All park owned homes?

Question

Is it feasible to buy a park with all park owned homes? And then slowly sell the home to the tenants on rent to own terms? What are the risks related to that?

Frank Rolfe · Answer

No, it's because they are not looking at it properly. Here's how they see it:

Home Rent $700

Less cost to repair, insure and prop. tax ($200)

NOI $500

But, of course, here's what's really going on:

Home Rent $700

Less Lot Rent ($400)

Less cost to repair, insure and prop. tax ($200)

NOI $100

If moms and pops subtracted the lot rent from their numbers, they'd all sell off the rentals. But, of course, if they did that they would ask far more for the properties (since real property can be "capped" but personal property can't) so I'm glad they don't!

Frank Rolfe · Answer

We do that all the time -- many owners do. The biggest risk is that you'll fail to sell it to whoever currently lives in it, and then have to fully renovated it before you can put it back on the market (at a cost of around $4,000 per home). Even worse, there may be some homes you cannot renovate, and these will cost you $2,000 to demolish and cart away in addition to losing your lot rent income on that space until you can refill the lot.

On deals like that, it's important that the homes be renting at an amount that is at least $100 per month more than the cost of ownership [lot rent at full market value + mortgage]. On older homes, you may be better off simply giving the home to the current resident to help keep costs low and encourage them to take ownership.

The big advantage to parks with lots of park-owned homes is you can reset the underlying lot rent to full market on day one, since the resident does not know or care what the split is between home rent and lot rent. For example, if the mobile home is renting for $700 per month, and the lot rent is $200 per month on the privately owned homes but the market is $400 per month, you can reset the lot rent on the rentals to $400 and sell the home and the tenant is happy because you've dropped their monthly cost from $700 to $400 ultimately. In this manner, some parks have a two-tier pricing system because it may take years for the lot rent on the privately-owned homes to catch up to what were the rental homes.

Remember that only the lot rent is "real property" income, and the mobile home is "personal property", so you always want to skew all revenue to the lot rent.

Jack Martin · Answer

Most parks you find will come with at least a handful of POHs.  As @Frank Rolfe explained above, the goal is to convert those to resident owned homes and focus on the park and the lot rent.  In addition to inheriting POH's at closing, there are times when you pick up a home along the way while owning the park.  Older people pass away, occasionally someone will move across the country and are not able to sell it prior to their move, or things like a divorce.  In most cases, we will buy the home just to make sure we control the outcome.  Then we follow the same process to convert that home to resident owned.

Mike G. · Answer

as @Jack Martin summed up and adding to what @Frank Rolfe said, the important key here is to not get caught up in POH vs TOH but to understand the math behind calculating them and understanding what Frank says when he makes the distinction between lot rent being income that can be capped (real property) as opposed to POH rental income that cannot be capped ( personal property).

Well said gents. . . .

Trin Nagireddy · Answer

@Jingwen Dunford : Most of the wholesalers suggesting this model.  As Frank said, Real value is lot rent.

By the way, I am from Atlanta ( Cumming), Looking for HMP. Love to meet  and discuss.

John Cornelius · Answer

@Frank Rolfe Great info! Does the conversation go something like this? "Mr./Mrs. tenant, you're paying $750 a month in rent,  which includes the lot rent AND home rent...I'll give you the home for free**, and only charge $400 a month in lot rent, but you'd be responsible for the upkeep/maintenance of the trailer. So you'll be saving $350 a month minus any repair costs, but as long as you're not kicking holes in the wall for fun, the repairs/upkeep cost should be more than reasonable.

**Or sell for a lump sum

Christopher Thrash · Answer

How does Dodd Frank effect this model?

Ken Buck · Answer

Following!

Charlotte Dunford · Answer

How would you find out if the state allows "giving the homes to tenants for free"?

Charlotte Dunford · Answer

@Frank Rolfe thanks Frank! So I wonder why the owners don't already sell the homes to the tenants already? Are they doing it for the extra cash flow?

All park owned homes?

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