Handling of 'option'/equity payments in MHP Sale

[Mark Simpson]

Hi All.  Long time investor but I am currently under contract to purchase my first MHP in Colorado.  Half the units are park owned, and all are on Rent to own leases.  All leases had the renter put up a $600 option, and then $100/month of rent is credited towards a predetermined sale price.  Of the units that are still park owned, there are varying balances still owed.  The option and equity payments are fully earned - if the tenant defaults, the park owner won't refund any of the money put up.

In the sale of a Park like this, how is the option/equity money usually dealt with.  Would you expect the seller to credit the buyer with the option money just like they would security deposits?  Is there a 'normal' way to handle this, or is it usually up to the contract.  

With the option being non-refundable, does it need to be held in escrow till the tenant either completes the purchase or defaults?

Thanks in advance!!

Mark Simpson

[Frank Rolfe]

"Rent to own" became illegal in 2008 with the SAFE Act, unless the park owner is SAFE Act licensed and follows the laws of the SAFE Act and the 2010 Dodd Frank laws. A "rent to own" agreement is considered a "disguised mortgage" under the law. So probably all of those transactions you are inheriting in this sale are actually technically wrong. That being said, you have to honor all signed leases and agreements when you buy the park, so you can't just suddenly say "wait, these are not SAFE Act compliant and therefore void" because they're probably not. It's an issue that there is no case law for, as far as I know, and another moment in which the government's direction is not clear. So most park owners simply service these inherited agreements until the tenant either ends up with the home or runs off and abandons it.

In valuing these, you should certainly put very little value in the homes to begin with, and even less in these documents. Only 1990 and newer homes actually hold value, as you can get actual mortgages placed on them by actual SAFE Act complaint mortgage providers like 21st Mortgage, PEP and Triad among others. But nobody does real mortgages on 1980s and older homes, so they are effectively worthless. You will spend around $5,000 renovating a 1970s or 80s home only to find it will sell for maybe $1,000 on the open market. As a result, most park owner simply give these homes away to the existing customer rather than even get involved in them.

The bottom line is that you should not put any value at all on these homes if they are older than 1990, regardless of whether they have these potentially incorrect "rent to own" documents or not.

Buy the park based on the "real property" income which is the lot rent. Don't put any value on the homes or their "personal property" income.