Mobile Home Park Help

[Kristi Nunes]

Hi fellow investors!  I am evaluating a mobile home park and would love to get your thoughts. Here are some quick stats:

- Appraisal done on park and vacant land alone (3.4 acres) valued at $40k but entire business with land valued at asking price of $480k. Brings in $11k/month in income and $4k/mo in cash flow after all expenses (this is after verifying/questioning owner's rent roll)

- 19 MHs, all POHs. MHs built 1966-1986, all recently renovated inside and separately metered so tenants pay all utilities.

- 1 three bedroom single family home, currently occupied by the maintenance man who is on a 1099 and gets $1200/month in addition to the housing.

- 1 office with an attached apartment. Currently used by owner but has potential for additional income.

- 1 large storage unit currently used by owner but has potential for additional income.

- Right next door there is another 11 acre lot for sale with potential to expand/grow the park

Questions I have for experienced mobile home park investors:

- I realize having tenant owned MHs are better than park owned, but in an area where the land value is so low I wonder if it makes more sense to keep them park owned?

- The current owners built this property up themselves 35 years ago. It is surrounded by single family homes and residential neighborhoods. Since initial build, the zoning has since changed to high density residential which does not allow manufactured home parks. I'm trying to get a hold of the city to see what this means for the future of the property, but here are my best/worst case scenarios:

A) Best case - We are able to continue operation as a mobile home park, sell as many MHs to tenants as possible, expand into the adjacent lot, bring in good cash flow and attract a decent buyer when we are looking to sell.

B) Worst case - The new zoning does not allow us to expand or build additional pads, the entire investment quickly loses value over time and we are unable to find any buyer willing to take it off our hands. In this case, I can think of some ways to get creative on how to keep ourselves afloat, but most of the creative options I can think of include developing the land with multi-units and/or subdividing the lots. Has anyone done something like this before and what kind of due diligence would you do to determine if it would be worth it?

Thanks so much for your help! Looking forward to hearing your thoughts/advice.

[Jack Martin]

@Kristi Nunes From what you have shared, the current owner owns all the units and everything has potential.  No history of renting the home, the office, the storage unit, and all the mobile homes are park owned.  Without knowing more, that tells me you could either have a great deal where the current owner is neglecting the opportunity, or a difficult deal where there is no demand in the market and you won't be able to do much better.  

As you evaluate the deal, consider one reason why all the homes are park owned and none of the other units are making money is due to the lack of demand in the market.  Location is the most important criteria in evaluating a property, and you ALWAYS want to buy in areas where the demand is high.  High demand areas are locations where there are jobs and the city's growth is trending in the right direction. In lower value areas, you will usually find a lack of jobs, a lack of growth, and therefore a lack of demand.  This is not necessarily a question of whether you should sell the homes or not, but rather COULD you sell the homes?  So before you answer that question, you should perform a demand study to determine the ability to sell the homes. Here are the simple steps to do that:

• Start with the apartments in the area. Call them and ask how much a 2 bedroom apartment is. It should be at least double the lot rent at a mobile home park in the same neighborhood. Then ask how many vacant units there are to choose from. If you find that the apartments have a low vacancy, that is a good sign. If you find high vacancy, that is red flag for the market and you should be cautious. You should always consider apartments as an option for your prospective tenant, because if it costs them more to make payments on a mobile home plus pay the lot rent, they could just rent an apartment instead. Most people might miss this little nugget, but it is a quick way to determine the lack of demand and where lot rent should be in the market.

• Next, call the parks within 5-10 miles that are similar parks. Ask them what their current lot rent is and what else is included/excluded? Ask if they have any rentals in the park and how much those rent for. Ask them if they have any homes for sale in the park and what the details are, and how many homes have sold recently. Do they finance? How much do they require down? What kind of credit do they require? Ask them if there are any vacant spaces in the park and what incentives would they offer if you brought your own home into the park. From those calls, you will have learned what your competition is related to lot rent, the sale of homes, how many POH they have, and what incentives you may have to offer as you sell homes. If you discover high vacancy, no history of sales in other parks, and almost all rentals, that would be a red flag for the market. Also, if the lot rent (lot rent only) at competing parks is lower than $200 per month, the park could simply be in a low demand area.  

• Next, you can advertise a home for sale yourself as a "test ad". Place ads on every platform you can where home buyers could be looking for an inexpensive home. The goal of these test ads are simply to find out how much interest there is in the market for the homes you will be selling once you purchase the park. Make sure to advertise in all the available channels you can find so you can perform a true test. (craigslist, FSBO, zillow, etc. as well as placing signs on the street corners in the area) You should be receiving a high volume of calls if you expect to sell all those homes. Lack of call volume would be another red flag.

Take the time to do this right and you will be glad you did. If you get positive signs from all those efforts, then it's likely you could sell the homes and rent out the other units. Remember, selling POHs is all about market demand. Make sure it is there or you'll end up wishing you had never bought the park. If you have high demand, you will always have the freedom to choose whether you sell homes or not, either to the existing residents, or to new residents as they become vacant.  

As it relates to expanding the park and best case / worst case, it will still come down to market demand.  Even if you redeveloped the property, you will need demand in the market.  Location, location, location!  You will learn more about that deal by doing a proper demand study than you can imagine.  

All the best,

Jack