Mobile Home Park Investing Newsletter

We are continually amazed at the positive media attention that the mobile home park industry is suddenly receiving. We’d like to think it’s the result of our daring article in the New York Times, which was the first of its type, but the truth is that the media has suddenly grown fond of the very business that it used to scorn. Who would have thought that mobile home parks would be featured in so many news outlets, and in such a flattering manner. The recent CBS News story on the industry was the crowning achievement, as it gave a new face to the industry to the entire American public, not just the intellectuals who read the Times, or the business people who read Bloomberg. History is full of examples of unpopular people and businesses that later become media darlings (Winston Churchill, Brittany Spears, Steve Jobs, etc.) and we’re glad that mobile home parks are finally getting their well-deserved credit as the premier supplier of affordable housing in the U.S.

If you missed this historic broadcast, then here it is to enjoy. It documents the many faces of affordable housing that are well served by mobile home parks – from the working class of New Mexico to the not-yet arrived movie stars of Malibu, California. A very interesting piece that was a ground-breaking moment for industry perceptions.

To watch the video, Click Here.

There are many misconceptions regarding smaller mobile home parks. Many REITs and other larger portfolio owners try to pretend that any park under 100 lots is not as valuable as those that are larger. We believe that the truth is there are many benefits to smaller parks, and that’s why we have continually bought smaller parks as often as larger properties.

Better pricing

One big benefit of smaller parks is better pricing. Typically, all the larger operators shun any park under 100 lots, and that takes a significant amount of competition off the table. Typically, with smaller parks, you may be the only active buyer, or one of just a handful, as compared to a dozen buyers for the larger parks, all bidding against each other. Another factor that we often find in smaller parks is that these mom & pop sellers are the least sophisticated on pricing, since they get called on by brokers so infrequently, as well as often disappear off the radar screen due to little advertising or even lack of a park telephone. Some of the best buys we have ever made have been on smaller parks where the rents have not been increased in 20 years, and the seller has no idea of what prevailing park values are.

Greater risk diversity

Why is so little said or written about proper park risk diversity? Our theory has always been that three 100-lot parks are superior to one 300-lot park, and six 50-lot parks are superior to three 100-lot parks – strictly based on diversifying risk. Our business is no different from the stock market: some parks go up, some stay flat and some go down if there’s a major market correction such as loss of a major employer. We hedge our risk by having a portfolio that is spread across markets and even regions. We maintain an average park size of 100 lots, while our peers average as much as 500 lots per park – some own park after park that exceed 1,000 lots in size. When you own a 1,000 lot park and the a tornado wipes it out, I’m betting you’ll suddenly realize that having ten 100-lot parks might have been more prudent. We think all smart operators understand this and embrace a mixture of lot sizes to hedge risk.

More seller financing

Since most loan brokers and banks have minimum loan limits of $500,000, smaller park owners are often already resigned to the fact that they will have to carry the paper on the transaction. Seller financing is, without question, more abundant among smaller properties. As you know, we think that seller financing is the best financing on the market, as it includes non-recourse, lower down payments, no expensive third party reports and legal fees, lower interest rates, longer terms – pretty much everything you could want.

Just as efficient as large parks

It is absurd industry myth that larger parks are more “efficient” than smaller parks. The costs in running a mobile home park have nothing to do with volume, nor is there any discount if you have 200 residents over 50 residents concerning water, sewer, electric, gas, trash, property tax, etc. The big difference is how you can manage a smaller park vs. a larger one. We cannot afford to have a “full time” manager until the park exceeds 100 lots, so under 100 lots means that you’ll have to do many of the “manager” duties yourself. But these jobs (such as filing evictions) do not really take much time per month, and the superior price and financing more than offsets these duties.

Conclusion

Small parks are great. They offer terrific values and help hedge inherent risk. Don’t let anybody tell you differently. The primary reason that most REITs and larger owners gravitate to giant properties (500 lots+) is summed up in one word: laziness. It’s a whole lot easier to put all your eggs in one basket – you only need one basket. It’s a lot harder to buy and maintain multiple baskets, but it means you can still eat if you drop one and break all the eggs.

We got a call from a guy named Jack Johnson about six months ago. He was pitching a new concept to us: a company that would re-negotiate our trash contracts for a part of the amount saved. We are suckers for 100% performance driven concepts, so we gave them our blessing, assuming that it probably would not amount to much. To date, this relationship has saves us tens of thousands of dollars, and resulted in ten times more in additional property value. How do they accomplish this? We still don’t have a clue, other than they really know trash well. If you want them to look at your park or parks, give Jack a call at (817) 525-3241. You have nothing to lose and everything to gain. And it paid off big in our case. Check out this video about their services.

A recent trip to a St. Louis area mall yielded these two photos of something you see throughout the retail industry: vacancy (and lots of it). The very forces of economic recession that make our mobile home park phone ring off the hook are also at play in the other direction for the retail, hotel, office and industrial real estate sectors. Basically, when we go up, other niches go down. Park owners have been accustomed to having high levels of demand since the economy fell off a cliff in 2007 (although we still had strong demand in the lower end of the spectrum for a decade before that). But don’t feel too sorry for that shopping center owner. There was a time in history in which his phone rang off the hook, while the mobile home park owner languished with a phone that was completely silent. That was in the 1960s, 1970s, and 1980s. So what goes around, comes around. And don’t forget that the economy runs in cycles, so don’t take gigantic mobile home park demand for granted. You need to offer a great product at a great price – a real value for the customer. You need to think about customer retention and treating people properly. There will always be huge demand for affordable housing, but I’m not sure that the 100 calls per week that we get at some parks is sustainable forever, and smart operators know that it’s easier to keep a tenant than to replace one.

A curse of being an insurance agent is that when I attend movies featuring colossal destruction, I can’t help but wonder who will pay for all that damage. Cars are flung, buildings are crunched, and Earthlings are maimed. While everyone else is enjoying popcorn and soaking up the movie, I’m thinking about insurance coverage and the resulting certainty of litigation. . So, enter my world for two minutes, and let’s think through what would happen if Godzilla attacked your mobile home park.

Billy Bob, my maintenance man, was in the tool shed when Godzilla whacked it with his tail 407.5 yards into the lake. From the look of the shed’s flight trajectory, Billy Bob won’t be doing any mowing for me in the future, nor will he be taking care of his family. Well, presuming he’s an employee and you have Workers Compensation insurance coverage, you and his family are in luck. Billy Bob was working at the time and he was mortally injured. Thus, Workers compensation will pay for any medical expenses he incurred plus income to his wife until she remarries. It will also pay income to his four kids, Burnelle, Waynette, and the twins, Daryl and Darrell, until they turn 18, or 25 if they are full time college students.

Now what if Godzilla was in the lake next to my park and his body shoved a 30’ wall of water that washed away 20 park owned homes and 50 tenant owned homes. Sure enough, like almost every insurance policy written today, my policy excludes flood coverage. But wait, this isn’t rising water or a tidal flow that fits the policy’s definition of a flood. This damage was caused by an out of control animal, albeit other worldly. There’s no exclusion for damage done by animals in my Special Form property policy. So Woohoo! My park owned homes would be covered. And the loss of income associated with my former park tenants’ homes (God rest their souls) will continue to pour into my investment account!

Next, the 400’ tall monster walks into the middle of my park and is standing over my clubhouse when all the cars, military vehicles, and seawater he’s ingested suddenly generate massive stomach problems. The resulting epic sh…., I mean poop, from 100’ above my building smashes the roof. Crap! Am I covered? Well, damage due to fallen objects is covered under most policies. But this is poop and poop is a pollutant. Pollution damage is excluded under almost every policy. Nevertheless, my guess is that because the “pollution” didn’t cause damage due to polluting something, it caused damage by smashing it, then it’s covered.

But wait, there’s more! What if Godzilla had just met, in the bowels of the Earth, with Middle East extremists who’ve been rejected by women and are now hell bent on raining down retribution on us all? But worse yet, the damage is far and wide, to the point the government has become deeply involved. Will the government label this an official terrorist event? Did I take that $150 terrorism coverage rider my handsome insurance agent suggested?!? If not, I could be without coverage.

And oh no! I just drove into town to visit the park in my new Porsche Cayenne. I even let some of the tenants take their picture next to it. And now, it’s been roasted into a melted ball of rubber and metal with one of Godzilla’s fire blasts, because Godzilla hates low EPA estimated MPG vehicles with a passion. Well, relax. Presuming you have “comprehensive” coverage, you should get a check for the value of the vehicle less the deductible.

And finally, what if Godzilla spared my park because he can clearly see all the quality low income housing I provide to a community that desperately needs it. He didn’t step a foot in it. But he damaged the power lines in the region so badly we are without power for 30 days. And we are in Texas! And it’s June and already 109 degrees! Thus my tenants stop paying rent and leave. Will my loss of income coverage pay? Most Special Form property policies exclude coverage for off premises caused power outages unless you specifically requested an often costly endorsement adding this coverage back. Thus, you’ll likely have to just hope your tenants keep their contractually required rent payments flowing to you.

There are lessons to be learned here. Be a good citizen. Don’t drive low MPG vehicles. Never stay in Texas during July for the whole month. And it’s ill-advised to choose a profession that will keep you from enjoying a fine Global destruction movie.

Kurt D. Kelley, JD, President
Mobile Insurance
[email protected]

We are really enjoying our copy of the 1955 book entitled “How to Build and Operate a Mobile Home Park” by L.C. Michelon. It’s a great snapshot of where the industry was at back then, and helps to explain how many of our parks are built and what they used to do in those abandoned clubhouses and laundry buildings, etc. The activities the book suggests organizing in your mobile home park include square dancing, fishing, gardening, movies, picnics, bingo, photography, hobby-shop, painting, ceramics, shuffleboard, horseshoes, gossip, conversation and card playing. I’m thinking that those would not be a good idea today. Modern alternatives might include beer can sculpture, hot dog speed eating contests, and toothless bobbing for apples.

We have used many different Phase I providers over the years. But some recent events have changed our opinion on who the best Phase I provider is, and we want to spotlight some “beyond the call of duty assignments” that have saved the day on some deals recently. One of the most important occurred on a property we were buying in Indiana. The park already had a Phase I that had been done when the owner purchased it and financed it with a well-known bank. However, at the final hours when the deal was to close and be financed by a new lender, a Phase I issue popped up that we had never seen before. A disgruntled former manager of the park had called the EPA and claimed that the park was operating an illegal landfill, in which entire trailers were demolished and buried near a barn. Although the report was suspicious, it had to be substantiated before the deal could close. So Mike Renz immediately went to the subject area and, using a device that he developed, was able to do immediate boring and testing to prove that the claim was a lie. There’s probably no other Phase I provider in America who could do that work, or do it that fast, or do such a good job of it. As a result, we are now using Renz and Associates as our exclusive Phase I provider, and we suggest you look into using them, as well. You can contact Renz at (614) 538-0451.

Mark Rothko was a modernist painter known for his bold swatches of color. No, he did not live in this mobile home, but it sure looks like he could have. You see unusual sights like this in mobile home parks frequently. I try to capture those images for this newsletter. But if you see one that you find interesting, why not take a smart phone photo and email it in to us for inclusion in the newsletter?

Most mobile home park operators have vacant lots to fill in their parks. They know they have the demand to fill the homes, and they know that they can get enough in rent to cover the costs. But the problem is financing – nobody carries the paper on the homes so you have to come out of pocket 100%, right? Well, that’s not the case anymore. Legacy Homes has brought out a new Park Finance Program that allows you to buy homes to fill your lots directly from Legacy, and they’ll finance 70% of the cost of the home including installation. We think that this will be a game changer for many operators, as they have been dreaming of a dependable financing source for their home purchases. And the Legacy product is outstanding as a home – nice floor plans, attractive colors, and great low pricing. We have been customers of this program from day one, and are excited that Legacy is now offering this program to all park owners, large and small. If you are interested in it, call Mark Ledet at Legacy at (786) 785- 9827, or contact us for a reference. We’re one of their largest customers.

We did a lot of conduit loans -- and regular bank loans -- in 2013. A common feature of those loans was Security Mortgage Group. If you are buying or financing a mobile home park, let Security Mortgage Group get you the loan. They'll get you better terms than you'll ever be able to find on your own. That's why the win the industry mortgage broker award virtually every year from MHI. If you have any loans you need help on, you can reach Anthony or Gerry at (585) 423-0230.