Standard Due Diligence/Closing Period for MHP?

Question

I've submitted an LOI for an MHP a few hours away from where I live in a great city, with high incomes, housing values, and retail stores. Seller's ad said willing to carry 50% for 2 years. Asking $100k, I offered $105k with favorable seller carry terms. 11 unit park with 3 abandoned homes and the rest tenant owned. City utilities, submetered. Lot rent is $260/month. Total gross as it stands is 8 x 260 x 12 = $25k. Applying a 35% expense ratio puts this at $16k NOI for a 15.5% cap rate.

I'm very excited with this as my first MHP investment, but here is the rub.

The seller, who seems like a nice guy, responded back to my LOI e-mail asking for a $1k nonrefundable deposit upon, 15 day due diligence, and a 30 day close.

These short timelines scare me much more than the possibility of losing my deposit, especially since I mentioned my due diligence would include an environmental report in the LOI.

Is this a standard request in the MHP industry from private sellers? It doesn't seem to me, but maybe he is just opening that up for negotiations. If so, what would be a reasonable counter? I do need an environmental report, right?! Without banks, is it reasonable to get due diligence done in 15 days and close in 30?

I appreciate your advice.

Account Closed · Answer

@Nathan W. Never skip a phase 1 even if you are getting a park for free. You could have massive exposure that would far exceed your initial investment. Often times (RECs) Recognized Environmental Conditions , won't be things that would be seen from a visual inspection.

Jay Hinrichs · Answer

@Jeffrey H. my last @@@@ show park I will sell for 3x what I am in in 16 months after buying it.. so it works LOL...I have owned B class parks.. And sold those at 5 to 6 caps when I exited.. which is about market for B class west coast.

Jay Hinrichs · Answer

1k EM Is ridiculously small... and 15 days for this little of a deal is standard.. nothing jumps out at me.. you should easily be able to ascertain if this works in those time periods.Even if it cost you 1k and you decide not to buy it.. that's simply the cost of doing business.with city utls.. I would think your goldenfor a list of to do's1.. city planning make sure you have no code violations etc.2. public works make sure they don't have anything bad3. MH you should be able to walk through your self they are probably fairly ratty.I think this sounds like a pretty neat deal.. although management can be an issue but just give the park owned one's away and charge rent.. so you don't have to fix any of the trailers. for the tenants. good luck with it.don't be scared 1k and a little of your time is nothing to be frightened about.... and if its a good deal someone else will snag it and you will be kicking yourself.let us know when you close will be excited to see how it operates.

Matt Boettinger · Answer

have you tried pushing back on the DD time line? You offered more than the asking price.

Nathan W. · Answer

I've talked to seller at length and he seems to be a good business man with proper records. THe park is in its own LLC with own bank account with 2-3 years of bank and tax statements available from it. I think I am good here. I appreciate your advice!

Jeffrey H. · Answer

Be very comfortable with the information he is providing. There is nothing worse than someone asking for 1K down when their books are on scratch paper for one month worth of collections. If you're getting two years of tax statements in advance then yes proceed.I'm not going to disagree with @Jay Hinrichs on his advice in general. He has bought a shit show trailer park and knows what he is talking about.

Jay Hinrichs · Answer

the other thing I do in this case would say give them another 500.. for another 5 days of due dil ... if you need it.. also have a 5 or 10 day auto extension to close...

Jay Hinrichs · Answer

Nathan.. for 100k I would not worry about a phase one myself.. your personal inspection should indicate any potential there.. same with encroachments.. these parks are usually courtyard style on rectangular lots.. but then again out your way it could be meets and bounds.. which could be different. you can learn a lot at planning and public works... Now I know folks survey out your way more often than our way.. but if its important you can do that. I know in Charleston were I work.. we survey everything as there ARE encorachments all over the place.. but we are working with infil little 20 to 40 foot side lots with homes built right on the lot lines and usually there are encroachments.. check with the title company. the day you lock it up open escrow and order a title commitment. you want that right away as well.my best guess is this will all be fine. however again your eyes on the property are your best defense for most any of this..

Nathan W. · Answer

Jay, thanks so much for weighing in. I was hoping you might see this and offer your advice. I really appreciate it. I just didn't know if 15 days was enough time since I've never done this before. I'l take your word for it that it is.Do I need a Phase 1 report and can those usually be accomplished in 15 days? Or is this something I can ask the seller to provide? I think I'm fine without an appraisal but what about a survey to make sure there are no encroachments? These nuances between buying houses and buying commercial real estate are what I've so far had the hardest time wrapping my head around.