What to Do with Old, Inherited, Occupied Mobile Homes

Question

Last year, my brother passed away and left my sister and I with a condo (which we're selling) and 3 occupied, single-wide mobile homes in NorCal. He wanted us to take care of his tenants because he said they were hard-working farm workers and reliable people who always paid on time.

It turned out that the homes were pre-'75 and in very bad shape. Two of the tenants pay $500/mo.; the third manages the properties and pays only $350. My brother did some upkeep or had repairs done, and we've spent $4900 in repairs since last June. Should repairs continue at the same rate, we'd clear almost $832/mo.

The property manager--who was so fond of my brother that she cried when she heard he'd died--had my husband over to her home, and he was shocked at how bad a condition it was in. If we could afford it, we'd replace all 3 of them, but there's no way that we could charge them what would be manageable for them. Hence, we don't know how long these mobile homes will even be viable as livable spaces. My sister has offered to sell us her interest in the properties, and that's what my question concerns.

The probate appraiser--who we don't think actually entered the properties--estimated each one at $15k: $10k for the land and $5k for the home. Each is insured for $4k. If they were worth $45k in total, I'd have no problem paying my sister half that. However, she had a RE agent drive by, and the agent estimated the lot at $15-20k and without seeing the interiors, the homes at $5-10k. That estimate adds up to $20-30k/property. My sis would want the high side ($90k), and the possibility of having to spend $45k to buy her half of the interest in such rundown homes--who look to have a short shelf life--has me spooked. I'm leaning toward having an appraiser actually go into each home, but still...these don't appear to be long-term investments. We're 12 hours' away and in the next state, so it's not as though we can do any repairs ourselves.

We own a couple of nice rentals, but they're in SoCal and have SoCal price tags. Not only do we not have experience with this price point, but also we do not have experience with mobile homes. I made a promise to my brother to take care of these folks, and while we need the additional monthly income, I'm not sure what to do about any of this. There is a personality conflict with my sister, so it really is best that we're not in business together.

Looking forward to your advice.

Katharine Chartrand · Answer

@Wendy Black

Then just put it on the market. That's how you find out what it is worth.

The best thing for those specific folks, and that community, is to have an engaged local landlord. This is not an easy property to deal with. You need someone local who can roll up there sleeves and do the work. It will take time and at least weekly attention to deal with this situation.

I absolutely agree that you cannot put a restriction on the property that will require the new owner to keep the tenants. You can only trust the universe, and the market, to take care of things. I know that is not what your brother seemed to advise, but I suspect when the dust settles on this situation, that is the truth.

From my experience, there is a possibility that the property is worth less than the either appraisal or cannot actually be sold, regardless of what the probate appraiser found in the MLS. These difficult properties are what I deal with. The appraisals are a major source of amusement. There is no comp for a home with a non-compliant septic system, for example.

Your sister may want $20K for her new condo, but there may not be $20K in the property. You won't know until you sell. I am concerned about giving her cash you don't get back and then, at the end of all this, you take a loss. From the information I have in this post selling, if you can, will be the best move financially for you and you sister.

However much your brother cared about the tenants, I sense that he cared about you more. Don't get hurt taking care of his business. I assure you that was not his intent.

Thank you all for your thoughtful replies. They've helped me look at the situation from a number of perspectives.

That's the key. The right solution will be the one that presents itself to you as simple, just as Rick H. suggests.

>KNC<

Katharine Chartrand · Answer

I respect your brother for caring about people, so I would start there. If you made a promise, you'd like him to respect your decision and why you made it.

But our brother's business sense may not have been good (possibly absent?). He's gone and you are in charge. Make every effort to realize his intent to provide low income housing for this community ... but almost certainly not the way he would. And you may find that you are simply not the person that can do it.

What these folks need is a sustainable housing options. Only something that makes business sense for a professional landlord will work in the long term.

To get to the truth, you have to get the facts. Your own rambling about appraisals suggests that you know that an appraisal on a marginal property is meaningless.

Try to sell the property to the tenants.

The first thing I would consider, because it realizes both your interest in income and the spirit of the promise to your brother best, is to try to sell the property to tenants as an owner finance deal. Price it at the lowest reasonable value 45K (don't be greedy here, from what you have described to me the value of this property may be zero), loan them the total amount over 10 or 15 years (they can't do a down payment) @ 5% interest, split the payments with your sister. The tenants are responsible for maintenance, taxes. You split the mortgage payments free and clear with your sister.

I honestly think that is the best deal here for everyone involved. The worst case scenario is that you get the property back because they don't make payments. Done right, you can structure the deal so you get the property back if they don't pay without going through foreclosure (send me a second question on that if you go that route.)

If not, put the house on the market

The only way to know the market value today is to put the property on the market. Realistically, that option has to be on the table, therefore, I think it is fair to ask assistance of some realtors and just do it. I would ask 2-3 realtors how they would price this property. Ask them for the analysis and data they used to get there. Pick a realtor, put the property on the market, see what happens.

Simultaneously, try to turn it into a viable buy and hold rental

The actual value of the property is the cash on cash return from the property as a buy and hold rental.

If only to evaluate the work of the realtors, imagine yourself in the position of considering buying this property and do some research and calculations on your own towards an offer on the property. Develop your plan and your price from this perspective.

First, look on craigslist or wherever people post rentals in that area and find out what it costs to rent a beat up trailer in that area. I suspect your tenants are paying market rent, but market rent is the key data point here.

The value of a rental property is a function of the cash on cash return, assuming market rents. Appraisals are meaningless. What an investor wants to know is ... what return to i get if i put my $20K here as opposed to in some other investment. The basic principle is that an investor will want 8% or 10% or 12% return on the cash they put into the deal. You assume the property was purchased with borrowed money.

You have to back out the value you need to get a 10% cash on cash return, making reasonable assumptions about what you can borrow, interest rate, the life of the asset, taxes and maintenance costs.

The key difference with mobile homes is the amortization period. The impact is only apparent in an analysis of the cash on cash return. HUD will allow a 20 year term on mobile homes, where they allow a 30 year term on regular homes.

The first thing that jumps out at me are the maintenance costs, which are equivalent to the payments for a year on a 60K loan, 15 year loan, and the interest payments on a 150K 15 year loan.

How I would look at this property as a potential buyer

If I was going to come in and try to take this property over, I would guess that the current value is only the land. Given the maintenance costs you describe, the mobile homes need to be scrapped, and that will cost money. If you say that the land is worth the value of the land minus the cost of scrapping the homes and maintaining the property (taxes, utilities, dealing with the tenants) while you do it. That is about zero.

However, the land has some utility. If you replaced the mobile homes, maybe the homes could give you a return.

I would research the cost of replacing the mobile homes with something lightly used (like cars, mobile homes lose 30% of their values the day the leave the retailer). I am guessing you can entirely replace those mobile homes for 20K each.

I suspect you can find a zero down deal on mobile homes. Even with a slightly higher interest rate, zero down does wonders for your cash on cash return.

I would look into the one time cost of scrapping those homes you have.

I would look into putting more mobile homes on the lot, to increase the potential rental income.

You may find that, since the land is essentially free to you, you can actually make a decent return renting mobile homes in good condition to low income tenants. I believe you can borrow money to update the mobile homes for about the maintenance costs you are paying. The newer homes may bring in a higher rent with much lower maintenance costs.

And now you are providing decent low income housing in that area, which fulfills the spirit of your promise to your brother. And you can sell the property for something because it has income that exceeds the mortgage payments and the maintenance/taxes etc.

I would get the tenants ready for what it will cost them to rent a newish mobile home, based on market rents. They have to make their own decision about whether to stay or move down the road to farmer bob's mobile home slum.

As you have figured out, running a slum is not a good business and not sustainable. Slumlords are just too lazy to pencil it out.

Your sister

Your sister may not make it possible for you to be in a position to realize your promise to you brother to use the property to serve low income residents. You may need to sell that property. Your best hope is that some smart investor comes along and does what is necessary to turn that into a decent low income housing situation.

Therefore, even as you explore whether you could turn that into low income housing and whether your sister will work with you on it, you need to be trying to sell it. Only the process of trying to sell it will show you, and convince your sister of the real value. Which may be close to zero. It sounds to me that if you can sell it for even the lower appraised value, you should take the money.

I feel the pain in your post ... being torn between the promise and the financial facts. Hope that helps. All you owe your brother is the best possible, but realistic, outcome for these folks.

>KNC<

Rick H. · Answer

File Affidavit of Small estate.

Give Sister Promissory Note for amount and terms that account for credit adjustments due to condition, normal costs if sold thru broker, and monthly oayments that still allow strong positive cash flow, even after paying ongoing maintenance expenses.

Don't complicate it.

Michael Meeks · Answer

I would try to owner finance the homes and remove the responsibility of home repairs. Find out the market rate for a mobile home lot, and collect lot rent. I assume residents are responsible for utilities. If not also work toward that.

Wendy Black · Answer

I continue to appreciate everyone's input because it's allowing me to flush out the pertinent issues in our case.

We're retired, so what's important is cash flow. We want investments that earn us more money than would interest offered by a bank, stocks, or a CD. We need to decide the minimum limit of what would be acceptable for mobile homes. We're not subsidizing the tenants because we didn't pay for any of this in the first place.

We have put the numbers on paper and continue to make a decent cash flow: over $800/mo. for three properties for which we haven't paid yet. One of the tenants is the property manager. We simply arrange for what needs to be done. No difference from our other out-of-state PMs, except we arrange for the workers and supplies.

However, I just found out that my husband--who handles these properties--has been considering expenses together, so that one property may have a lot of repairs and another property has few. Clearly, that gives us an inaccurate picture because one of my issues is risk. I don't want anyone hurt, and I clearly don't want to be held responsible if something's in bad shape. I made the assumption that all of the homes were in the same condition because the exteriors are equally unattractive. Before I write a check, I want to be able to estimate what each of them is worth and how long we can expect to make an acceptable cash flow before each of them goes south. I look forward to looking at his new figures once he works them out.

Belinda Lopez · Answer

John Fedro might be able to add some insight. But if you're not going to look at like a business situation and take the emotion out of it, your options are extremely limited. The market for older mobile homes is extremely limited. The tenants have been getting a great deal for a very long time and if you want to continue to subsidize them and now your sister, that's great! But the numbers are what they are; homes are not worth anything at this point except to a niche investor who wants to get some cash flow.

Do some test ads at various prices and see what response you get. Not sure why your husband is saying it doesn't make sense to sell them right now but somehow managing them from afar at a more than their value expense does? Renting mobile homes is a very difficult business, not for the faint of heart. Selling on terms takes away the majority of that pain. You can also create the Notes and then sell those for cash to give your sister the funds she needs but again, there may not be that much value in everything

Put the numbers on paper and see what makes the most economical sense for your family and go from there. Good luck!

Wendy Black · Answer

Hubby simply doesn't want to sell at this time. Says it makes no financial sense yet.

My bro had a condo in Stockton (and was head of the HOA), but he was an engineer and worked in SF. He did minor repairs himself, but from what I hear, he wasn't adept at them.

Good question how much my sis would pay me for these properties. The worth clearly will be in the 3 lots. We're having to deal with the sale of his condo right now, but in the meantime, we'll need to put these 3 properties into a new LLC. In case something happens, I don't want our other LLC's assets touched (including one in Oceanside, Bruce.)

BTW: Hubby, who held my bro's POA, said the mobile homes have liability only for $300k. The homes themselves aren't insured.

Bruce May · Answer

You've gotten some great advice so far. It sounds like your sister is making you feel guilty about the situation or you are making yourself feel guilty. As hard as it may be you'll be best served to keep emotion out of the equation. While your sister may want to buy a condo with the money you should only concern yourself with the value of the property your brother left you to be fair to yourself and your sister and strike a fair agreement for each of you.

How much will your sister give you to buy you out of the homes? That may show you the true value of what they are worth. Best of luck.

Wendy Black · Answer

My sister wants cash to buy a townhome as her primary residence, so there'd be no payments made to her. I was willing to hand over $20k+ and change. Second, since I originally posted, the probate appraiser said he'd gotten his info from the MLS.

Our brother paid cash. While I can pay my sister what I think is a reasonable amount of cash, hubby and I really don't want to replace these mobile homes. Unlike our SoCal properties (OC is like our second home), we're very unfamiliar with the area: Santa Nella, an hour or so out of Stockton, CA. At the same time, we don't want to turn out the tenants. I don't know that we could sell to another buyer and then impose restrictions (to keep the tenants) on whomever took them over. Nevertheless, not everyone in their mobile home park (or area) has such dilapidated homes. Some are quite nice. The lots are so small, though, that there's no room to add another home.

Hubby and I have been in REI for a couple of years, but since we're in our mid-60s, we don't want to owner-finance any of our properties. These homes likely won't last another 10 years. Maybe not even 5. In the time we could be holding on to their notes, the properties would be aging. I can't see holding on under those circumstances. Like an old car, we'd wanted these homes to reach a point at which it wouldn't pay to keep repairing them and then to sell the land. For now, we'd like the additional income streams, but we don't want to overpay my sister. We've known this would not be a good long-term investment for us.

It seems the first goal would be to obtain an accurate financial picture of their worth and then decide how long they could remain viable sources of income. I think that's what we need to make an informed decision of our next step.

Thank you all for your thoughtful replies. They've helped me look at the situation from a number of perspectives.

Wendy Black · Answer

They pay for utilities. These are poor farm laborers. I would not charge them extra for lots or anything else in the foreseeable future. As bad as these homes are, I'm grateful they have a roof over their heads.

I see where you're coming from, but under these circumstances, I doubt it would work. The PM is on disability. Has no money. As for the others, they likely have little if any credit or money, and they'd be more concerned about paying for their own food than buying a rundown mobile home.

What to Do with Old, Inherited, Occupied Mobile Homes

What to Do with Old, Inherited, Occupied Mobile Homes

Most Popular Reply

10 Replies