Who thinks mobile home parks are cash cows?

Question

If run properly mobile home parks can be a sound long term investment. No dealing with rentals are beaten by tenants. Info structure usually does not require updates as often as apartment buildings. Any word on deprecation on this product?

Frank Rolfe · Answer

As long as you buy with at least a 3-point spread between financing rate and cap rate, you should be able to hit a 20% cash-on-cash return (for example, finance at 6% and buy at a 9% cap rate). And as long as you perform great due diligence, you should be able to avoid parks that cannot deliver good returns.

But I hate the term "cash cow" because it implies that the business is easy and any idiot can do fine as long as they own the "cow". The truth is that you have to know what you're doing and be very particular on which "cow" to buy. Operations are actually easier than most people would expect, but even then that's contingent on buying the right deal.

The right deal, for us, involves five key components: 1) economics 2) location 3) density 4) infrastructure and 5) age of homes. We own over 170 parks and are able to manage that workload because we only buy parks that meet our guidelines. There are plenty of parks out there that are "cash vacuum cleaners" instead of "cows", so you've got to know what IS an opportunity from what is NOT an opportunity.

Frank Rolfe · Answer

Jo-Ann,

About 50% of our deals come with seller financing. Not always on the front-end, but the result of educating the seller on the benefits of carrying paper. These include:

1) A much higher interest rate than they would receive on a CD. About 5 to 6 times more.

2) Favorable tax treatment. They only pay income tax on the money as they receive it, so they actually earn interest on what would have been paid to the IRS if they took cash instead.

3) Much safer collateral. They hold a first-lien real estate note, as opposed to some junk bond.

Aaron,

The formula to derive the value of a mobile home park is to take the # of occupied lots x the lot rent x 12 x .6 (if the park pays water and sewer) or .7 (if the tenants pay their own water and sewer) x 10 = the value of a mobile home park at a 10% cap rate. You can then add in the value of the mobile homes, if required, but we're talking around $1,000 each for 1960s or 1970s, around $5,000 for 1980's, around $10,000 for 1990s and $15,000 to $20,000 for 2000 and newer.

Jefferson Lilly · Answer

Aaron -

If you are indeed looking to value a mobile home (not a mobile home park), then the value of homes varies widely with the park the home is in, the economy the park is in, and the condition of the home.  If you are buying a home that is 'somewhere else' and you are looking to move it onto your own land, or into your own mobile home park, then you should deduct the value of the move (around $4,000).  All that said, for homes that are set in decent parks and that are in good condition, I'd say 1960s/70s homes might be worth $2,000 - $5,000, 1980s homes might be worth $5,000 - $10,000, 1990s homes might be worth $10,000 - $15,000, and 2000-and-newer homes might be $15,000 - $40,000.  All this assumes we are talking about single wide homes.

If you are acquiring a mobile home park that comes with homes, then you should run some test ads to determine what you can sell the homes for on a note.  That is the value you should ascribe to the homes in such a 'package purchase.'

But whatever you do, don't use NADA Blue Book Value.  Those numbers are way high.

My 2 cents worth,

-Jefferson-

(Post edited: Website / contact info etc. should be put in signature - not in the post!)

Joe Fairless · Answer

I know @John Fedrois a mobile home expert and would definitely agree with you.

Ken Rishel · Answer

Jefferson -

The community or location adjustments are critical to getting the valuations correct. As you know I have been a principal in three finance companies, one a related or captive finance company, and the other two "outside" finance companies. In all three companies it was very important to assess an accurate value of the homes for two reasons:

• We did not want to "over lend" on homes because that would have affected the profitability of the lending operation;
• We routinely had to borrow money to make loans with and we had to have an appraisal method that worked in order to satisfy part of the concerns that investors have when the only real collateral being offered are the homes and the lending contracts.

Years ago, I signed up for and took the two day course offered in using the NADA system. That is where I learned how to correctly utilize their books (later the disc and now the cloud) and doing that gave us accurate numbers long after I taught employees how to use the system and no longer did appraisals myself.

Rishel Consulting Group were one of a group of select Beta testers on their new system they rolled out a couple of years ago. There were bugs, but between our input and considerable input from 21st Mortgage (as well as others) they, in my opinion, got it correct. Both 21st Mortgage and Triad prefer the NADA system for chattel lending as does our related finance company Triangle Finance.

If you and I ever get together at one of the myriad of meetings and we both have 20 minutes to spend on the subject, I can teach you how to make this appraisal process give you accurate numbers. It isn't hard, but it does require some additional steps you may not be taking.

Matt P. · Answer

My entire RE portfolio consists of MH parks. After 4-5 years of ownership the 20% coc return is feasible. On my seasoned properties my last numbers we're 19.9%. It's a bit of an art to know what to do with vacancies and such but the upsides are tremendous if you have some cash reserves. Favourable city and county legislators can allow pad expansions to increase cap rates quickly.

Andriy Boychuk · Answer

@Frank Rolfe What is your criteria on "5) age of homes."?

@Aaron Howell Another way to determine a mobile home value to compare it to other mobile homes for sale on the market. I recommend to use craigslist.

Ken Rishel · Answer

Actually, NADA is one of only two appraisal systems the CFPB has approved for chattel lending. They are no longer using books - everything is on a "cloud". The adjustments I referred to have been around a very long time, but, they were never easy to find - even in the books and were not well explained. They also had, and have, several different values including wholesale volumes.

NADA had a training program to correctly utilize their materials in conjunction with the Appraiser Institute. I'm not sure this program still exists, but it should.

Jefferson Lilly · Answer

Ken -

I am not familiar with the community adjustments you mention.  I was so disappointed in the NADA publication a few years back, I've made no effort to look at it since.  Perhaps the adjustments are something new..?

Regardless, consider this: NADA guides are not based on actual used mobile home sales prices.  That's right, NADA makes absolutely no effort whatsoever to determine what used mobile homes sell for in the market (any market anywhere).  I got the publisher on the line a few years ago (Sherry Clevenger) and she explained that NADA only makes note of the initial sales price of the home when new, and then apply a constant depreciation amount every year.  I was incredulous when she told me this.  I thought for certain NADA would have a database full of thousands of actual used mobile home sale prices nationwide.  Nope.  NADA just has a spreadsheet that takes last year's value of the home, and multiplies by .97 (or so) to come up with the value of the home this year.

So that's why I say I don't like/trust NADA values.  And they do seem to be high.  We've been buying ~1998 3/2s in Oklahoma for $8,500 in excellent condition with all appliances and central heat and air.  NADA says I should have paid twice that.  No thank you NADA.

My 2 cents worth,

-jl-

Who thinks mobile home parks are cash cows?

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