Mobile Home Park Investing Newsletter

What an amazing industry we’re becoming! About 90 days ago, it was announced that three of the largest mobile home park portfolios in the U.S. were on the market at the same time – and all at about $2 billion each. That’s a huge news item, as there has only been one prior transaction in history that even exceeded $1 billion. Naysayers said it would end up an embarrassment, as there would be no way the industry could digest three deals that large even if given a couple years to do so. But here we are, about 90 days later, and all three are under contract to sell – and nearly at their full asking prices. How is this possible? The answer is that the industry has finally broken through its stigma issues, powered by high rates of return, a recession-resistant business model, strong support by the lending community, and a superior business model to the other real estate sectors (mainly due to the inability to build new parks). We have been talking for over a decade about the future of the industry, and it’s falling into place exactly as we predicted. So what predictions do we have next? That’s easy. We predict significantly higher lot rents (as a result of industry consolidation and the insane median apartment and single family prices) as well as much higher occupancy due to aggressive home programs sponsored by Clayton, CAVCO, Champion and Legacy. We also stand behind our prediction that this is the best (and final) opportunity to buy mobile home parks at great prices, as the biological clock is ticking on the moms and pops that built this industry and provide the real opportunity in pricing and maximizing operations. We think that window of opportunity is around ten years in length, but closes every day. If you’re going to buy a mobile home park, you need to speed up, rather than slow down, or the opportunity will pass.

When you buy a mobile home park, you are not only buying a piece of real estate, you are also buying into the macro town and market. That’s why it’s essential that you only purchase parks in areas that are strong and relatively immune from recession. So what are the signs of that type of market?

Population

One rule that we’ve found over the past twenty years is that it doesn’t matter what size the town is, but what the metro market is. You can find this statistic on www.Bestplaces.net , and that’s where all lenders and future buyers look, as well. You can’t guess at the metro population – you’re either in it or you’re not, and Bestplaces shows you what the government says about it. As far as metro size, we prefer metro populations around 100,000 and up, but we’ll buy in smaller markets if we understand and believe in them. You can do fantastically in a market as small as 5,000, as long as it’s a great market (Aspen, Colorado only has a population of 6,600, but has one of the most valuable mobile home parks in the U.S.).

Single-Family home prices

We prefer single family median home prices around $100,000 and up, but can still be confident at prices at lower if the apartment rents are strong. Let’s face it, relatively few mobile home park tenants can possibly have the down payment and credit necessary to buy a stick-built home, so that’s not our primary competition. However, low home prices can also be reflective of weak employment and wages, and at some point the mortgage on a home can be less than the rent on a mobile home or lot. That’s why there are few successful parks in the weak coal-mining regions of southern Illinois, where you can buy a decent frame home for $30,000 and the mortgage is only $195 per month.

Apartment rents

While the U.S. median apartment rent is $1,150 per month for just a one-bedroom, that price is highly influenced by markets such as San Francisco, where the average rent is over $4,500 per month. The important point is that the apartment rents are in the range of $600+ for a two-bedroom and $800+ for a three-bedroom. At those prices, you’re park will be a bargain that will never have trouble filling homes.

Housing vacancy

The average amount of vacant housing in a given market is around 12.47% in the U.S. We prefer markets that have single-digit vacancy, and get very concerned when it exceeds this U.S. average. Vacant housing is a hallmark of a market in decline. Detroit vacant housing, even today, stands at 28.69%.

Unemployment rate

The U.S. average is 6.3% right now. Detroit stands at 14.5%. Not to bash Detroit, but this is again a terrible sign of market strength. I’m not aware of any strong market in the U.S. that has a 10% or greater unemployment rate. But we are in a ton of market in Iowa, Kansas and North Dakota where the rates are under 3%.

Top Ten Employers

This is a critical analysis step for the “recession-resistance” test of a market. By “recession-resistant”, we mean that a market is not subject to the whims of private enterprise, but are backstopped by employers that can’t fail or lay off, such as hospitals, schools and government. The best way to analyze this is to make a list of the top ten employers in the market, as well as how many they employ. Avoid markets where the top employers are private or public companies with a huge percentage of the employment market. For example, let’s say that the #1 employer is a private company with 4,000 employees, while #2 and down only employ 500 people each. If that #1 company should stumble and go out of business – or even have a moderate layoff, the market will be destroyed even though the other nine employers are doing fine. We call this a lack of “employment diversity”. The worst markets for this right now, for example, are the “man camp” areas of Texas and North Dakota, where oil and gas employers are 90% of the employment base. With oil and gas in complete collapse, these markets are virtually worthless.

Wal-Mart

Wal-Mart has the best due diligence team in the U.S., and their choice of locations are spectacularly accurate. It is rare to see a Wal-Mart fail. If the park in question is near a Wal-Mart, or even in the same market as a Wal-Mart, then you will typically be in for a positive experience.

Conclusion

It’s important to choose the right market, as that will dictate your park’s success as much as its own personal traits. Even the greatest park operator cannot overcome a weak market. Put at least as much scrutiny on the market as you do on the park.

We recently received another award from 21st Mortgage and Clayton Homes, the “Platinum Builder Award” for hitting $1 million in sales. We have been the largest originator of CASH home sales for a couple years now, and the largest purveyor of CASH homes in the U.S. So why do we put CASH homes on so many vacant lots in our parks? There are several reasons:

• It makes us a ton of money. Every lot we convert from being vacant to occupied makes us $20,000 to $40,000 in value. Every 30 homes or so that we do with the CASH program makes us around $1 million in equity.
• The ability to fill lots with 100% leverage. No other manufacturer offers a program to fill lots that requires nothing our pocket. If the program works in your park, you can effectively fill all your vacant lots with $0 of your own money.
• A great product that customers love. Clayton builds a terrific home that everyone finds attractive. The Clayton section is the highlight at any home show. They employ the best designers in the business.
• Great customer service. We enjoy working with CASH because they are professional, and we appreciate that. And our customers appreciate their timely response to warranty repairs and payment questions.

For more information on this program, call Candice Doolan at 800-955-0021 ext 1735 or email her at [email protected].

There have been very few large transactions in the mobile home park industry, and most people can recite them with reasonable accuracy: ARC, Hometown, Chateau, AMC. When it came to light that there were no less than three roughly two billion dollar deals coming on the market at the same time, nobody knew what the outcome would be. But all three deals found buyers within roughly 90 days – and this has resulted in new lessons learned on where the industry is headed.

The Carefree Transaction

Carefree was a portfolio that was an ELS wannabe – mostly coastal lifestyle choice properties with about two-thirds of their lots RV. It sold for around $1.7 billion to SUN Communities, the U.S. #2 largest mobile home park REIT. With 103 MH and RV communities, comprising 9,829 manufactured home sites and 17,725 RV sites, the price worked out to roughly $62,000 per lot (but that’s not really accurate, as RV lots are not worth nearly as much as mobile home park lots, so it’s probably more like $80,000 per lot if you compare apples to apples).

Here’s the announcement Carefree Sale Announcement

The Northstar Transaction

Northstar is being purchased by Brookfield Asset Management of Canada, for around $2.04 billion. They are more affordable housing than lifestyle choice in our opinion, and is the largest transaction in that segment in history. Their portfolio is roughly 135 mobile home parks with 33,010 lots, which works out to around $61,800 per lot if every lot was occupied (which they’re not).

Here’s the announcement of this transaction Northstar Sale Announcement

The YES Transaction

This transaction is so fresh that it’s still just a rumor. But the word on the street is that YES is selling for around $2 billion to a private equity group in Singapore. YES is believed to have around 40,000 lots, which works out to around $50,000 per lot. Again, unlike ELS and SUN, YES is essentially an affordable housing portfolio, in our opinion, and many of their properties are right next door to ours.

What these all have in common

All three of these sales have key points in common:

• They are unusually large. A $100 million deal in the mobile home park sector makes headlines. $6 billion is absolutely unheard of. These are apartment portfolio numbers in size.
• The buyers in two cases are not from the U.S. I don’t recall ever hearing of any foreign buyers in the industry before. Two out of three will have non-U.S. ownership.
• The price per lot is staggering. Most mobile home parks sell for $20,000 to $40,000 per lot (outside of California and select parts of Florida). To have three transactions between $50,000 and $70,000 per lot is striking.
• They sold extremely fast. Large transactions typically take a long time to find a buyer, as the pool of potential acquirers is much more limited. But in this case, they sold within a few months of being announced that they were on the market. Of course, there is always some behind-the-scenes negotiating before the general industry hears about it, but these moved so fast that we think it surprised everyone in the industry

What these say about the state of the industry

We think that these three transactions suggest many changes in the status of the industry:

• Consolidation is gaining speed. We’ve been discussing and predicting this for years. The mobile home park sector is incredibly fragmented compared to the other asset classes. Self-storage alone, which is younger than mobile home parks by a couple decades, is still three times more consolidated. It’s a natural cycle in any industry that, at some point, institutional buyers step into replace moms and pops, and to roll up even the smaller portfolio owners.
• Affordable housing is starting to receive as much recognition as lifestyle choice. ELS, SUN and UMH are the three current public company mobile home park owners, and their product is “lifestyle choice”. As a result, that tiny niche receives 95% of all media attention. With $4 billion of “affordable housing” deals, this should start to give the mainstream part of the industry on the map (remember that there are approximately 44,000 parks in the U.S., and only around 4,000 of those are “lifestyle choice”.
• The buyer pool is becoming global. With the #3 owner from Singapore and the #4 owner from Canada, that means that only 3/5 of the top 5 portfolios are U.S. owned. And we predict that there will be many more overseas buyers pouring in to the U.S. soon. Bear in mind that mobile home parks do not even exist in most overseas countries, to this is a sector they are just finding out about.
• Per lot valuations are exceptional. We can’t emphasize enough that having the three largest transactions in industry history scoring in the $50,000 to $70,000 per lot range will have a huge impact on appraisers and lenders.

Conclusion

The mobile home park industry is much larger than most people think. Most people have no idea that there are single portfolios valued in the billions. Now they will. And these three sales will have huge implications going forward – all positive.

We are excited to host the Mobile Home Park Investor's Boot Camp in Chicago, IL on July 15th-17th for our 3rd year in a row. You’ll learn how to identify, evaluate, negotiate, perform due diligence on, re-negotiate, finance, turn-around and operate mobile home parks. It’s a three-day immersion weekend, with over 30 hours of instruction both in the classroom and outside in real mobile home parks. Learn why the New York Times raved about the quality of our Boot Camp, and the instructor, Frank Rolfe. Frank, with his partner Dave Reynolds, is the 5th largest owner of mobile home parks in the U.S. and the New York Times described him as “having a virtual PhD on the habits of trailer park residents”. With over 200 parks and 21,000 lots, Frank can tell you virtually everything you ever wanted to know about buying and operating a mobile home park. And you also receive a ton of valuable items, such as the Park Evaluator software and every form and contract you will ever need.

Click Here For More Information

The wooden riverboat was a common form of transportation in the 1800s, but had complete died out by the 1930s, having been replaced with automobiles, planes, better trains and metal ships. Some things, like the pay phone, become obsolete over time and suddenly disappear from sight. But that’s not the case for mobile homes, for a variety of reasons.

Basic floorplan that has not changed much

The general arrangement of rooms in a mobile home has changed only slightly since the 1950s. The big difference is mainly in room sizes, as homes changed in widths from 8’ to as much as 18’ today (with 14’ being the norm). Since the late 1970s, the changes are so minor that the average person can only tell that the home is old by looking at the exterior. As a result, old mobile homes don’t have much danger of becoming obsolete unless humans stop needing kitchens and bathrooms and bedrooms.

Sizes restricted from change due to moving regulations

Starting by the 1980s, the width of mobile homes were 14’ – which is still the most popular width today. Why have they not doubled or tripled? Simple. The highway department has limitations on the maximum width that they will allow to move down the highway. This width limit is capped at 18’. And the length is capped at roughly 100’, with 80’ being the norm, just as it was decades ago. So as long as the highway department does not change these standards (which is extremely doubtful) mobile homes of the past are roughly equivalent in size to mobile homes of today.

Non-demanding customers

Sure, the bathrooms and kitchens in new construction McMansions can make or break a sale, but in the affordable housing business, the customer is much less demanding. They are simply happy to have a safe, clean affordable place to live, that has the creature comforts and a place to sleep. They care little about granite countertops and wall texturing. They are more price fixated than finish out.

Sturdy materials sheathed in a metal coating

There is a general misconception that mobile homes wear out over the years. This is as ridiculous an assertion as saying that stick-built homes have a shelf life. A mobile home is made of the same materials as a traditional house – wood, metal, and resins. Only a mobile home is then sheathed in metal, which is a finishing touch that traditional houses do not have. What destroys a mobile home is the repair and maintenance and, more specifically, water intrusion. But the lifespan of a mobile home – properly maintained – is infinite.

The economics of replacing an old home with a new one

Dealers tell customers that they need to trade-in their old home for a new one, just like a car. Why shouldn’t they? That’s how they make money. But the truth is that it’s rarely economically smart to replace an old home with a new one. Our typical old-home renovation is $4,000; $2,000 parts and $2,000 labor. It costs more than $4,000 to simply move and set a new home. And since the average customer is just as happy with an old home as a new home, what’s the point of making the transition?

Conclusion

Old homes never die. They never will. If you maintain them, they will last forever. Until such time as we all become the Jetsons and float around in outer space, mobile homes aren’t going anywhere.

In the 19th century, you wore black in times of mourning. But mobile home park owners never need to worry about unhappy endings if they follow the basic strategy of thorough due diligence.

Permit

Every park due diligence should start with the Certificate of Zoning. This puts on paper what the park’s zoning is, number of lots, and if it’s legal conforming, legal non-conforming (grandfathered) or illegal. You would never want to buy a park that’s illegal, as you can be forced to close it at any time, and may be subject to fines or other penalties.

Infrastructure

Good infrastructure essentially means that the park is built to deliver the water, sewer, roads, electricity, gas, and lot condition that you promised your customers. Poor infrastructure can leads to excessive cost, frustration and even litigation. The most dangerous types of infrastructure are private water and sewer, master-metered gas or electricity, and dirt roads. While these may be satisfactory in some instances, you need to have complete understanding of them and what their limitations are.

Density

At a certain density, some mobile home parks may have trouble with the Fire Marshal. While the “dream density” is 7 units per acre, the norm is often double that. But when you start approaching 20 units per acre, you transition from a safe zone to extreme danger. At risk is the Fire Marshal forcing you to reduce density, or having lots too small to fill with conventional homes. These need to be fully understood.

Economics

You’re in the mobile home park business to make money. Make sure that the numbers you are buying are accurate and sustainable. Budgets should be well-thought out and accurate – both operating and capital repair. Any park that cannot, based on a realistic budget, provide coverage of the monthly note payment and a reasonable return on investment should be avoided. As the Army says “hope is not a strategy” and you should never let emotional reasons influence you when the cold, hard numbers say “no” to buying the park.

Environmental Contamination

You should never buy a park without a Phase I report. Environmental pollution can easily mount up to millions of dollars of cost to remediate. Most mobile home parks are free of environmental issues, but there are those that pop up with a failed Phase I, so a report is always mandatory.

Survey and title problems

Will you have correct title at closing, and are you buying the entire park with no missing pieces of property? Are some of the homes extending onto the neighbor’s land? Is it in the floodplain? These are not things to take lightly, as any of these can ruin your investment. You should always use a proper title company for every park purchase, and heed their warnings.

Conclusion

Benjamin Franklin once said that “diligence is the mother of good luck”. Good luck equals happy endings. Diligence gives you the edge to influence your destiny in a positive manner.

Of all the alliances you have to forge in successfully buying and operating a mobile home park, one of the most important is your attorney. There are many different attorney profiles, and you must select the one that is best suited for the task at hand. The most common occurrence, for most park buyers, is the attorney to read and protect your interests regarding loan documents and questions that come up on title and contract issues. Like anything else in life, if you chose a bad advisor, you will have a bad outcome. So how do you find a terrific lawyer well-versed in mobile home park law and issues?

The best corporate lawyer we have ever used is Dave DiMarco at Woods Oviatt Gilman, LLP. We have used him exclusively for all of our conduit loans, as well as traditional bank loans. What we love about Dave DiMarco is that he knows what we are trying to accomplish (get the loan closed quickly and inexpensively) and he can quarterback the situation and push it to the goal line without us having to bug him or worry about our progress. How many attorneys have you had to nag, or even worse, call 100 times to get them on the phone? With Dave DiMarco, you don’t have to worry about if he’s making progress – he’s typically bugging you to push you along on your part of the equation. We have given Dave some extremely complicated, time-sensitive tasks and he has successfully completed them on-budget and on-time. He also has terrific people skills and can take charge of a rogue bank attorney and bring them back around both in speed and complexity. Our success rate with Dave DiMarco has been 100%. We get calls all the time from people looking for a good lawyer, and we always tell them to call Dave. If you need a lawyer to represent your interests in a transaction, then you will be well served to call Dave DiMarco at (585) 987-2833. And, yes, he’s the brother of Anthony and Gerry DiMarco – the #1 mobile home park loan brokers in the U.S. This is a family that definitely shapes the industry.

In the Wizard of Oz, it was suggested that Kansas is the most dangerous place in the world for tornadoes. We’re not sure who wrote the movie, but they were lacking in their knowledge of weather. While Kansas certainly has tornadoes, the worst spots in America are south and east of Dorothy and Toto’s house, as shown on the historic weather maps on the internet. Well, at least the ruby slippers were based on fact.

Whether you are simply in need of an insurance quote or you have the unfortunate, yet common task of filing a claim, Mobile Insurance is ready and waiting to take your call.

They offer you the best mobile home park insurance coverage when you need it. Being able to contact them when you need them is just as important. Shopping for insurance or setting the wheels in motion to get your damaged home or your business back on track is not easy. At Mobile Insurance, they work to make the whole process easier with greater value for your money. Call them at 800 458-4320 or email [email protected].

We found this piece of clay tile sewer in the St. Louis History Museum recently, in the exhibit on the 1904 St. Louis World’s Fair. Clay tile was considered state of the art in piping in the U.S. until the advent of other materials in the 1950s. We have had nothing but good experiences with clay tile, with the exception of root intrusion in parks with big trees, caused by the fact that clay tile sewer sections do not fit tightly together. When you consider the fact that clay tile dates back to the Romans, it really does deserve a place of prominence in a museum.

I wanted to share my recent experience with Mike Renz. Jeff and I needed a Phase I completed for a mobile home park purchase late last year. I shopped around, including Mike Renz as one of my quotes, and eventually chose a local consultant to perform the work. The savings was on the order of $300, and the local guy was "local"--meaning, he should be familiar with the area databases, industries, geology, etc.

In my initial conversation with Mr. Renz (and during every presentation he's given for you), he mentioned that regardless of who I chose, if I had questions, to call him. His advice would be free of charge.

The report I received from the local consultants was pretty bad. Being an engineering consultant in my prior life, I was expecting a much higher quality report. The local guys didn't really do any consulting, and worse, made blanket assumptions, suggested scientific theories that were incorrect with no supporting data, and worst of all, erroneously listed recognized environmental conditions (REC). I called Mr. Renz--he immediately/graciously reviewed the report, talked me through his major concerns, and provided a detailed email with a list of talking points that helped me discuss the report with the local consultant. With the talking points, I was able to reason with the local consultant. The final product was a Phase I report that I felt comfortable with, and more importantly, that the bank accepted.

Needless to say, next time Jeff and I need a Phase I, we're calling Mr. Renz.

As always, Jeff and I appreciate your help and advice and your willingness to share your experiences. After listening to Mr. Renz' presentation oat the Summit, I wanted to thank you again for bringing professionals like Mr. Renz to our attention.

-Jill S.

You can contact Mike Renz at (614) 538-0451.

We did a lot of conduit loans -- and regular bank loans -- last year. 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.