, it does need a ton of capital. When you're trying to buy a property like that, one of the first things you need to do to restrain yourself from making a terrible decision is do some ballpark calculations of what will it cost to clean this thing up. It's so different that if you're looking of buying a certain kinda car, a classic car. Let's say you wanna buy a 1970s Dodge Challenger. It's not so much what you're paying for the Dodge Challenger on the front end if it's an old rust bucket, but what will it cost to redo the floor and put in new seats and repaint the car in that type of item.
In this case, the good news was that the most expensive feature of the mobile home park itself was not too bad and that's the roads. The roads needed some pothole repair, but they were generally in good condition. Roads can be very, very expensive. Hundreds of thousands of dollars in this case would've been needed to replace the roads, but the roads weren't too bad so that helped hugely. Some of the ugliest things of mobile home parks really aren't that expensive if you think about it. If you've got a pile of debris on every single lot, that's a roll off dumpster, it's some guys, it's some labor but you could probably get all that cleaned off within a couple of weeks, and that's exactly what we did here. I think we ended up taking away ... I wanna say something like 30 or 40 roll off dumpster loads of trash and debris, the bulk of it probably tree material, limbs and actual giant trees that had fallen over over time. So we were able to get the clean up done for not a huge amount of money, not cheap, but nothing like the roads would have cost.
The next item on the list we had to do was get all of the trees fixed. We had to take down all the dead trees and dead tree limbs, and again there were a lot of them. The park had a whole lot of trees but we were able to get that done. So we were able to physically get the thing in a fairly sightly condition on a somewhat limited budget. We put in new signage, we fixed the fence that ran down the frontage of the property, put in some feather flags, generally spruced things up. Went to the clubhouse, took all of the debris out of that, put in some inexpensive carpet that was fairly attractive, painted all the walls, made that back into an area that you could use for a community event. So all those items in the end still made the price appealing. So you gotta make sure that you budget for those accurately and correctly. But in this case, even when you add in those additional costs, since we were only paying $5,000.00 per space on the front end for it, that all seemed to work.
So now the next problem is, what do you do with tenant base which you can't build around? This property had a lot of residents who had not paid rent in years. Even though mom-and-pop did bill them, they did not evict people, and that's one of the worst things you can do as a park owner. If you wanna really ruin your property, don't enforce collections. Every park out there should use a no pay, no stay strategy. It's the only fair way to make sure the people who wanna live there pay to live there, and for those who do pay their rent, that they're not being discriminated against because everyone has to pay. It's not fair for people to be paying rent when others don't pay. So first thing we had to do was we had to make sure that the folks in there could afford to pay, and we lost a lot of people. We lost out of that property probably 50 people once we let them know that they had to pay their rent every month. So 50 folks basically left and abandoned their homes in there faced with the idea that they actually had to pay rent.
We also had a bunch of undesirable folks in there who were making drugs. We knew that they were, we had met with the police before buying the property and they advised us there were some bad folks in there. First time I drove through the park, people came out on there in front of their mobile homes and they would put their hands on what was clearly a gun inside their pocket to try and scare me that they were the boss, and the park had lost control and of course, it's not true. The park owns the land, it can non renew their lease, but for some reason they thought they were powerful, but it didn't work. We non renewed them and what really kind of ended the entire drug issue was the manufacturing home in the park blew up and burned to the ground. It was a double wide and that kind of set off the exodus of all the people who were in the drug trade from leaving the property.
So pretty soon, we had the thing as we spoke about on our last tough turnaround discussion, we had the thing stabilized. We only had residents in there who were paying the rent, who understood that we were trying to run a business, that we trying to keep ... have pride of ownership in there. So we had people that were good. We got rid of all the bad people, all the folks who wouldn't pay or didn't wanna behave. They were all gone and we cleaned up the property as best we could and made it back to being a clean and sightly place. But then of course, you come to the next part of the tough turnaround mantra and that's maximize. So now we've stabilized, but now we have to maximize. So what do you? Well now we had a lot of vacant homes. When you have a lot of vacant homes, what you have to do is you have to go in those homes and you have to grade them, ABCDF just like you do in school.
An FO means it's not salvageable, it's in such poor condition you might as well destroy it. The number one cause of a home getting an F grade is a lot of moisture intrusion, which has led to black mold and other issues which are not safe for humans to live in. So those homes all got an F designation and they were scrapped. When you scrap a home like that, you literally just bring a roll off dumpster out, you hire someone who has basically a Bobcat. They strike the wall off a couple times with the Bobcat and the home basically collapses. They break it apart and put it in the dumpster. So all those homes were scrapped. Though what that left us then were homes that were ranked ABC and D. A home means it just needs cleaning. B home needs light renovation. C home means average renovation, which in our industry's about $4,000.00 parts and labor. D home however, needs up to $10,000.00 of repair and often the D homes ultimately end up being scrapped.
So we basically went and graded our homes, cleaned up the A's first, the B's second and the C's next, which of course makes logical sense 'cause you're racing the clock to get the revenue going. And we ran the ads and we started having people come in and move into those homes. So overtime, we got all of the homes that were decent occupied and those that were not worthy of saving, demolished and removed. So where are we now in that part of the movie, 'cause this is still a turnaround in progress. Where we are now is we're now in the filling the lot mode. We've got a lot of vacant lots on this property. So what we're doing is we were bringing in used and new homes, advertising those homes and trying to find folks who wanted to buy or rent these homes in a park that is now becoming a nice, presentable part of the overall equation. How long will it take us to fill the lot? So we've got probably around 150 vacant lots on this property. So based on any kind of actuarial table of fill, this park can probably fill about two units a month. So it's still probably five years out from being full, but we're not even sure if we're gonna use all the lots.
In some of the cases, the lots are so small we'll probably combine them together. So we'll put one home across two lots. So at the movie, we probably will not end up utilizing one home on each lot. We'll sometimes have one lot ... one home spread across two lots and some cases maybe as many as three lots. We may also establish at some point a section of that park that allows for RVs, it's allowed under our city permit. So to do RVs, we'll probably take one section where we have a lot of vacant lots together, put a little white vinyl fencing perhaps and show a little identity. Maybe a little RV lot sign in front of that and make that into its own standalone RV park inside of the mobile home park. We may also over time take some of the vacant lots and make them into other uses. You know it's important in today's world, remember from that Time Magazine article that a mobile home park is the gated community for the less affluent, to offer as many consumer amenities as you can. So it may be over time that we take some of those vacant lots and congregate them to make them into things like park and store areas, where you can put RVs and boats, or possibly just further additional playground areas for people.
So I'm not even going to say for sure that all those lots will ultimately have a home on them at all, some of them may find other uses. That's kinda where we're at in the movie. So basically once again, what's the mantra? How do you do a tough turnaround? Well first you stabilize the property. You get rid off all the bad things, all of the debris, all the abandoned burned up homes, all the debris, all the trash. You get all that off property. You also make sure that all the residents that you're going to have living in there are paying their rent every month and are playing by the rules, and are part of the overall picture of making the property a nice place for people to live. Then you go from the stabilizing section to the maximizing section. What that means is you take all the vacant homes, all the vacant lots, all the vacant structures and you try and make those income producing. It's absolutely critical.
Now what made us tackle a deal of this magnitude, because again this is the physically roughest property that I've never been involved in. I think what made it possible was number one, the location was good. Not the best location we've ever seen, but it's a residential area in a town that we're just minutes away from major shopping areas, lots of different employers for our kind of residents. So the location was good, the infrastructure was great. The roads were very solid, we have concrete curb and gutter. We have the clubhouse, which although at the time was a detriment, today is an asset. So we like the infrastructure a lot. We also loved the fact that the economics of the lots being so cheap and despite the fact that we had to put so much money into the cleanup mode, the lots still came out at a fraction of what it would cost to build the park new. We also just loved the overall picture that at the end of the movie when we get done, we'll have a large, large property with nice features. I mean the clubhouse alone would impress any banker or appraiser, parts of it has two story ceilings in it. So we really love the fact that we could see the end product in our minds and we still do currently when we get completely finished with it, it's gonna be a very nice property.
Now will it ultimately be quality, top of the line, five star? Probably not. Probably not based on its location and the age of a lot of the homes. It certainly would never be something that would be on the cover of a mobile magazine. But it still will be a very nice, functioning, kind of subdivision for folks living in the city that want something that's a nice alternative to apartments. So there's definitely ... there's a need for it in the market, there's demand for it in the market. But one other point, this property ... One thing's really aided our turnaround in this tough around is our selection of the manager. We were very, very lucky to find someone that shared our vision. In fact, it's the manager from another mobile home park in that same market. We went to them and we were looking for someone who would wanna manage the property and they kind of liked the challenge of bringing it back to life, 'cause in many ways they could use a little creativity to make this different.
Normally when you manage a property, it's already a done thing and you don't really have any ability to actually impact any value add yourself. But in this case, the manager was kinda shaping the future for all of these residents and really enjoying that feature. So the manager's been hugely helpful. Not only do they know the market, and not only are they a great manager, but they're really excited about the creativity of making this a nice place yet to live again. So overall, we're very happy with the way it's been progressing, but this one is unlike the ones we've mentioned so far, our turnaround is still very much in progress. But I thought it would be an interesting contrast with the others because this one again came from an area being so very rough on the front end. It would certainly scare off most people who might've driven through it. But when you see turnaround situations like that, you have to look through all the clutter. You have to look through what could this be. Can I budget appropriately for the capital cost to make it what it could be? Can I go ahead and make the payments on the note until I can get it there? And if the answer is yes to all those categories, then maybe that tough turnaround is for you.
On our final in our five part ... fifth part in our five part series of turnarounds, we're gonna go over one of the craziest, most complicated turnaround stories of all time. It's a property over in Dallas, so tune in for that. This is Frank Rolfe, the Mobile Home Park Mastery Podcast, be back again soon.