An Old Mobile Home Note or Money Tree in Disguise?

I got a call from one of my favorite note brokers last month regarding a mobile home note secured by a mobile home in a park / rented lot.  The note was created by a dealer and he was in need of capital. The broker gave me the details of the notes structure and information on the payer and mentioned that he has had a rough go of finding any buyers for note because the land was not part of the security.  In by quick once over of the note I told him that I thought we could come up with something that would work for all parties involved.  He faxed me a copy of the note and I went to work getting my offer together. 

The terms of the note: 

Sale Price: $30,717        Down Payment: $6,000 
Note Amount: $27,717    Interest Rate: 12%        
Term: 188 Months          Payment: $401.16 
Date of First Payment: 04-28-2010      
Remaining Balance: $23,338.88     
Number of Payments Made: 9     
Number of Payments Remaining: 88

I liked the fact that the buyer had put down a respectable down payment.  I also found out that the payer was gainfully employed close by and had made some updates to the home.  The home was built in 1999 and in good shape.  It looked like the mobile home was not over sold just because the owner was willing to take back a note.  The broker had talked to the seller and got the point across that there are few buyers for mobile home paper and that he would definitely have to take a good sized discount if he really wanted to sell.  The seller’s response was that he totally understood.  I was getting the feeling like I was on to a deal here somewhere!     

I promised the note broker that I would pay him $1,000, if and when we close the deal, if he would allow me to talk directly with the seller.  I negotiated a purchase price from the seller of: $14,000 knowing there would be about $1,000 in closing costs.  I figured I would have about $16,000 into a note with a principle balance of about: $23,338.

 

So for $16,000 I would have the rights to collect the next 88 payments or $401.16.  The yield on this investment would be about 25.3%  or good enough in most books.  The total return in 88 months assuming everything goes as planned would be: $35,302.08!!!

 

Just as I was thinking of moving in for the kill I got a call from a friend of mine looking to put some money to work at better than market returns.  Now I have worked with this investor in the past, and had a good feeling the types of returns he was talking about.  I told him his timing was impeccable because I had just gotten in a quality note that could be had at a good price.  As it turns out the mobile home was located less than a mile from where my friend went to elementary school and he was familiar with the area.  He did his due diligence and we agreed to let him buy the note for $17,500 plus closing costs. 

 

Now my friend has about $18,500 into a note that has a balance of about: $23,338.  Since it was getting close to the end of the month the note seller ended up collecting another payment so now there were only 87 payments left of $401.16.  In my book this equates to about a 19.9% yield or more than good enough. 

 

We closed the deal and everyone was happy.  My associate that bought the note was able to park his money where he was confident that he would get a good return.  The note broker was happy because I was able to put together a transaction that he has almost given up on.  He should have called me first!  The mobile home dealer / note seller was happy because he got to pull his money out that was tied up into the note.  I ended up happy because after I paid the note broker his $1,000, I got to walk away with the difference (you do the math) and move on to the next deal. 

 

It’s been about a month since we closed this transaction, and today the note broker called with the details of another note that the dealer has available.  Creating these types of relationships is what makes our business work and it is always easier to do business with repeats and referrals.  I hope this one turns out as good as the last one did and that I can come back and finish the story.  Until then……