Mobile Home Parks: A “Cash Cow” with Financing Issues and Opportunities
Mobile Home Parks: The Issues
Mobile Home Parks can be difficult to buy due to the issue of income verification due to a sizeable portion of most mobile home parks income coming from either rent pay with cash, or rents payments made with Money Orders from 7-11 or Circle K made out to “cash.” [Issue: Did the mobile home park owner, and/or their property manager deposit in the bank All the cash, money orders or checks paid? If the answer is not absolutely, then there is an income verification issue for the potential buyer and their bank lender!]
How does a potential buyer know and verify the actual collected rent (that may or may not be deposited) versa scheduled rents provided by the mobile home park owner?
How does a potential mobile park lender really know and verify the actual collected rent (that may or may not be deposited) versa scheduled rents provided by the mobile home park owner?
Since the real estate crash of 2006-2011 real estate investors will find that on investment property that banks and institutional lenders offer a far tougher loan underwriting rules, restricted loan terms, shorter amortization and higher loan rates than they offer on homes:
1. much large down payments that owner-occupied homes,
2. shorter loan terms for investment property (FYI- No 30 year fixed rate loans, in fact on investment properties loan terms are as short as 3, 5 or 7 years and shorter loan amortizations of 15 or 20 years), and
3. there are much tougher qualifications and underwriting standard to get a loan approval on an investment property.
4. higher loan rates than they offer on owner-occupied homes
Mobile Home Parks: The Solution!
This results in an additional problem on arranging bank financing with limited or questionable proof of income from the seller. As I true in life, with every problem is an opportunity also present with the deal.
HINT: Don’t use bank financing, but instead buy the mobile home park from the owner with seller financing! Since the mobile home park is the real “cash cow” as represented by the mobile home park owner – ask for to buy the mobile home park with No Money Down or Low Money Down.
Depending on the mobile home park location and age, you will find that 33% to 45% are owned “Free and Clear” by the Mobile Home Park owner. What an amazing opportunity for Seller Financing for you as the Buyer of a Mobile Home Park!
The mobile home park seller knows first-hand the real income of the mobile home park and know that is valuable and usually asserted that the mobile home park is “real money maker” or a “cash cow.” You can flush out if it really is the profitable property they suggest and arrange very favorable acquisition financing all at the same time by making an offer to buy with seller financing (assuming the mobile home park is owned “Free and Clear”).
FYI the owner will probably inform you that they own the mobile home park and have paid off the mortgage with all the cash they are making. As President Reagan said “Trust, but verify” and that is easy to find out from a local Title Company if the mobile home park is debt free (a quick upfront Preliminary Title Report with give you an informal answer prior to the offer. Of course the Full Title Report provided in escrow or the attorney closing will give you solid formal verification and protection on the lien status of the mobile home park).
Seller financing is the best type of financing (rather than bank financing) for most buyers on mobile home parks (and for that matter most cash flow investment real estate).
Real estate investor insight to the nature of the taxation of a mobile home park owner:
The mobile home park owner should be able to shelter the income from the mobile home park by taking advantage of the IRS Code by depreciation the improvement (not the land), IRS Section 179 deductible expenses, and many other business deductions. [Note: you need to review tax deduction with your CPA, or EA, or other Tax advisor] Note: Most current mobile home park owners are paying little, or no, income taxes because of park improvement depreciation, Section 179 deductible expenses, and other business deductions.
You will find that most mobile home park owners that own their mobile home park “Free and Clear” would prefer not to sell their mobile home park for cash, as they may have advised by their CPA that that would result in their paying massive giant capital gains tax and recapture of depreciation (Ouch!)
Most mobile home park owners want, or need, to retire from the mobile home park management and day-to-day mobile home park responsibilities. The owners know that the mobile home park if managed properly will make money and be able to service the loan on the mobile home park. You can provide a stable fix rate income mobile home park owner from the loan payment from the buyer which is well in excess of the low yield on Bank Certificate of Deposit, or the roller-coaster Mutual Funds.
What if the mobile home park owner wants a down payment?
Inside Secret from a seasoned Investor: I suggest a solid and legal financial maneuver of closing on the 3rd or 5th of the month, not at the end of the month. This maneuver can result in you receiving a Credit from the Seller at the Closing of the Purchase equal to nearly Two Months Rents! How is that possible?
Here is the answer on how to get a windfall at closing, or to have the Seller fund your modest Low Down Payment. By closing on the 3rd of the month You as the new owner are entitled to a “Partial Month Rent Credit from the Seller” at closing equal to 27/30 of the scheduled rents for that month, plus you “Rent Deposit Credit from the Seller” equal to all the rent deposits held by the mobile home park owner. Since loan payments are always calculated and paid in arrears (not in advance), as an additional bonus usually you would only pay the interest only portion of the mobile home park loan or trust deed for 57 days and have your 1st loan payment due 57 day after closing. This last bonus in the “Close on the 3rd or 5th of the month” maneuver also adds to your positive cash flow.
The Seller financing strategy is a total “Win-Win” for the mobile home park owner “Seller” and you the mobile home park “Buyer.” You need to listen not only to their description about the mobile home park and you will responsibly completely take over the mobile home park management and all day-to-day mobile home park responsibilities.
The mobile home park owner knows that the mobile home park properly run can and will make money and you will be able to make the loan payments to him and that he will be secured with a 1st Mortgage, or 1st Trust Deed, on the Mobile Home Park.
How to Negotiate:
If you have preliminarily determined that you would like to buy the mobile home park from the current owner, then you need to structure an offer with Seller Financing from the mobile home park owner.
You need to convince them that you will take over all the mobile home park management and all day-to-day mobile home park responsibilities and pay them a regular monthly payment.
You should mention that selling the mobile home park to with seller financing could reduce their income tax liability (the mobile home park owner should confirm your position and that will strengthen your deal).
What If the mobile home park owner won’t sell you mobile home park with seller financing?
The motivation of many mobile home park owners to get completely out of mobile home park management and all day-to-day mobile home park responsibilities, and have not have to deal with tenants anymore.
If that is the case with the mobile home park owner that you are dealing with but they just don’t want to sell the mobile home park with seller financing-then offer to Master Lease their mobile home park with the Option to Buy at a fixed price the mobile home park in one to five years.
You need to convince them that you will take over all the mobile home park management and all day-to-day mobile home park responsibilities and pay them a regular lease monthly payment. The mobile home park owner will be free from having to deal with tenants, and free from mobile home park management and all day-to-day mobile home park responsibilities. They (mobile home park owner) would still own the mobile home park and receive a monthly check from you on the master lease. You would have master lease and pay the owner month on the mobile home park master lease, and take over all the mobile home park management and all day-to-day mobile home park responsibilities.
PS: Please download and review the Mobile Home Park Due Diligence Checklist in the Real Estate Investing Tools section of: www.RealEstateMentor.co
If neither the mobile home park purchase with seller financing or a master lease does not work. Then Just Go on the NEXT deal!