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Compare it to the other months to see if there have been any changes. In a lot of cases, the park owner or seller will raise the rents on the park just before putting it on the market, there’s not a problem with that, but you need to know that so you’ll have an idea when you can raise the rents next. In most cases I wait at least a year before I raise them again, but no longer. Raising the rents yearly is a very important thing to do. It doesn’t have to be much, but you need to do something.
This is where I get the most problems with sellers. I’ve been selling parks for many years now, so I get lots of resales.
It's unfortunately to get the common call from the selling saying, “John, we want to sell the park. What’s it worth now that we’ve had it 5 years?” To which my first question is, “How much have you raised the rents?” This is the unfortunate part. Generally their response is “ Oh John, we couldn’t raise the rents. What if we’d lose someone.” Thus the reason you see so many rent raises just before the park goes on the market.
"HA!" Is the response initially in my head. But coming out of my mouth is the hardest words to say, “The Park is worth what you paid for it.” As you can imagine, the response to that is not always pleasant, expected, appreciated or believed.
I’ve said this all to many times. "These are income properties, which has to produce additional income as years progress in order to be worth more expidentially for years to come." More income means more value, less income or equal income to when purchased means less value or at best the same value.
Raising the rents annually is the only way to further your invests worth.
This is one of my best stories; there’s a park in a big sky area, tourist attraction town. The park there is a little over priced but it is a very good place to own a park. So I’ve got buyers calling me nuts on the sale price, and I keep telling them, you just need to raise the rents. Almost every person I talk to about that gets a little sideways when looking at raising the rents. But look at this, in this town there hasn’t been a vacant mobile home space in over 15 years. IN THE WHOLE TOWN!!!! 15 YEARS!!!!!! The lowest price home you can buy in a 40 mile radius is $500,000. One guy tells me, “John the park just up the road from this park is only charging $300 per month. How can we raise the rents to $600?” What difference does it make what the other parks are charging when they don’t have a vacant space and haven’t in 15 years. He’s just nuts for not raising his rents and that’s all that is. In that town a vacant mobile home lot is worth $100,000 plus the lot rent to the owner. I would hope for a vacant space.
Just two months ago a 1978 14x 78 came up for sale in this park and sold for $85,000 cash in less than a week. Anywhere else in the world that mobile is worth $1,500. So,if you were so lucky as to get a vacant space, in two weeks you could move in a new 16x48 2 bedroom 2 bath, your cost would be about $25,000 set up, then sell it for $150,000 cash, make an easy $125,000 plus get the lot rent, in three weeks tops.
If there is a lot of late fees:
This will tell you how your tenants pay. While late fees are great as extra income, if you have a lot of them it shows you may have problem tenants. So then look at the delinquent tenant list. If there are a lot of late fees, but the seller says there are no delinquent tenants, this would be a red flag and I’d ask for proof of deposits history for a few months.
Likewise, if there’s no late fees this could be a good thing saying you’ve got great tenants or you’re not getting all of the info on the park. For sure you want to ask about it. Remember when in doubt ask for the proof of deposits. Take the time to match up the deposits with the tenants. This will give you peace of mind.
I bought a park a few years ago that the seller showed me a rent roll that said he had $8500 income per month, but when we started collecting rent the next month it was $2800. He had faked the whole thing. There was a bunch of park owned mobiles that came with the park, he had fixed them up to look like they were rented when in fact they were not. That doesn’t happen very often but it does happen. But don’t let that scare you off, that park is making $19,500 per month now and worth much more than I paid for it. He who laughs last…..
Next, where’s the deposits:
We don’t take deposits on spaces rented, but some park owners do. You’ll want to see what’s what on this. There’s nothing worse than to have someone want to move out and they ask for their deposit back. You didn’t get it at closing and now you find everyone has deposits, but you don’t. The best way to check this is to look at the leases signed by the tenants when they moved in.
Water, sewer, trash, elect., and other income: Most of the parks we own are sub metered for water, meaning we get the overall water bill then pass it through to the tenants via a water meter at each site or charging a fixed extra water fee. In most cases the state will not allow you to charge a profit for the resale of the water but you can charge a reading fee and other fees depending on the state--something you’ll want to check out.
We charge for water via the meter reading then add a fixed fee for sewer, trash and meter reading fee.
This is a good place to look at the condition of your water system in the park. Check the difference between the water income and the water bill. If the water income doesn’t meet the income, you could have a problem with water leaks in the park, but it could also be from the owner watering the common grounds or RV spaces, ask the question.
I’ve learned the hard way that the next day after you’ve closed on a park, everything that can go wrong will go wrong. The water line fitting that has held for the last 30 years without a problem, will for sure break. So just know it’s going to happen and smile and say, John said it would happen.
If there’s a laundry in the park you’ll want to be sure that income is reported. For some reason sellers lie about this income often saying it’s a lot higher than it is. Don’t ask me why, but it could be because they steal it all and don’t count it. This happens more often than not.
I really believe in having a laundry. While they’re a lot of extra work, the income is better than space rent. If you’re looking for ways to add extra income to the park, this is one you should look at. But that’s a different subject.
I think that about covers income.
Expenses are always the devil.
The buyer always wants to include everything he can think of as extra expenses so he can show the property is worth less than the seller is asking and the seller is always not adding expenses to the list to show more value.
There are always expenses that aren’t on the rent roll and in most cases there are expenses that shouldn’t be on there.
We've owned a lot of parks and so I know what I’m looking for going in. Most buyers though, don’t. So they are afraid there’s a mystery expense out there somewhere that’s going to kill them. The mystery expense does raise its ugly head sometimes, not often, but it does happen.
In 99% of the cases it is in the taxes on the park. Watch out for park owned mobiles. This is sometimes overlooked on the tax rolls and if they’ve not been paid in a while, can be a big deal. We pay $20,000 a year in taxes on park owned mobile homes, so if we’d miss a cutoff date on them that could get costly for sure. At about $400 per month in penalties it adds up fast. If you want to have some fun, go and ask the county for a discount on them. I thought one woman was going to cry laughing once when I asked if there was any way.
Another place to watch is the utility deposits, most cities water companies and utility companies want a deposit of at least a month worth of charges. So, if your water bill is $4,000 you can expect a $4,000 deposit and so on.
Check the state you buy in and see if your property taxes are going to go up once the sale price of the park is shown on the state records. Some states you don’t have to disclose this and in most cases won’t see a tax raise. In other states you’ll not be so lucky, it could jump up a ton so you better be ready for that. We just had one go from $2,800 to $7000 without notice.
Other than that, unless you’ve got a seller hiding things from you, you get what you see. The best things about MHP’s is they just don’t have that many working parts: water, sewer, elect., mowing, tree trimming, road repair and you’re pretty much there.
I want to see some utility bills to match them with the report I’m getting from the seller. Mostly this tells me if he’s being up front with me. If he is on this, most of the time he is on the rest of the info.
So with everything on the table what are you looking at? You’re trying to see if you are going to make money or not.
Over the years everyone is trying to buy property with as little down as can be. This to me is the worst mistake you can make.
I look at it this way, if you leverage the property 100%, which has been done, and you’re buying at a 9 cap, you go to the bank and get a loan at 8% and the seller is holding a second for 8% (if you’re lucky) you’ll be making 1% return per year. It takes a lot of rent raises to get in the black that way.
This is something you need to watch out for. You need to build in a reserve for future upkeep and it needs to apply against the cap rate when you purchase the park. That amount will be hard to figure out but it needs to be there. I don’t know a seller that’ll go for it though. If you have a 100 spaces park, repaving the roads could cost you $50,000. With a 1% return, it’s not there and coming out of pocket isn’t a good idea. If you have bought the loan on the park down by making at least a 20% down payment--40% is the best--then you don’t have a problem with the reserve. I know it is cool to say you bought a million dollar park for nothing down, but in a year you have to start telling about how the park is costing you more than you’re making. That takes the coolness out of it.
So, the bottom line is buy right, make rent increases every year, and put money away to do the repairs you will need to do.
Buying right doesn’t always mean getting it cheap. Paying more for a park that’s in good shape--and I don’t mean the mobiles. I mean the infrastructure--is always the best way to go. It is a lot easier to raise the rents to get more value, than replace the water system, or the electric grid. And that’s a nut shell version of my look at a mobile home park purchase. Please feel free to call me with any questions. I’m sure there’s a ton of other ideas out there about this, but as someone told me years ago, probably my mother, “keep it simple, stupid”.
jh