There’s a huge demand for affordable housing in the U.S. and one of the best ways to drive a mobile home park’s net income and value is through filling vacant lots. However, not all parks are created equal in this regard. In this episode we review the factors that can make a mobile home park incapable of filling lots in the correct manner, and this may well lead you to pass on that deal.
Episode 195: When Filling Lots Is Not An Option Transcript
One of the classic ways to create value with any mobile home park is typically to fill those vacant lots with new or used mobile homes. However, not every park can accomplish that task. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to be talking about the challenges you face with some mobile home parks when it comes to the concept of filling vacant lots.
Let's start off with the obvious one. You cannot fill vacant lots in a mobile home park that suffers from no or low demand. How do we know that going into the park? How can we figure out whether people want to live in that mobile home park or not? Well, here's what we do. We like to run what are called test ads. So what's a test ad? Well, a test ad is something that's been used in real estate for decades. You see the signs along the highway, "Coming Soon! Shopping Center," "Now Leasing! Call this number." Well, there's no shopping center there and there may never be. The developer is simply trying to see if there's any pad user or other retail tenant who is interested in that spot. If they got a lot of calls they'll say let's go ahead and build the shopping center. They don't get any calls, they may say it's too early stage still to build it, we'll hold off until the phone rings a little more.
In the mobile home park sector what you typically do is you'll run an ad in the metro newspaper classified section under mobile homes for rent, or you could also do mobile homes for sale in addition to mobile homes for rent. If you don't have those two categories, then just under mobile homes. Almost every metro paper has a mobile homes section. The ad says basically the name of where this park is located, not specifically but the school district, the generic slang term, the way that the locals will know where that is exactly. You can't just put the name of the entire metro in there, they won't know what they're calling about. Then the verbiage is typically, "Two and three bedroom mobile homes for sale/rent from" whatever the price point is, and a phone number. Now, the phone number for that would be Grasshopper or some other disposable number only used for the test. When people call in it transcribes their phone number and what they say, and then records what they say. Now you run that ad for a 10 day period, you see how many calls you go in. a good test ad result is typically 20-30 calls in a 10 day run, but the great parks can do over 100. That's the newspaper portion of the test ad.
The other is to do something on Facebook, Craigslist, some online source. There's two schools of thought when it comes to advertising for mobile homes. The general thought, and this is probably a myth, is that the internet drives 75% of the traffic but only 25% of the closings, and the old style is 25% of the traffic but 75% of the closings. No one really knows, that's just what people say, but it's important to remember that when you run test ads you have to do them in both the old timey and the new age ways of advertising, because some areas seem to attract younger residents who are more into the tech world and other areas older residents who are not. That's how your best way to gauge the demand.
How much demand do you need to make a success of filling those vacant lots? Remember that if you're going to bring in a mobile home today and sell it, the price point is probably going to be somewhere around $30-50,000. Very expensive these days. That's because the price of the homes has gone up, transport has gone up, and most importantly in many states you now have to deal with HUD's installation standards which can add easily $10,000 where they make you pour a concrete pad or piers, or runners, underneath the home. Even though the phone rings with demand, it doesn't mean that demand will necessarily translate into somebody who has the down payment or the credit to actually buy that new or used mobile home. So you need a lot of calls. If you run a test ad and you only get in three or five calls in that 10 day run, you really just don't have enough demand.
Now we know from experience that it takes three calls for one showing, and three showings for one sale or rental. Nine calls would typically translate into a happy customer filling a home, but again we don't know their actually credit so I want to have a whole lot more. Instead of having nine calls in that given timeslot, I would rather get more like 20 or 30 plus because I'm going to have to burn through a lot of applications probably to find somebody who can meet the underwriting standards of the lenders. If you don't have that kind of demand, if you don't get on your test ad 20 or 30 calls, then you don't probably have enough customers who want to live in that park badly enough to make a go of trying to fill those vacant lots.
Now another killer that can go ahead and ruin the whole concept for you is if the park has very, very low lot rent. How low? Anything that's under $200 makes it kind of tough. Here's why. Look at the value of that occupied lots. Let's assume I bring a home into that lot and put a human in it who now pays me rent. What's that worth to me? Well, we know the lot vacant is worth zero, but the value of the lot occupied is a function of the rent. So let's just model the rent. If you have $150 rent that's $1800 of gross revenue. Let's assume that the park pays water/sewer so you get only 60% of that. So 60% of $1800 is let's just average that to $1,000. That means that lot at a 10 cap is only worth $10,000, at an 8 cap maybe $12-14,000. But the problem is going to be I can't bring a home into that lot for that small an amount of money. As a result, if I bring in a home and I sell it, now making that lot thereby full I've certainly picked up $10-14,000 of value but sadly I've spent maybe $30-40,000 on the house.
Now I'll get my $30-40,000 back someday over time, but if I went to go ahead and sell that park before that home has been paid off, where am I exactly? Well, I'm kind of upside down with my efforts. And if I go to sell the park there are many cases in the US where people weren't following this rule, and the price and value of the park is only a fraction of the amount of home debt they have. So on those really low rent parks, states such as Mississippi and Louisiana where we see rents frequently under $100 a month, it economically is impossible to fill the vacant lots and still make any of the numbers tie. That is a real problem because obviously if I've got vacant lots and I lost money, or could lose money, or at least put myself at risk with every lot I fill, that's really not going to work for me as a business model.
Finally, there's some parts of America where the customers, despite many applications, simply cannot swing the amount of down payment or the income necessary to buy a mobile home, even the used ones. Why would that be? Well there's certain markets where your property may just not attract a fluid enough customer to meet modern credit underwriting standards. Typically what lenders are looking for is to have 3X the amount of the total home cost, both lot rent and home. So given today's prevailing home prices you're talking the average lot rent is in this example $400 a month. Let's say the total home is $1,000 a month, they're going to have to have $3,000 a month of gross revenue or a job that pays $36,000 a year. You might say well Gee, doesn't everyone make that much? No, that's not true at all. Remember that there's about 20% of Americans that don't have a household income of $30,000 a year. That's a big slide, and most of that 20% of our macro American housing market are your potential customers. Now, if you have a situation where people just don't have enough credit or enough down to clear the trees and make the sale, it’s not always the end of the world. Unlike those first two, those are mathematical probabilities that it won't work as far as filling your lots. You might still be able to try and work around that low credit. How can you do that? Well, it's going to be difficult. Possibly you can tap into people wanting to retire into RVs into that community. Maybe it's a case where you can get Lonnie dealers to fill deals for you and let them deal with the housing issues. Maybe you can find really, really cheap homes on Craigslist and Facebook and drag them into your park and be a really smart shopper, and patch them together, and get them really cheap, maybe $10,000 or that kind of proximity. But the bottom line is it will make your mission very, very difficult.
Now there's other ways to make money with mobile home parks. Obviously, raising rents is by far the best. You can typically cut costs. We can typically sub meter sewer/water back and pass it on to the residents. You might be able to cut costs as far as the manager's salary or other items. But when it comes to filling lots you have to be a little more careful. When you're out there looking at mobile home parks to buy, you have to make certain that park, although it has vacant lots, although we have a national need for low cast places to live, but not all parks can deliver the customer at the price point to make that happen. If you buy a park with lots of vacant lots, and in fact it is systemically impossible to make a product that customers can afford, and that they desire to live in, it may render your plan of filling those vacant lots impossible. If that's a big part of your budget, then your numbers simply won't work.
Now if you buy a park with vacancy and you say, "Well, I won't even budget in filling those vacant lots. I'm just going to raise the rents or cut costs," always remember you still have to have enough demand to cover the fact that you will lose customers over time. They'll typically abandon their homes. You'll take those abandoned homes through an abandonment process, but you still have to have demand enough to refill those homes or over time, your park will dwindle to nothing. However, since the home is already there those homes will be the least expensive homes possible. Assuming you get those homes through abandonment, go through the process, and we feel like the whole goal as a park owner is to let everyone be a home owner as quickly as they humanly can so their only burden is the lot rent. In so doing, even on lower levels of demand, even on lower levels of credit worthiness, you can still make that function work.
So not all parks that can't fill lots are rendered valueless but you have to model it appropriately. Do not in your calculations, unless you have big demand, don't factor in the ability to fill a lot of vacant lots. Because although everyone wants a detached place to live, particularly in a post COVID world, you can't always deliver a product that the consumer can match to, and therefore you're taking a much greater deal of risk in those properties when you go ahead and model big amounts of filling vacant lots. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.