Mobile Home Park Investing Newsletter

We just got back from the annual MHI industry convention in Las Vegas. Every year we debate if the pilgrimage is worth the enormous cost in time and money, but it’s kind of like going to the doctor; unpleasant at the time, but yields worthwhile information that we really need to know. So if you were unable to get to Vegas this year, read up on what was going on amidst the background of cheap fake French decoration and empty banks of slot machines. And if you decide to go next year, we’ll probably see you there. Also, if you missed the article in the Wall Street Journal about the industry, give it a read. The industry is really coming into its prime right now.

The Manufactured Housing Institute (MHI) is the trade organization for mobile home manufacturers, dealers, financiers, and park owners. They hold two park owner events each year: 1) Las Vegas ad 2) Chicago. If you did not spend the time and money to go to the MHI annual industry convention in Las Vegas in mid-April, then here’s what you missed.

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A stark contrast

The convention this year was held at the Paris Casino. Caesar’s Palace (which owns Paris) had filed for bankruptcy a month before the show, so to say that there are financial problems afoot in Vegas is an understatement. Assuming that you actually need customers putting money into slot machines to make money – and not just thousands of idle slot machines – then Vegas’ future is uncertain. To me, however, the problems in Vegas were a sharp contrast to the booming fortunes of the affordable housing industry. Here were a bunch of mobile home park owners who house the growing bottom third of the U.S. population, having a convention in a casino that offers $10,000 rounds of poker, $200 dinners, and $5,000 suites, set amidst fake French art and marble. There’s no doubt in my mind that the people who own Caesar’s would have happily traded places with every owner in the room, as the mobile home park business model is coming into its prime while the casino industry appears to be going down the drain.

The makings of a ghost town

One of the unique features of the MHI Vegas show is the absence of humans. There are the endless slot machines with nobody sitting in front of them. The empty game tables in the salons. And there’s also room for improvement in attendance. The reason is that they charge around $500 for a ticket to walk through the booths. So the only folks who buy tickets are the vendors already in the room, who then roam around with nothing else to do. I’ve never understood why they don’t let people walk the booths for free, since the whole point is to maximize foot traffic. It’s kind of like the difference between the business models of Neiman’s and WalMart – and I think that WalMart may be the better choice as far as total visitors is concerned. I think there is a grass roots movement to find new ways to increase attendance in the making. I’m betting that the new excitement about the industry is going to change the way that MHI Vegas is constructed – perhaps even in terms of a change of venue. Properly constructed, the MHI show could hold perhaps three times more people than show up, at no cost to the organizers. It’s a big room – so let’s fill it! Otherwise, the number of vendors may start to decrease.

The regular vendors with a spin

While most of the vendors are there every year, there were some interesting additions this year that gave clues as to the future of the industry:

• HUD. I’ve never seen them at the Vegas event before, and it got people concerned that they were about to launch a new assault on Dodd Frank or the SAFE Act. Many owners went over to the booth to complain about how much they hate the Federal Government’s programs. However, I went over and talked to the representative, and they immediately told me that they have nothing to do with SAFE or Dodd-Frank (different division of the government, called the Consumer Finance Protection Bureau “CFPB”) nor did they have materials to give out on Fair Housing. They were simply there to talk about mobile homes, not parks, as in their standards and such. It might demonstrate that the government is getting more interested in affordable housing, which is a good thing.
• A ton of lenders. The best freebies were found at the many bankers’ booths for Wells Fargo, etc. They had the best pens, notebooks – heck, they even had bottles of water. It represented how mainstream the industry has become from a financing perspective. The vendor area had more banks in one place than Manhattan (New York, not Kansas). Anyone who is having a problem getting a loan on a park must be locked in a cave, as you could walk up and talk to probably 100 banks between bankers and loan brokers.
• A ton of brokers. Marcus & Millichap’s booth must have had flyers on 100 properties, and also a brochure highlighting the fact that they have 25 mobile home park-specific brokers on their roster alone. The coolest side events were all sponsored by brokers, although many required stylish Italian shoes for admittance. If you are looking for a broker with pocket listings, they were to be found everywhere.
• Gamma Sonic. This was the most popular booth at the show, featuring a solar street light that looked great and cost $150, or Victorian double light design for $350. We bought 20 units from them as tests at some parks. We’d seen similar products before, but just not that cheap. If you add a solar lamp post to your park’s entry design, it may give you significant bang for the buck, and without requiring any expensive electrical wiring.

Same old cookie-cutter speeches

How many times do you need to hear “the five steps to selling homes” and “how to make your park look and smell terrific”? I did not hear much feedback on the speech selection, except that it allowed people to talk during the speeches and not feel like they’d missed anything. Hopefully, as more new entrants to the industry emerge, we can get some really interesting stuff that is not so shop worn. You can get better content in one issue of this newsletter than you’ll get in a thousand of the standard industry speeches – I think they have been redundant since 1985. If the purpose of the convention is to get fresh ideas to make money with your park, then I can think of at least 100 topics that I’d want to hear. Again, I’m betting that a more sophisticated audience is going to start demanding more enlightened speakers and topics. Here are some suggestions: “The shelf-life of a typical resident: a study of home default”, “Pipe-bursting and plastic lining: new methods to replace aging water and sewer lines”, and “The top 10 ways to fill your vacant lots for zero out of pocket”.

Lots of free food

Of course, this is the prime reason to attend any convention – a ton of free food. Whether it was the endless buffet in the vendor area, or the many sponsored dinners going on everywhere, it was a great opportunity to gain 10 pounds on eggrolls, tiny ham sandwiches, and crab Rangoon. If you go next year, be sure to bring an icepick so you can cut an extra hole in your belt to let it out a notch. Someone should put in a booth for Nutrisystem in next year’s event – they’d really clean up.

Conclusion

MHI Vegas has become an annual tradition for most park owners. You get a pulse on the industry and see all of your lenders, brokers, and insurance agents in one neat three-day annual window. It may drive you crazy when you’re there, but you may feel left out if you miss it. We’ll probably be back next year and, if you miss it, we’ll give you another free review.

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.

When I was sixteen, my Dad told me to be on the lookout for drunk drivers. He said you can tell they are drunk when they are swerving within their lane, speeding up and slowing down, slowly veering over, and not following traffic signs. Dad knew how dangerous drunk drivers were.

I was thinking about this the other day as my wife and I were driving across Houston. I asked her to drive so I could catch up on some correspondence. When I stopped looking at my smart phone and looked around, I was shocked to see how many drivers were handling, looking at, or typing into their phone. At least three drivers were playing games on their phones. These smart phone using drivers often stopped early or late when the red light was nearing. Their speed was regularly inappropriate.

Today, the person you see driving like a drunk driver is most likely talking, looking at, or typing into a smart phone. Nationwide, juries are treating drivers who cause accidents while using their phone as harshly as drunk drivers. When significant bodily injury is involved, there’s almost no limit on the jury’s award. Recently, a Corpus Christi jury tagged a Coca-Cola distributor with a $20,000,000 judgment when the company’s driver caused bodily injury to another while using his smart phone.

The statistics show distracted driving is extremely dangerous. According to the Department of Transportation, the odds of being involved in a crash, near crash or lane deviation are 23.2 times greater for the drivers who are texting than those who are not. Texting drivers take their eyes off the road an average of every 4.6 seconds. Drivers dialing a cell phone are six times greater than those who are not to be involved in a safety incident. According to the National Safety Council, one in four vehicle crashes are a result of using a hand-held cell phone.

As a business manager, you must be aware of the reality of smart-phone-a-holics as well as the risks your business faces because of them. Some of your employees likely use their smart phone while driving. Because of this, you need to protect yourself and your company from this risk.

It is important for a company to prepare a policy statement and educate all employees of what that policy is and the penalties that may follow. It’s recommended that you:

1. Have a Zero Use policy for hand held phones while driving on company business, whether in a company or personally owned vehicle;
2. Require all employees to acknowledge they understand this policy by signing an Acknowledgement that’s kept with their employment records; and
3. Regularly remind your employees of this rule and the consequences.

Follow these rules and you’re more likely to stay out of the courthouse. SMART phone driving is DUMB.

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

We all know that Warren Buffet is the second richest person in the U.S. And we also know that the reason Buffet is so rich is that he develops great ideas and then acts on them. Well, one of the best ideas he ever had has made its way to the mobile home park industry. And this idea is the Community Rental Program, also known as “CRP”. We believe that this program will become a mainstay of the industry going forward, as it finally unlocks the door for park owners to fill their vacant lots without using any of their own money, and is supported by the endless financial resources of Warren Buffet. If you own even one vacant lot in your park – or are looking at buying a park with vacant lots – then you need to pay careful attention to this new program and see what it can do for you. We will be having a Lecture Series Event with question and answers on this topic in the next few weeks. Be watching for the announcement.

The last article about the mobile home park industry in the Wall Street Journal was in 2012 and titled “Tide Changes for Manufactured Housing” and it slammed the industry by declaring that “investors have soured on the sector”. So when the Wall Street Journal brought out its latest article nearly two and a half years later, it was quite a shock to see the change in sentiment. It seems that the Wall Street Journal now loves the industry, and the article reads like a sales brochure. Here are the key points of the article that every investor should be aware of.

The title and sub-title says it all

The article name is “Low-Cost Housing Boosts Mobile-Home Park Operators” and the subtitle is “Three Manufactured Housing REIT’s Generate 44% Total Return”. If you think that’s a good start, check out the first paragraph “strong demand for low-cost housing is proving a boon for one of the real-estate industry’s least glamorous sectors: companies that operate mobile-home parks”. Have you ever seen a more buoyant opening to a piece in the Wall Street Journal? I haven’t.

Key business points discussed

The structure of the article is basically a list of all the positive points of the industry right now. They are, in the order of appearance, 1) you can’t build any new parks, so the supply is frozen 2) the consolidation of the industry is reducing competition and raising values 3) demand has allowed for raising rents 4) retirees ready to downsize, snowbirds, and lower-income families are turning to mobile homes because they are so much cheaper than traditional homes 5) mobile homes rent for less than apartments 6) the median price for a SFH is $202,600 and for a MH is $64,200 7) apartment rents in the U.S. now average $1,131 per month and 8) the growth of the baby boomer segment of retirees leads to greater demand by itself. This is extremely important to have an affirmation like that of the industry’s dynamics by no less than the WSJ.

The real economics are even stronger than the article suggests

The article had two facts that only a true park owner would know are wrong. First, it states that the median price for a mobile home is $64,200. That’s true if you only count new homes that are 70% doublewides (that’s the industry stat). The real price, we all know, is more like $30,000 for new singlewides and more like $5,000 for old round roofs. So the price differential is not $202,500 vs. $64,200, it’s actually $202,500 vs. $15,000 or so. That’s a much stronger case than the article described. Additionally, it states that mobile homes rent for around $800 per month, when the truth is that most rent for around $500 per month. Any way you cut it, the true story is even more unbelievable than the article.

The article referred to the industry as “mobile home park” and not “manufacture home community”

When the New York Times article came out about Dave and I, we were pelted with insults over the use of the words “mobile home park” and “trailer park” and not “manufactured home community”. Well, the WSJ article came out and nobody said a word about the word choice. Hypocrisy? Of course. But nobody can argue with the words now that they were used by the WSJ and embraced by the three REITs in the article. Eugene Landy of UMH saying that his company has been buying “mobile homes and renting them out”? Heresy, surely! But not anymore. I guess the name game is over and “mobile home park” has come out the victor.

The big picture

In April 2014, the glowing article about Frank & Dave in The New York Times came out, which heralded the industry as a win/win in which owners make money and tenants get a decent place to live. Now in April 2015 – almost exactly one year later – the Wall Street Journal brings out a similar story, telling the tale that affordable housing is in just the right position to outstrip the returns of all other forms of commercial real estate. We have always said that what creates value in the industry is the “stigma” of trailer parks, which scares away most investors and results in high cap rates. As the industry becomes accepted, like any other real estate niche, cap rates will decline and values will soar. The 10% cap rate of today will be re-valued to 7% cap rates in the future. That’s why there’s a window of opportunity in this business that many people do not grasp – there’s a huge overnight value boost simply from gaining acceptance, in the same manner that self-storage became mainstream.

Conclusion

The Wall Street Journal article is a much bigger deal than many people may realize. If you look back at the 2012 article, and compare it to the 2015 model, you will find a 180 degree change in sentiment towards the industry, and it’s one that most lenders and appraisers will take note of. We think that the shift of mobile home parks from “weird” real estate to mainstream has definitely begun, and those who own parks when the shift gets in full gear will be benefit enormously.

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.

Maybe it’s because of the horror I’m seeing for those who invested in oil & gas “man-camps”, but I feel the need to continue to act like Paul Revere and alert everyone to the dangers of economies with only one main employer. This is a photo I took recently of yet another abandoned lot at the dying mobile home park in my wife’s hometown in the old coal-mining area of southern Illinois. The mines have all closed down due to regulations on air emissions, and those $50,000 per year mining jobs have all evaporated, along with the stores, restaurants – everything. Even the only gas station/convenience store has shut their doors. When you invest in a mobile home park, you are also investing in the city and town it is located in. To be successful for the long term, every city and town must have a vibrant economy, and that means in good times and bad. The key is diversification of the employment base, as well as a solid foundation on employers that are recession-resistant – things that can’t be shut down or downsized even in the fiercest depressions (hospitals, school districts, government offices, etc.). We get about a call a week right now from those who built or bought “man-camps”, wanting to know if we want to buy them out, with the promise that oil and gas exploration will come roaring back in the near future. We have been very vocal critics of the “man-camp” concept from day one, and predicted its ultimate doom. Don’t be of a “man-camp” mentality. Embrace the concept of economic diversity and shun the one horse town forever. You will be very, very glad that you did.

For further reinforcement of this concept, refer to a recent article in Bloomberg Business titled “The Oil Industry’s “Man Camps” Are Dying”, which describes the flaws in the business model that began in the fracking boom. It describes the sorrows of the publicly-traded man-camp provider Civeo, which has seen their stock decline 89% since the company began trading. Here’s a scary stat: the shale boom oil companies were spending $40 million per year to house and feed 1,000 workers, which works out to the ridiculous number of $40,000 per year per worker. Now that’s a bubble! Want a piece of that action? Then stick with diversified markets!

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.