Mobile Homes - Converting POH to TOH

[Ryan C.]

Hello,

I am a new investor looking into a property that currently has ~100 pads with 57 of them occupied by tenants with tenant owned homes, while the remaining pads all have vacant park owned homes, at varying levels of livability. The price of the park is based off the NOI of the 57 occupied pads with a 10% cap rate and no value is attributed to the other 43 vacant POHs. Basically any warm body I can get into the vacant POHs will add value to the park, so instead of fixing up the units, I was thinking about just selling the existing POHs for next to nothing and charging lot rent. Is this a good idea or is there something I am missing?

Thanks for any help!

[Jack Martin]

@Ryan C. first of all, Yes, that's the real Frank.  If this is your first park, you are about to get a great education!  Prepare yourself for some heavy lifting, as that is not the easiest one to start with.  However, when you successfully stabilize a park like this one, you will have learned some of the tougher lessons in the business.  The good news is that there is a home on the remaining spaces.  That is a tremendous value to the park (more than you may be aware of) and from the sounds of it, that's probably a good deal. 

As Frank mentioned, DO NOT allow just any warm body into those homes. That is a recipe for disaster. This is your chance to change the culture of the park and significantly upgrade the overall resident base in the park. Considering you have 33 homes the can be renovated and sold to high quality residents, just think of the impact of that. Plus, a nicer home will attract better buyers who can pay cash for the homes or put significant money down on a seller financed sale. Better homes = better residents = better park = higher lot rent = greater value = higher ROI.

Once you have the park in escrow, make sure to perform a thorough market demand study.  Since you have 33 homes to sell, you want to make sure the appropriate demand will be there before you close on the park. Here are the simple steps to uncover the reality about market demand:

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 of 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 a 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 the mobile home, plus pay the lot rent, they might 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 help you determine where lot rent should be in the market.

Next, call the parks within 5-10 miles that are similar quality 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 POHs they have, and what incentives you may have to offer as you sell homes.

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, facebook marketplace, 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 fill a high amount of vacancy at a park. Low 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 you probably have a good opportunity on your hands. Remember, selling POHs is all about market demand. Make sure it is there or you won't be able to sell the homes.  

Then take the time to put an experienced mobile home renovation team together to bring homes to market at the pace equal to the demand.  If you do that part right, you will end up with a great asset with a tremendous amount of added value. 

All the best, 

Jack