Mobile Home Park - Convert from Park Owned Units to Tenant Owned?

Question

Hi,I purchased a mobile home park about a year ago. Things have gone relatively great. There have been a few hiccups as I expected there would, but nothing that I couldn't figure out with some help from my awesome property manager and from this website. I am now getting to the point where I am thinking about looking for park #2.In searching for #1, I had a lot of criteria that was largely based on the information in this blog, and one of the key things that I was looking for was a park with TENANT OWNED HOMES. This keeps the park owner's (my) maintenance low, tends to attract good tenants with some amount of "pride of ownership", and also keeps turnover low. That said, in searching for my previous park, probably 80% of the parks that I encountered consisted partially or completely of PARK OWNED HOMES. I have no desire to own the units in my park, but I am wondering if anyone has been through converting a park that owned the actual units into one that consists of tenant owned units? If so, how did that go? Did you try to sell to the existing inherited tenants before listing the homes for sale? If so, how did you structure the offer to them? I am trying to wrap my head around how large of a time and money commitment this would be, or if this idea is even worth considering. If this option were on the table, I'm sure it would open up a lot more options when searching for my next park, I just want to make sure that I'm properly accounting for the time and cost of the conversion when doing my analysis.Thanks for any thoughts and ideas!Cheers!Cory

Brian Spear · Answer

@Gulliver R. As present (Q4 2017), Dodd Frank precludes park owners from seller financing chattel inside their communities. If you'd like to provide mortgages to your residents, you'll need to be licensed as a mortgage originator. Should you have an interest, contact @Ken Rishel. Ken is an industry leader in the MLO space, helping small community operators comply with all regulations. That said, we are hoping that the government rolls back some of the onerous regulations that adversely affect low income families. There is discussion that Fannie/Freddie will 'soon' support mortgages on homes under 'Duty to Serve'... A direct excerpt from the legislation is below for your reference:§ 4565. Duty to serve underserved markets and other requirements (a) Duty to serve underserved markets (1) 1 Duty - To increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for underserved markets, each enterprise shall provide leadership to the market in developing loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages for very low-, low-, and moderate income families with respect to the following underserved markets: (A) Manufactured housing - The enterprise shall develop loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages on manufactured homes for very low-, low-, and moderate-income families.In time, this legislation should help more low income families become homeowners. From an investment standpoint, it should be easier for professional operators to fill vacant lots. That said, nobody knows exactly when the government will actually facilitate this secondary market. The goal for many is to acquire communities in advance of the next stage of consolidation in the industry.

Matt Boettinger · Answer

As always, check with your Lawyer. But the was we structure it the answer to you question is 'yes'. as long as you give them the option in the contract to decline your offer of taking the home without any penalty.

Brian Spear · Answer

@Gulliver R.If you're unwilling to get licensed, I'd suggest you look into the Lease-Option / Rent Credit model to help your residents become homeowners.Some additional insight -- @John Fedro put together a pretty solid summary on how Dodd Frank will impact park owners in the following links: Read John's blog on Dodd FrankListen to an interview on the subject of Dodd Frank

JC K. · Answer

@Cory H. This is one of those things that most MHP investors will probably be faced with at some point or another. You may want to look into is 21st Mortgage's Used Home program. My understanding is that thru this program you can get cash for MHs that are 1976 or newer. If you think about it, this can open the doors to different opportunities as in theory you can recover some of your initial investment. The way I read it, the max sale price is 130% of NADA. The tenant (under a lease to own program) pays 5% down. Interest rates are 7.25% to 10.95%. Other terms seem very reasonable. I will definitely be looking into this to sell a few POHs.

Jon Dorsey · Answer

how are you estimating the value of each POH? Do you buy reports for each?

Gulliver R. · Answer

@Brian Spear in the variables listed would you say the nicer/better the home/park, then the higher the percentage? Thank you again for your help!

Brian Spear · Answer

@Gulliver R.The Rent Credit is derived from an arbitrary % that you create based on your business model. To be clear, it is separate from the Lot Rent. For example, if your monthly Lot Rent is $200 & your monthly House Rent is $400, the total monthly amount due from a resident is $600. In this scenario, should you choose to credit 75% of the house rent, a resident would accrue 300 Rent Credits per month. Should you choose to credit 50% of the house rent, a resident would accrue 200 Rent Credits per month. Operators typically credit between 50%-100% of the house rent. Variables when determining the percentage are below: age of homecondition of homestar rating of communitybusiness model of operator Again, please speak with an attorney regarding any of the aforementioned info. As mentioned earlier in the chain, Dodd-Frank prohibits park owners from seller-financing chattel. Seller-financing, lease-options, and rent credits can be seen by the courts as one and the same if you don't have the proper language in your contract(s).

Gulliver R. · Answer

@Brian Spear is a rent credit = 100% or the monthly house payment or is it 50%?

Brian Spear · Answer

@Gulliver R.I pm'd you more specific info... In general, we try to have residents accrue Rent Credits at a pace that will allow them to acquire a home within 5 years. Also, you should refrain from using the terminology 'down payment' when implementing the Rent Credit program. This can be misconstrued as seller financing... Residents will pay the first month's house & lot rent in addition to a security deposit -- just like a standard rental.

Gulliver R. · Answer

@Brian Spear I was just talking to somebody about using the Rent Credit method. How long do the tenants rent the home for until they can buy it (transfer title)? What is their typical down payment? Thank you!