Mobile Home Park Investing Newsletter

We just got back from the National Communities Council meeting in Chicago. This is the companion piece to the Vegas industry convention, and is well attended by a diverse blend of park owners, bankers, appraisers, brokers and notable guests like Jim Clayton. It’s a great way to get a handle on what’s current in our real estate niche, as well as to connect with operators from all over the U.S. and see what they’re up to. If you missed this year’s event, then the article below will fill you in on the key topics that were discussed and observed. You can count on us to hit all the industry events each year, and be your source for a quick synopsis of what went on and what was worth finding out. Hope you enjoy.

The NCC is the “fanciest” event of the year, and this year’s conference was no exception. The setting was the Drake Hotel – one of the best hotels on the “Miracle Mile”. This always strikes me as strange. We’re an industry devoted to affordable housing, yet we hold this event in one of the upscale settings in the U.S. However, that’s also a huge draw and that’s why there are around 300 community owners, bankers, appraisers and brokers in attendance – and certainly nobody complains about the venue. So here’s our basic rundown of the event.

Attendance

Impressive. It was up over last year – and last year was pretty good. I would guess about 300 industry people were present. It ranged from folks that owned one park to the largest REITs. It included most of the best-known industry banks and brokers, and there were also some of the those private equity groups we keep telling you about sneaking around. Overall, I think this event is here to stay and will probably increase significantly in the years ahead.

Speakers

The majority of the time – around six hours – was devoted to one speaker: the Ritz Carlton. The topics were basically how to give superior customer service and how to be a superior leader. Since most people spend the event networking and having little one-off meetings in the hallways, few people really pay a lot of attention to the speeches. But this one was unusual as it did not seem to fit the industry at all. While there were a few items that people remarked on later like the fact that the Ritz gives each employee a $2,000 per day discretionary budget to make sure that every customer is happy (can you imagine how fast you would go bankrupt in the mobile home park business if you actually adopted a similar concept), most attendees echoed the fact that we needed something that fit the industry better as a future topic. Of course, most people just used the speeches as background noise while on the phone or emailing, so you could have probably played a continuous loop CD and nobody would have noticed. The in-between “focus groups” had much more relevant content, and probably the most memorable comment came from Dan Weissman (who shared the Bloomberg article with us earlier in the year) who, when asked what the greatest threats to the industry are commented “global warming and class-action lawsuits”.

Overheard at Dinner

Perhaps the most anticipated part of the NCC event is the dinner. Last year it was on a dinner ship in the harbor. This year, on the 96th floor of the John Hancock Building. It’s a once-a-year mixer in which old friends re-connect, old enemies are avoided, and new contacts are made. My dinner was memorable in that I sat next to Jim Clayton, and had a chance to get his insights into the future of the industry (one of my favorite topics). For those who have never met Jim, he is a 100% great guy who really understands the business as he devoted his working life to it. He’s also a smart businessman who sold the business to Warren Buffet in 2003 before the real industry turn down took effect. I learned that his first home was a 12’ x 44’ and was white with light blue trim, and that simple home grew into an industry leader in manufacturing and financing. I also learned that what really took the manufacturing business down was not the product or the customer, but the financing fiasco brought on by Greentree Financial in the late 1990s. Prior to that moment, mobile homes were sold on 5 to 10 year amortizations, and required 20% or so down payment. As a result, the lender was well protected against a loss if the homeowner went into default, and the homeowner had much more to lose if they considered letting the home go back. The advent of the zero-down, 30 year mortgage on mobile homes around 1999 spelled doom, as what had been a well -balanced relationship with relatively low losses suddenly hemorrhaged into a debacle that took many lenders under. It was kind of like taking a well-balanced terrarium and putting a shot of bleach into it. I’ll have a complete rundown of topics from the event in my Journal article coming out soon.

Overall Review

My hat is again off to Jenny Hodge at MHI, who put the event together. It ran smoothly and was well-attended. It’s still the only event that you can find so many industry people wearing suits – you might mistake the thing for a buyer’s convention for the suit department at Neiman Marcus. Will I be back next year? Absolutely.

Kurt Kelley and his staff share various different sound bites you won't ever hear at their office. If you're looking for an insurance agent for your property, make sure to call Kurt's office at 800-458-4320.

The above photos are of actual homes that tenants’ abandoned, and shows what they left behind. While these may look shocking initially, the actual damage that the tenants have done is very minimal financially. It is rarely talked about, but the simple construction of mobile homes is a huge benefit when it comes to fixing the homes in-between residents. If you really look at what you see in the photos, you are initially repelled by the filthy conditions the tenants made their everyday lives. But what you are really seeing is nothing more than trash to clean out, broken sheetrock, some flooring replacement, and some paint. Here’s why mobile homes actually fare better than stick-built homes when it comes to tenant abuse and repair.

No plaster or masonry walls

When a tenant damages a wall in a mobile home, it’s a 100% certainty that it’s just drywall to repair and replace. Mobile homes do not have plaster or masonry walls by design. They can’t. Such a wall type would crack in moving the home. A hole in a masonry wall would cost ten times more than the drywall repairs you see in the photos. We simply patch the drywall, paint it, and we’re back in business.

No real wood or ceramic floors

Just as walls are simple to fix in a mobile home, so are floors. Thanks to weight and potential shipping damage, mobile homes do not have tile, brick or solid wood floors. So fixing the flooring is a cinch. You literally just cut out the section that’s weak, and nail a new one down. Then replace the linoleum or carpet to suit. You can do the whole thing in a few hours and the home is ready to go. Replacing ceramic tile would cost about ten times more.

No foundation to block access

OK, so the tenant has caused a leak in the pipes because they let the pipes freeze. No problem. You can go directly under the mobile home and fix it. Unlike a stick-built home that has a slab foundation to dig through with a jackhammer, you can get under the home and make the fix in a few hours. Again, that’s about 10 times cheaper to fix than a stick-built home.

No picky analysis from the next tenant

The typical mobile home tenant is not very discriminating. They are very forgiving if the paint color is not quite right, or the wall texture is not perfect. They are just happy to have a nice, safe, clean place to live at a price they can afford. Compare that to your typical stick-built home tenant.

Conclusion

While the first few mobile homes you go in when the tenant runs off will definitely shock you visually, the price to fix them will be a relief. Fortunately, mobile home damage is literally only skin deep, and a dermatologist is definitely cheaper than a surgeon.

The NCC event confirmed my theory that the future of this industry is not based on what the everyday person thinks of mobile homes, it’s actually only what Wall Street thinks that’s important. The industry has so far only focused on the never-ending, vain attempt to convert the name of our business from “trailer” and “mobile home” to “manufactured home community” and “land lease community”. What a total waste of time! Our industry is all about affordable housing, and customers live in mobile home parks for one simple reason: it’s the only form of detached housing that fits their budget. They are not going to move to a mobile home park because they want to as a result of an ad they saw – it’s because they have to. The industry would be miles ahead if, instead, it focused on educating the folks who invest on Wall Street – the mainstream investor, the stockbroker, the financial community as a whole – of the superior performance and business model of the mobile home park. As Bruce Nall, probably the most respected mobile home park appraiser in the U.S., discussed, if the mobile home park business could be considered safe and mainstream in the investment community, the cap rates on parks would decline down to self-storage and multi-family (around 8% down to around 6%). That’s the 800 pound gorilla we need to be going after. So instead of wasting time and money trying to do lame P.R. on the “wonders of living in a manufactured home community”, we need to spend the same effort and money showing the true workings of the mobile home park industry that everyone who invests can understand and appreciate. Wall Street needs to be the industry’s focus on education, and not Main Street. The elevation of the mobile home park industry to an equal status with its real estate peers would be the greatest value enhancement of all time, and it’s already slowly in the works. To be honest, the name change to “manufactured home” (which sounds like modular construction) and “land lease community” (which nobody understands) has only served to confuse investors. Let’s use the honest name and the honest story, and we’ll all be a million miles ahead.

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.

On November 27th, we will all sit down to a nice turkey meal. But we will also be reflecting on those that we give thanks for being in our lives. We would like to honestly say “thanks” to everyone for being a part of our extended mobile home park family. It’s having the ability to communicate with our peers that has given us so much enjoyment for the past decade. The mobile home park business can be very lonely when you’re on your own, but we’ve never had a shortage of people to talk to as a result of the website and Boot Camps. So have an extra serving on us, and stay tuned for the great Frank & Dave Christmas Show we are currently writing, as well as the annual Industry Summit we are building for January. Thanks for being a part of our lives, and drop us a line occasionally and let us know what you want us to write and talk more on in the New Year.

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.