Mobile Home Park Investing Newsletter

We have been talking for a couple years now about the pending consolidation of the industry, as well as the destruction of the “stigma wall” that has held the MH sector back from its place at the table with its close relative, the apartment industry. The recent announcement that Northstar is offering roughly 33,000 lots for around $2.5 billion is evidence of this evolution. Their target buyer will probably be a hedge fund or other large private equity group. Early indications are that they are not interested in splitting the portfolio, so you don’t need to ask for the prospectus unless you can write a check for about $700 million cash and obtain the balance in debt. This will be the talk of the industry for at least the next year or so, as it will be arguably the largest single transaction in industry history. It will also create a huge amount of positive publicity for the industry, as you have a well-known private equity group probably passing the baton onto another well-known private equity group or pension fund, in a transaction that is as large as Sam Zell’s recent sale of a huge portion of his apartment holdings.

If you’re like Dave and I, you worry all the time about every possible thing that can happen in life. Terrorism, crime, increases in income tax – those are all macro topics that we ponder constantly. But what are the top mobile home park specific fears that we, and any owner, would have on the top of the list – and how can we mitigate those worries?

Problems with City Hall

You can’t be a park owner and not at least worry about City Hall trying to give you problems. Perhaps citations on the condition of your homes or streets. Or maybe a challenge to you bringing in a home to fill a vacant lot. Fortunately, this is a problem that you can mitigate pretty effectively. During due diligence you need to obtain a Certificate of Zoning, which states how many lots you have, what the zoning is, and if you are “legal conforming”, “legal non-conforming (grandfathered)” or “illegal”. If you are not “illegal” then you have legal rights that protect your ability to run a park in most states. You also ask for a list of all existing citations during diligence. While this would not protect you from any new ones, it does demonstrate that the park is clean of problems as of that date, and tends to show the city’s opinion of the park. In addition, it sets somewhat a precedent of required property condition. Finally, many state Supreme Courts have rendered decisions in favor of park owners on bringing in homes to fill vacant lots. To date, to our knowledge, no park owner has ever lost such a case in a higher court. And most city attorneys are aware of this.

Severe weather events

You can’t control Mother Nature. Whether it’s a tornado, hurricane, forest fire or earthquake, every state seems to have something that can go wrong. The only way to mitigate this worry is to understand what your odds are, to carry plenty of insurance, and have some trust in the Federal government. We personally have too much concern to own a mobile home park in a hurricane zone – however, not if it’s significantly inland and away from the surge in sea level and flooding. Many states that are assumed to have extremely high likelihood of tornadoes are, in fact, not that bad (look at a historical chart on-line). In fact, the highest risk states are not the Midwest, but the Southeast. When a calamity hits, you want to have a ton of insurance (have your agent help engineer your coverage). But it’s also been our experience that in the event of a disaster (not including the magnitude of a major hurricane), FEMA and the Red Cross work quickly to get folks back into homes, and parks are often rapidly re-filled with homes purchased or gifted by FEMA.

Failure of water and/or sewer lines

Most galvanized water lines and clay tile sewer lines have already had substantial partial replacement over the past 50 years or so. Whenever a piece breaks, it typically gets put back as PVC. In this manner, there is probably no “pure” old line park left. Our tenants cook with a ton of grease, and this causes frequent calls to Roto-Rooter, but does not require pipe replacement. But we all know that nothing lasts forever, so what happens when those pipes finally start failing so frequently that it is more cost-efficient to replace them? The best way to mitigate this is twofold. First, establish a reserve account and stick with it. This account is there to pay for major capital expenditures, and most large banks will force it upon you if you have not been engaging in it. But probably the best way to sleep at night is to know that there are new technologies emerging that will reduce the cost substantially when that day comes (but see if you can’t hold out for few more years right now, so that these new methods are more common). On the sewer line side, “pipe-bursting” is amazing and worthy of study on Google (including videos). Using hydraulics, the main line is replaced by seamlessly crushing the clay tile and pulling PVC through that cavity in the earth. We bid that on a park in Missouri, and it came out as two-thirds cheaper than traditional line replacement. There is also a system, on the metal water lines, to sandblast and coat them on the inside with plastic – basically building a PVC line inside your metal lines. This technology is much newer and we have not bid a park on it yet. But the general thought is that it will also be substantially cheaper than full line replacement in the end. But, like flat screen TVs, letting the technology mature can be worth a fortune.

Liability

Slip and fall claims are the #1 insurance item in a mobile home park. But dog bites can be even more costly. The good news on liability is that most of it can be mitigated by proactive action to remove the source of the danger. Dead trees and limbs should be removed on sight, as should uneven curbs and any hole that someone can fall in or trip over. And the insurance requirements of no dangerous breeds of dogs, swimming pools and trampolines should be strictly adhered to. Of course, the biggest reason why park owners can sleep at night is their liability insurance. The fact that you carry $1 million or more of protection against a liability claim should protect you from any problem that pops up.

Private water or sewer regulation changes and/or system failure

Private water and sewer can be a source of continual worries. Unlike other concerns, you can’t protect yourself with insurance, or some clever strategy. Instead, you have to use common sense to mitigate the risk. The most important way to protect yourself is on the front end, with great due diligence. You have to make sure how long the system has left, that you have the legal right to replace it, and what that will cost. In addition, you have to make sure that all permits and licenses are 100% current and correct. And you have to make sure you have the proper licensing on the front end. Equally important – for your peace of mind – is to have an exact idea of how far away municipal water and sewer are located, since that’s your ultimate back-up plan if you’re private water or sewer should become unmanageable.

Skyrocketing interest rates

Anyone who lived through the Reagan years will never forget the era of 15% interest rates and 10% CDs. And you can’t help but constantly worry “are they going there again someday”? But the truth is, the U.S. was a very different place in the 1980’s when interest rates rose to those lofty levels. For one thing, the U.S. government had around $900 billion in debt. Today, we have around $19 trillion – nearly twenty times more. The bottom line is that 15% interest rates would result in complete insolvency of the U.S. government, and a return to a hunter/gatherer society. However, there is no question that rates go in cycles, and we are at the lowest rates in American history. The Fed currently seeks to raise rates around two points. So the only way to sleep at night is to buy parks that have the upside to increase the cap rate at least 2 points to stay ahead of that increase. If most park owners simply raise their lot rents 5% per year, they should be fine. If you can fill lots, push back water/sewer billing and keep costs low, you’ll be in an even better position.

Mass prosperity

This used to be the number one concern of park owners in the 1950s and 1960s, as bizarre as it may sound today. Back in the 1950’s, the best customers were moving out of parks and buying homes in these new things called “subdivisions”. But back then, jobs were continually paying more, and there was mass prosperity on the horizon. Of all the fears that a park owner may have, we would have to rate this dead last. We honestly can’t see any possible hope that the U.S. economy will make significant positive advancements and that affordable housing will no longer be necessary. We are a country that has over 50% of our citizens on a social program, with 10,000 Baby Boomers retiring per day. Get serious.

Conclusion

Reducing stress is important for the health of all Americans. And that’s true for park owners, too. Although worrying can sometimes keep you out of trouble, it can also wear you down. Fortunately for most park owners, their fears can be managed with proactive strategy and insurance.

The 2016 Affordable Housing Summit was held live on January 26th. It featured 18 of the top experts in the industry, including Charles Becker, an Economist from Duke University, and Tim Williams, the CEO of 21st Mortgage. It explained in detail how the industry has changed during 2015 and what the predictions are for 2016. This is information that you can use to create your strategies and attack plans for the year. Just one good piece of information out of the 18 speeches and Q&A periods can pay for itself a thousand times over. So what do you do if you missed the Summit for 2016?

The answer is that you can still buy the recording. Sure, you won’t be able to ask live questions, but you’ll be able to hear the presentations and questions that were asked. Many people said that this was, by far, the best of the Summits we have produced. So shouldn’t you get some insider information on the best strategies for 2016?

Click Here To Order The Recordings

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 have written countless articles on the whole problem with the industry trying to change its name from “mobile home” to “manufactured home”. Based on Google analytics, the game is lost – “mobile home” is used 90%+ more in SEO. But even then, we question the whole idea of using the label “manufactured home” – or any name for that matter. Here’s why.

Why do we let a name define us?

We have long asserted that the best name for what the industry builds is “home”. Just like a brick “home”. Or a frame “home”. Or a micro “home”. Why do we feel the need to attach “manufactured” to the simple concept of “home”? When you look at places to live, there are two divisions in most realtor’s vocabularies: a “home” and a “mobile home”. One is real property and one is personal property. Most realtors won’t even sell personal property. So the more we point out our difference, the worse it is for the business of attracting customers. In small town USA – where we live – mobile homes are just called “homes”. Why would we not want to fit in with our more expensive relatives made of bricks?

If we’re going to use a name, let’s use something attractive

If the industry feels the need to attach one word to “home”, certainly “manufactured” is probably not the right one. What do you think of when you think of “manufactured”? Nothing very positive. Maybe a car (which is also personal property and only makes that stigma worse). Maybe snack food. Or maybe a television. But certainly not a dwelling. I know that some people will say that “manufactured” means all kinds of good things: quality control, lower cost, faster speed. But none of those are really good things when you talk to a homebuyer. If we have to add a word, how about “green” (since small homes are more environmentally friendly) or “resort” (since mobile homes have the feel of a “vacation” home). But we’re unconvinced that “manufactured” is a turn-on.

Nobody is listening, anyway

It’s also important to remember that the customer could care less. They know better. They see mobile home dealers when they drive by, and they know that something that sits in the air and has skirting is not a regular brick home. We cannot fool them with a new name. Instead, we should wow them with a great product, which we are now capable of doing, based on what I saw at the Louisville Show. In marketing, there is a general theory that most consumers buy for emotional reasons, and then try to rationalize that decision. So if they buy a mobile home because they like the product or the cost, then let’s not ruin the transaction with reminding them of the negatives with a lousy name.

Conclusion

We’re well aware that many folks in the industry believe that “manufactured home” is a great label. We’re not so confident. We think that the best name for our product is … no name. Just a “home”.

This is a ferry on the Mississippi River. A barge on the Mississippi River can go twice as fast downstream as it can go upstream. In fact, before the invention of the steam engine, going up the river at all was very difficult. The current is going around 3 miles per hour 24 hours a day, and fighting that current is extremely hard. The same is true with megatrends in any industry – you are a whole lot more successful when you can “go with the flow” and opposed to fighting the large forces of megatrends. Fortunately, we believe that all megatrends are in our favor as park owners. Here’s why.

The decline of the U.S. economy

This megatrend is well documented, particularly in an election year. Since our product is affordable housing, we are helped by lower real wages and the conversion from high-paying jobs to minimum wage. I believe that there have been enough studies cited that this first megatrend is a given.

The rise of the Baby Boom retiree

The largest segment of our U.S. population are the “Baby Boomers” defined as those born between 1946 and 1964. This group has started to enter retirement age, and are doing so at the rate of 10,000 per day. As a result, there are 10,000 Americans – every single day – converting from higher paying jobs to social security checks that average $1,200 per month. This is creating a giant force of downsizing, and mobile home parks are one of the recipients of this megatrend.

The micro-housing fad

Living in tiny spaces has become “cool”, as opposed to giant McMansions a decade ago. As a result, Americans are growing less concerned about their square footage and more about their quality of life. Since mobile homes are the smallest form of mass-produced housing, they are gaining a following among young people that would not have been caught dead in them before. Even Tony Hsieh, the CEO of Zappos.com and a near-billionaire, now lives in a mobile home park in Las Vegas, in a classic airstream trailer. This would have been unimaginable until now.

The decline of Class B and C apartments

One megatrend that does not receive a lot of media attention is the decline of Class B and Class C apartments. These are the older complexes that are starting to fall apart – and it’s accelerating. Part of the problem has been that the largest apartment owners typically sell off their older complexes to smaller investors as they age, to focus instead on their Class A holdings. These new owners, in turn, do not have anywhere near the capital required to keep them in good condition. The Harvard Business Review estimated that around 40% of the revenue in many Class B and Class C complexes would have to be devoted to capital expenditures to update these complexes – an impossible challenge when you’re trying to cover a mortgage. As the tenants become unhappy with the condition of the apartment stock, mobile home parks are a desirable alternative. In fact, the bulk of our new residents report that their primary reason for choosing us as their dwelling is that they were unhappy with their former apartment home.

The collapse of traditional investments

While we are big believers in economic cycles, the future of traditional investments look to be on the wrong side of the curve for the long-term. The stock market has risen an average of 10% per year since founding. However, recent jumps in valuation suggest that, to average 10%, prices will have to plunge for years. In addition, there’s not much to be excited about in stocks, as the companies that make up the exchange have bleak futures in increasing earnings. And bonds are equally in trouble, as interest rates have nowhere to go but up, and there’s a mass downgrading of bonds ahead due to oil and gas weakness and city and state government insolvency – in other words, many bonds are going to be classified as junk in the near future. The collapse of traditional investments has opened a new examination of alternative investments, of which mobile home parks are one of the best performing.

Low interest rates

Interest rates currently stand at the lowest levels in U.S. history. This has created a great market for mobile home park acquisitions, because the “spread” between cap rates and loan interest rates has never been greater. Although interest rates run in cycles, it is hard to imagine interest rates climbing more than a couple points in the future. The reason is simple. The U.S. government has $19 trillion in debt, and a significant movement in rates would render it insolvent. As a result, we believe that great rate spreads will continue well into the future, making all income properties an attractive investment.

Conclusion

You can float down the Mississippi, from Minnesota to New Orleans, on an inner-tube in 90 days. You cannot get from New Orleans to Minnesota without an engine and a bunch of gas. It’s always been better to go with the current. And with mobile home parks, you can.

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.

Clayton Homes and 21st Mortgage have partnered together to bring a game changing new program to mobile home park owners. If you have any vacant lots in your mobile home park or in a park that you are looking to buy, then you definitely need to be aware of the CASH program to fill vacant lots with nearly zero capital out of your pocket.

For more information you can contact Lance Hull at 21st Mortgage. You can call him at 800-955-0021 ext.1218 or email him at [email protected]. You can also contact Aaron King at Clayton Homes. You can call him at 865.380.3000 Ext. 5164 or email him at [email protected]. To visit the Community Calculator website discussed in the webinar, click here.

Disclaimer: The materials and information available from this posting are for informational purposes only and not for the purpose of providing legal advice. The contents should not be construed as, and should not be relied upon for, legal advice in any particular circumstance or situation. Further, the information presented on this posting may not reflect the most current legal developments. An attorney should be contacted for advice on specific legal issues.

Disclaimer: The information in this posting is not for consumer use and is not an advertisement to extend consumer credit as defined by TILA Regulation Z.

We wrote around a year ago about the filming of a new movie in our park in Fountain, Colorado. That film is called “Cop Car” and it’s now available on DVD. It was not a blockbuster film, and is never going to be considered a movie classic, but it was exciting for our residents to have a real-life Hollywood film with a major star shot inside the park. Some would say that a film about crime that is partially shot in a mobile home park is a cliché that we do not support. That’s true. A Federal Government study proved that mobile home park crime is no higher than subdivision crime. But it’s not every day that you get a call from a Hollywood agent that tells you that they want to film a part of a movie in your park, so we decided to give it a try. For those that are wondering, we received absolutely no cash compensation for acting as the set for a part of the movie, but our residents were thrilled and gifted with many autographs.

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.