Due diligence on MHP

[Avery Robertson]

I am in negotiations on my first mobile home park. What are some due diligence items I should request or be aware of?

Should I request two years of rent rolls and p&l’s?

Thanks in advance!

[Jack Martin]

@Avery Robertson our approach to due diligence begins with determining if the value of the park is in line with the seller's price expectations. To properly value a park requires a fairly deep understanding of how they will operate, given all the potential variables. Some of those variables are the size of the park, number of vacant spaces, number of POHs, number of vacant POHs, number of MH spaces, number of RV spaces, the park amenities, the age of the park, underground infrastructure age and condition, park location, size of the market, value of SFRs in the market, city water or well, city sewer or septic, other utility sources and whether or not they are direct billed, deferred maintenance, cost of management, and more. I won't dive into that evaluation here, since this thread is about due diligence, but just keep in mind every park is unique and without understanding all the variables, it's possible to misinterpret the value of the park.

With that said, if you determine the value is there, then it's time to start due diligence. To highlight the basics of DD, we like to break those up into 4 areas: financials, initial walkthrough, compliance, and paid inspections/services. If you are seeking to keep the initial out of pocket expenses low, begin with the items that require just your time, but not money. Get familiar with the financials to determine how the park is currently running, and then do an initial walkthrough so you know what you have. If everything is still a go at that point, spend time on the compliance to make sure there are no deal killers. After that, you will need to spend money on the inspections, surveys, environmental, etc.

Financials - Review of the financials can be tricky, particularly when the current owner has not kept the books correctly. But the goal here is to underwrite how you would expect the park to operate and see if that lines up with what the seller is demonstrating. This is where you can begin to see where there are operational inefficiencies, cost overruns, or areas where income can be improved. Sometimes you can do this prior to opening escrow, but there are cases where a seller will not deliver financials until you commit and put up EMD.

Initial Walkthrough - Confirm the number of spaces, the general condition of the utilities at each space, the status of the home on each space (POH, TOH, vacant, RV, etc.) and the condition of the rest of the park and amenities (roads, clubhouse, office, pool, etc). We also like to sit down with the current manager and go through everything related to how they are running the park (collecting rent, problem tenants, sales of homes, marketing efforts, recurring maintenance items, problem areas in the park infrastructure, etc)

Compliance - this includes everything related to city, county, and state compliance to continue to run the property as a park. That includes zoning, (including a zoning letter to confirm legal use) building, permits, sales tax, licensing, etc. In addition to that, we like to check with the police, fire, insurance, sex offender status, and anything that might affect the operations of the park. The goal is to avoid surprises, understand what challenges may be present, and what impact the results of inspections may have on our future operations of the park.

Inspections - If all of the above checks out, now it's time to start spending money on paid services. Inspections should include electrical, plumbing, and septic/sewer contractors (to address the underground infrastructure) but also can include pool, home inspections, asphalt, and more, depending on the park. The goal is to always work with contractors who are familiar with parks. That is not always easy to find, but trust me, it is worth making 50 calls to find the right contractors who work in the park arena and understand them. When you meet with the contractors, make sure to have them help you understand what you have, what will be required to repair and maintain what you have, and what you should be budgeting for future capital improvements, if needed. A survey and phase 1 will likely be required if you are getting debt, and smart to get those done either way just for peace of mind, but those will cost money as well. 

Congruent with the due diligence items above, we are also putting together the strategy for the park, performing our rent survey, running our market demand study, and creating the budget for the project.

All the best,

Jack