All Forum Posts by: Daniel Smithson

I'll +1 Glenn's book for sure.

Frank and Dave's MHU is the defacto jumping off point for most investors wanting to start in this space. I'd recommend it. Especially being virtual now, it's easy to attend from anywhere. With the course, you get all of their books as well which outline everything you'll need plus ample case studies. I believe you can buy the books separately as well if you're unable to attend the classes.

@Jack McWatters - totally hear you and agree with starting small on your first deal. Value add is where the money is in the market right now. There's nothing wrong with buying a stabilized property for some of the cash flow and (hopefully) appreciation, just don't expect to replace your W2 with a smaller property like this one. 

Agents do complicate things sometimes, but usually the sellers have them there because they want to have a gatekeeper to the shenanigans some buyers will pull with low ball offers, etc. It's tough to get direct to the seller to explain how seller carry might benefit them in the long run, but it's worth the try. The biggest value to the seller is often either less capital gains tax on the sale (unless they're seeking a 10-31, then you're out of luck altogether) or a higher sales price with their carrying some or all of the note. 

Since an agent is just looking for a paycheck and to move on, these types of deals don't usually benefit them as much and they won't pass it to the seller as readily unless you've outlined how you'll pay the agent as well. You can offer them cash or cashflow too!

I still think your biggest issue on this one is going to be financing with a bank. It's a small, complicated, and seemingly over-priced deal. Be ready to hear a lot of "no's" but keep pushing and keep a record of them. When you've exhausted them all, that's a negotiation piece to take back to the seller to show you're serious and they're going to have to make a concession. 

Last note on the lot rent - $275 to $400-500 is a big jump. Where are lot rents in your market? If you give up control of the houses and are $100+/mo higher than other parks, your residents may move or sell their homes to other parks. If you jump up your one lot renter that much too soon, they will leave. 

Remember that residents owning their own home is a cash-flow liability to them and the residents will want a commensurate trade-off in payments if they're smart. If they're not, they'll abandon the home when the hot water heater breaks and leave you to sort out the titles, rehab, etc.

If you're serious about this deal, put together a business plan with the information you have and get it in front of some lenders for their feedback.

@Jack McWatters - It certainly seems like they're counting the MHs as real property. It's a common mistake with sellers, especially when a realtor is trying to help them get top dollar (what they should be doing). The trick is to look at the deal through the eyes of a lender who is going to see the MH as a risk of disappearing or depreciating to 0. 

As far as financing goes - I'd say it's deal-dependent. Each deal is going to qualify for different amounts of lending that would be ideal given the deal. $1.3M+ deals should try to go with agency debt (Fannie/Freddie) for the best terms. Anything smaller will likely be through regional and local banks who know the market. If a property has high vacancy, turnover, or is otherwise unstabilized, you're going to have to bring cash, get some kind of seller carry, or even a master lease with an option to purchase (make sure this is bulletproof where the seller can't back out after you've done the work to reposition). What is it that Brandon T. always says - it's like having different tools in your toolbelt and knowing when to use each.

The big play in the industry right now is arbitraging parks from one level to the next - take an unloved park from a seller-carry deal to agency debt and you've got a winner on your hands. This of course takes time, knowledge, and a lot of money. If you can't jump a park up to the next level, it can still be a good deal but it won't pay out like the deals the big players chase. That's why they chase parks with a certain number of lots (50 - 60+), to make sure they can get up to agency debt in most markets. 

My concern with your deal, from what you've said, is that it's stabilized already but it won't likely be big enough to make the leap. The best you'll be able to hope for is a local bank lender getting a fully amortized note and riding that out until it's paid off. There's not much meat left on that bone. And it's likely overpriced to the point where it won't appraise out (that protects you and the lender, but appraisers do crazy things sometimes). 

Partners can be great, but there are a ton of caveats with that setup as well - treat it as serious as a marriage and make sure you outline what each partner's responsibility is going to be in the deal. Stealing from Gary Keller here, treat your partnership agreement like a dis-agreement and outline all of the ways it can go wrong and what happens, because it likely will. 

I'm all about starting and getting your foot in the door, but make sure you understand the strategies that will make you succeed faster rather than just gettings pads under contract. 

@Jack McWatters - $550k is likely too high. If you're targeting a 10 CAP (I would recommend going higher for such a small property), @Frank Rolfe laid out the value of the 7 park pads around $115k. You can add in the value of the homes as personal property (do not apply a CAP rate, only what they could sell for) and the house separately. 

You have to decide if the house is worth keeping as an investment or if it's better to separate it and sell it off. If you do sell it off, it will likely sell for less due to the proximity to the park. Not that it should, but that's just people's perceptions. 

In my market with 90's - 00's MHs on each lot, you'd be looking at a total guestimate valuation of around $300k ($115k park, $60k MHs, $120k for the house). That's my guess, in my market. You'll need to underwrite each element separately based on your strategy.

The best way to value a MH is through local comps - start with other parks, FB and CL. Make sure you filter for homes that do not have to be moved as that always discounts the sales price heavily. I'd also stay away from national sources like NADA as the value of a MH can vary widely - a $2k home in rural AL could be $100k in the right market in CA. Location still matters, even with something that's semi-mobile. MHVillage is actually a good place for comps for retail sales - not a great source for buying for infill though!

@David Denzy - you're spot on. Always go with the lower of the values, and discount it some from there if possible. You can always try to separate the home from the park package if the seller is set on a high price and let them sell it separately. If that doesn't work, I wouldn't lose sight of the forest for a tree. One slightly overpriced home shouldn't sink a deal if it's a decent deal. If your margin is that tight, you probably have other underwriting issues you need to review. Also, you can always do a straight rental for a year or two, get your money back, and then sell it for its value at that point.

Of course, all of this assumes the home title is free-and-clear. If not, that's a whole other can of worms to deal with.

@Leslie A. - nothing has really changed with the RTO laws. It's been reviewed by a bunch of lawyers who have developed what is, in their opinion, a legal workaround of sorts. There are two systems most people use - a lease with option to purchase and a MH industry-exclusive rent credit system. Both systems do not allow the buyer to accrue equity in the home as is typical with a true note. With the LO, the home depreciates over time so it becomes more affordable. With the RC, the buyer accumulates credits to eventually be "awarded" the home, not unlike a retail loyalty program. We've used both, but find the management of the LO program to be much easier. I'd consult a lawyer before using either system though.

We still advertise as "rent to own" because that's the verbiage our clientele are used to seeing, but we utilize these systems as our lease and purchase agreement documents. You can imagine the looks I've gotten trying to explain Dodd-Frank and the SAFE act to someone asking if we rent to own. Haha!

Just my $02 - I'm with @Leslie A. on this one. Since the RTO agreement is so new, even with the higher deposit, I would significantly discount it. There's still probably a 50% default rate on these types of agreements because the buyers who use them typically have terrible credit and payment histories. Ideally, you'll underwrite the value of the home as if you had to resell it later, much like you would a house flip.

Also, keep in mind that there is no obligation for the buyer to buy the home in an RTO agreement (rent credit or lease option) since it's not technically a mortgage-lender originated note. Also double-check the insurance and taxes as you'll often be required to pay these on the home until the title changes hands. The buyer may have agreed to pay these separately, but they need to go through you to ensure they do get paid.

Best of luck!

Everything Frank said! There's nothing inherently wrong with the POH model, it just suffers the same drawbacks that investing in single family homes does. The building was not designed for cash flow so you have much higher expense ratios and more headaches to contend with. It may still be worth it though of the spread is big enough between home and lot rents.

UMH is a large operator who has embraced this model with new homes. I think they're purchasing something like 800 homes per year as rentals in more Northern areas. Their maintenance is lower, at least for now, because they're buying new, rental-hardened homes. I'll be interested to see how this plays out in 15 - 20 years. At least in their markets, once the home is depreciated out, they can always replace or sell it in place for just the lot rent.

Make sure you consider your timeline too. The southeast is behind the rest of the country in the TOH model, but I believe we're moving that way eventually. The lot/home rent ratio is decreasing and I think that trend will continue as lenders in our area become more sophisticated and force this model more. If you have a long enough time horizon on owning a park, you may be able to rent the homes long enough to pay them off and then capitalize on the trend. You may even be able to set the trend.

Hi @Grant Gibney - you may find some retailers who are willing to push some business your way. I don't know many who will pre-set a home in a park anymore to sell it on-site, but you might get lucky. You'll probably have to incentivize the dealership with a few months of free lot rent for the buyer and not charge them lot rent while they're selling the home if pre-set. 

Just keep in mind that this is a really passive strategy and will likely result in very slow infill if any at all. I understand not wanting the headache because it's a huge pain sometimes, but your investor needs to decide if he wants to buy a business or pay a little more for a passive, already optimized asset. Buying a value add park is a business and if he's going to be successful, he'll need to treat it like one. Eventually, though, no matter which way they go, they will be in the home business at some point. 

As @David Benton pointed out - it's absolutely worth the learning curve to push the value of the property to do this infill work though. That's where most park owners are making their money right now. Any why manufacturers are on a 3 - 4 month lead time on home deliveries. Getting a dealer's license and set up with 21st Mortgage or a manufacturer's program can make this a little bit easier to handle as well - far easier than trying to infill used homes!

I wouldn't discount that you can also utilize the CASH program for rentals. If you're okay with lot rents at that level based on your budget, it sounds like you'd have enough margin to cover a home note between market rents and lot rents. 

Now, just because it's a rental on the CASH program doesn't mean that you're not giving your tenant's a path to ownership. You can utilize a rent credit or lease option program to find the right buyers. 

The best thing to do is run a test ad if you haven't already and be generic - "New manufactured homes, lease/rent to own, from $600/mo" and see what happens. I know a lot of those terms are what the industry is trying to get away from, but you have to speak the language of your customer.

Ideally, you're going to bring in someone who can bring enough down to cover your upfront costs on CASH (set, hookups, decks, skirting, HVAC - probably $6 - $8k) which can be a stretch in most markets. Even if you can't recover all of it, a good chunk down protects you somewhat and weeds out a lot of tire kickers. That's also a lot less out of pocket than trying to infill with used homes and then refinance them later.

Best of luck!

Your closing/title company can help put this together for you. It's a one page addendum that lists each asset separately and its portion of the loan. Just talk with your lender and agree on a value for each home that when paid will release it from the loan.

The second part is where some salesmanship comes into play. You have to structure the deal where its a good deal for the resident to want to buy the home.dont expect them to jump at the opportunity to pay the same or more and take on maintenance and repair as well. Each situation will be different and you'll have to sell them a little differently (butmake sure you treat each resident the same, can't stress that enough).

What we've done with some success is to tell the residents that we are selling the homes, no ifs ands or buts. We offer them a sweetheart deal, usually a lease option with "time served" as the down payment. If they reject it, we'll try to sell it to a MH investor with a tenant in place (that's never worked yet). At that point, we usually just wait for them to end their lease assuming they are paying, etc. The new resident will then purchase or LO the home.

We have never forced anyone out of a POH who was performing just because they did not want to purchase the home. It's just part of the deal sometimes - you can't be in this business without being in the home business in some way. It will take some time to sell them all off.